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EX-23.1 - EXHIBIT 23.1 - IMMUNE PHARMACEUTICALS INCv466981_ex23-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  

For the Fiscal Year Ended December 31, 2016

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____

 

Commission File No. 001-36602

 

Immune Pharmaceuticals Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   52-1841431
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

 

550 Sylvan Avenue, Englewood Cliffs, NJ 07632

(Address of principal executive offices) (zip code)

 

Registrant’s telephone number, including area code: (201) 464-2677

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨ No x

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes ¨ No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   ¨

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨   Smaller reporting company x
    Emerging growth company ¨

 

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

 

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

 

As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate), computed by reference to the closing bid price of such shares on the NASDAQ Capital Markets was $19,869,116.

 

As of May 16, 2017, the registrant had 10,027,057 shares of common stock on a post-split basis, par value $0.0001 per share, outstanding.

 

 

 

 

TABLE OF CONTENTS

 

PART I    
Item 1. Business 4
Item 1A. Risk Factors 23
Item 1B. Unresolved Staff Comments 49
Item 2. Properties 49
Item 3. Legal Proceedings 49
Item 4. Mine Safety Disclosures 50
     
PART II    
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 50
Item 6. Selected Financial Data 50
Item 7. Management's Discussion and Analysis of Financial Condition And Results of Operations 51
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data 57
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 57
Item 9A. Controls and Procedures 57
Item 9B. Other Information 58
     
PART III    
Item 10. Directors, Executive Officers and Corporate Governance 59
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders 69
Item 13. Certain Relationships and Related Transactions, and Director Independence 71
Item 14. Principal Accounting Fees and Services 72
     
PART IV    
Item 15. Exhibits and Financial Statement Schedules 73
   
SIGNATURES 78

 

 2 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, or Form 10-K, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. All forward-looking statements speak only as of the date of this Form 10-K, are expressly qualified in their entirety by the cautionary statements included in this Form 10-K and are subject to a number of risks, uncertainties and assumptions, including those described under the sections in this Form 10-K entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K.

 

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, among others:

 

·our limited liquidity;
·our ability to continue to meet our obligations under our existing debt agreements;
·risks associated with our ability to raise additional funds sufficient to meet our working capital requirements;
·our limited operating history;
·our history of operating losses since our inception;
·our ability to continue to operate as a going concern;
·our ability to maintain the listing of our common stock on NASDAQ;
·risks associated with our ability to protect our intellectual property;
·risks associated with litigation;
·our reliance on collaborative partners and others for further clinical trials, development, manufacturing and commercialization of our product candidates;
·our ability to complete our planned clinical trials (or initiate other trials) in accordance with our estimated timelines due to delays;
·the cost, delays and uncertainties associated with our scientific research, product development, clinical trials and regulatory approval process;
·our dependence upon key personnel;
·our ability to find partners for our products on attractive terms, on a timely basis, or at all;
·our ability to obtain approval to market and commercialize any of our product candidates;
·our expectations regarding government and third-party payor coverage and reimbursement; and
·the highly competitive nature of our business.

 

Further, any forward-looking statement speaks only as of the date on which it is made. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties, or how they may affect us. Except as required by law, we do not intend to, update or revise the forward-looking statements in this Form 10-K after the date of this Form 10-K, whether as a result of any new information, future events, changed circumstances or otherwise. This Form 10-K also contains market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock.

 

 3 

 

 

PART I

 

ITEM 1. BUSINESS. 

 

Overview

 

Immune Pharmaceuticals Inc., together with its subsidiaries (collectively, “Immune” or the “Company”) is a clinical stage biopharmaceutical company specializing in the development of novel targeted therapeutic agents in the fields of immuno-inflammation, dermatology and immuno-oncology. The Company’s lead product candidate is bertilimumab, a clinical-stage, first-in-class, fully human antibody, which targets eotaxin-1, a key regulator of immuno-inflammation. The Company’s asset portfolio includes NanoCyclo, a topical nanocapsule formulation of cyclosporine-A, for the treatment of atopic dermatitis and psoriasis, Amiket, a prescription topical analgesic cream that has completed Phase II clinical trials, and LidoPAIN. The Company’s immuno-oncology pipeline includes Ceplene, which is effective for the maintenance of remission in patients with Acute Myeloid Leukemia (“AML”) and Azixa and crolibulin, two clinical-stage, vascular disrupting agents (“VDA”) which have demonstrated encouraging preliminary proof of concept study results. In addition, the Company has two immuno-oncology platform assets, consisting of a bispecific antibody platform and a nanotechnology combination platform, referred to as “NanomAbs”.

 

The Company’s current product portfolio is summarized below: 

 

Product(s)/
Product Candidate(s)
  Primary Indication(s)   Status   Commercialization
Rights
             
IMMUNO-INFLAMMATION and DERMATOLOGY
Bertilimumab  

Bullous Pemphigoid

IBD (Crohn’s and ulcerative colitis)

 

Phase II

Phase II

 

Immune

Immune

NanoCyclo (cyclosporin-A)   Atopic Dermatitis, Psoriasis   Preclinical   Immune
             
IMMUNO-ONCOLOGY
Ceplene/IL-2   Acute Myeloid Leukemia  

Phase III (US)

Approved (EU)

 

Immune (Americas, Israel)

Meda AB (EU, RoW)

Crolibulin   Solid Tumors   Phase II   Immune
Azixa   Glioblastoma multiforme   Phase II   Immune
NanomAbs   Solid Tumors   Preclinical   Immune
Bispecific Antibodies   Oncology   Preclinical   Immune
             
PAIN
AmiKet   Neuropathic Pain   Phase II   Immune
LidoPAIN   Pain   Phase II   Immune

 

Ceplene®, crolibulinTM, Azixa®, AmiKetTM and LidoPain® are trademarks that we own. Each trademark, trade name or service mark of any other company appearing in this annual report on Form 10-K belongs to its respective holder

 

History- Reverse Merger

 

On August 25, 2013, Immune (formerly, EpiCept Corporation), a Delaware corporation, closed a merger transaction (the “Merger”) with Immune Pharmaceuticals Ltd., a privately held Israeli company (“Immune Ltd.”), pursuant to a definitive Merger Agreement and Plan of Reorganization, dated as of November 7, 2012, as amended (the “Merger Agreement”) by and among Immune, EpiCept Israel Ltd., or the Merger Sub, an Israeli company and a wholly-owned subsidiary and Immune Ltd. Pursuant to the Merger Agreement, Merger Sub merged with and into Immune Ltd., following which Immune Ltd. became a wholly-owned subsidiary of Immune and the former stockholders of Immune Ltd. received shares of Immune that constituted a majority of the outstanding shares of Immune.

 

 4 

 

 

Reverse Stock-Split

 

On April 12, 2017, the Company announced a reverse stock split of its shares of common stock at a ratio of 1-for-20. Beginning with the opening of trading on April 13, 2017, the common stock began trading on a post-split basis on the Nasdaq Capital Market ("NASDAQ"). All share and per share amounts in this Form 10-K have been reflected on a post-split basis.

 

Business Strategy

 

The Company’s core business strategy is to build a portfolio of novel immunotherapies and compounds with the potential to treat or prevent severe inflammatory diseases in dermatology, gastroenterology and cancer, develop each compound to pre-determined milestones, and license the compounds to pharmaceutical companies for advanced development and commercialization. The Company intends to obtain revenues from licensing fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates or intellectual property for specific therapeutic indications or applications.

 

In April 2017, the Company announced a corporate restructuring with the objective of prioritizing and segregating its research and development efforts on a focused set of products in inflammatory disease and dermatology and strengthening its financial position. Under this strategy, the Company intends to focus its business on immuno-inflammation in general, and immuno-dermatology in particular, by developing its core asset, bertilimumab, and by developing topical nano-cyclosporine for the treatment of atopic dermatitis and moderate psoriasis. The Company will continue to consider the optimal path forward for its pain programs, AmiKet and LidoPAIN.

 

The Company intends to segregate its oncology business into its subsidiary, Cytovia, Inc. (“Cytovia”) and pursue a possible spin-off of Cytovia into a separate, stand-alone company. Cytovia will focus on the development and commercialization of novel immuno-oncology and hematology therapeutics, led by Ceplene, Azixa, crolibulin and the Company’s bispecific antibody platform. Additionally, Cytovia may seek to acquire commercial stage drugs in the field of immuno-oncology.

 

Products and Programs

 

Bertilimumab 

 

The Company’s lead product candidate, bertilimumab, is a first-in-class, humanized monoclonal antibody that targets eotaxin-1, a specific chemokine that plays a role in both innate and adaptive immune responses and modulates the cross-talk between key cells involved in inflammation. Chemokines are low molecular weight molecules that have been shown as important chemical attractants of inflammatory cells to sites of inflammation and infection.

 

Eotaxin-1 has been shown to be highly specific for eosinophils, which are inflammatory cells that play a central role in the pathogenesis of allergic airway diseases, inflammatory bowel disease, skin conditions and potentially in many other conditions. Eotaxin-1 has been validated as a bio-marker of disease severity and a therapeutic target for several inflammatory diseases, including Bullous Pemphigoid (“BP”), Ulcerative Colitis, Crohn's Disease, Severe Atopic Dermatitis, non-alcoholic steato-hepatitis ("NASH") and severe eosinophilic asthma. Recently, eotaxin-1 has been proposed as a therapeutic target for these conditions.

 

Bertilimumab is a novel personalized therapy that targets and lowers eotaxin-1 levels in many inflammatory conditions. By neutralizing eotaxin-1, bertilimumab may prevent the migration of eosinophils, thus helping to relieve inflammatory conditions associated with eotaxin-1. Bertilimumab is being studied to for improvement in outcomes for patients with diseases that either do not have therapies or where the therapies have severe limitations.

 

Bertilimumab and Bullous Pemphigoid (“BP”)

 

Published studies have demonstrated that eotaxin-1 levels are significantly increased both in serum and blister fluid in patients with BP and these elevated levels correlate with disease severity. Bertilimumab may prevent eotaxin-1-induced chemotaxis of eosinophils and neutralize eotaxin-1 in the circulation, preventing eosinophil migration. Hence, bertilimumab has the potential to eliminate the eotaxin-1 positive feedback loop which is responsible for the recruitment of both eosinophils and Th2 cells to the site of inflammation in BP.

 

 5 

 

 

In preclinical studies, bertilimumab was shown to be safe and well tolerated in primates. In a Phase I clinical study consisting of a single administration to healthy volunteers, bertilimumab demonstrated excellent safety and tolerability (no significant adverse events and no anti- bertilimumab antibodies) and high affinity and specificity for human eotaxin-1. The drug proved to be highly selective, with rapid and lasting biological activity.

 

In July 2015, the Company initiated planning for a Phase II study, IMNP BP-01, Evaluation of Safety, Efficacy and Pharmacodynamic Effect of Bertilimumab in Patients with Bullous Pemphigoid, at clinical sites in Israel. Study initiation refers to the training of hospital staff to allow for patient screening and immediate patient enrollment into the clinical trial upon selection. Screening began in February 2016.

 

In October 2015, the Company submitted an Investigational New Drug Application (“IND”) to the U.S. Food and Drug Administration (“FDA”) to allow recruitment of patients for the IMNP BP-01 study at sites in the United States. In November 2015, the Company obtained clearance of its IND application from the FDA.

 

The bertilimumab Phase II BP clinical trial is designed to recruit 10-15 adults, newly diagnosed with moderate to extensive BP. Primary end points include safety and efficacy, measured by a reduction in clinical symptoms and tapering down of systemic corticosteroids.

 

In March 2017, Pr. Neil Korman, Director, Clinical Trials Unit, UH Cleveland Medical Center; Director, Murdough Family Center for Psoriasis, UH Cleveland Medical Center; Professor, Dermatology, CWRU School of Medicine, and member of the Company’s Scientific Advisory Board, presented preliminary data with bertilimumab from the IMNP BP-01 study at the American Academy of Dermatology 2017 Annual Meeting in Orlando, Florida. The Bullous Pemphigoid Disease Activity Index ("BPDAI") measured in the patients who completed the study was reduced by an average of 84%. Oral prednisone was tapered down to 10mg or less. No significant adverse events were reported. Based on these preliminary results, the Company submitted a request for orphan drug designation for bertilimumab in BP. Also, based on these encouraging results as well as petitions by investigators, plans were initiated to expand the study population to include patients previously diagnosed with BP who are on corticosteroids and who cannot be successfully tapered (so-called taper resistant patients) to evaluate symptomatic improvement and reduction in the use of steroids.

 

Set forth below is a summary of the ongoing study:

 

Summary of IMNP BP-01

 

Study Purpose and Design:   This is an open-label, proof-of-concept, single group study in adult patients with newly diagnosed, moderate to extensive BP or taper resistant patients
     
Duration per Patient:   The study consists of three periods: a screening period of up to 2 weeks, an open-label treatment period lasting 4 weeks, consisting of IV infusion of bertilimumab on Days 0 and 14 and 28, and a safety and efficacy follow-up period of approximately 13 weeks. Total duration: 84 to 118 days (±3 days). Patients receive concomitant oral steroids during the treatment and follow-up period
     
Primary Objective:   To evaluate the safety of bertilimumab
     
Secondary Objective:  

To evaluate the preliminary evidence of clinical efficacy as measured by the BPDAI score (a severity outcome measure), proportion of patients achieving

dose of prednisone 10mg/day at Day 84)

     
Exploratory Objective:   To determine change from baseline of biomarkers of inflammation
     
Study Sites:   Two study sites in Israel; six study sites in the US, all actively recruiting
     
Preliminary Patient Results:  

·    BPDAI reduced by an average of 84%

·    Oral prednisone was tapered down to 10mg or less.

·    No significant adverse events were reported.

 

 6 

 

 

Bertilimumab and Ulcerative Colitis (“UC”)

 

In June 2015, the Company initiated a Phase II study, IMNP UC-01, Evaluation of Safety, Efficacy, Pharmacokinetic and Pharmacodynamic of Bertilimumab in Patients with Active Moderate to Severe Ulcerative Colitis, at clinical sites in Israel. In 2016, the Company expanded the study to clinical sites in Russia.

 

IMNP UC-01 is a randomized, double blind, placebo-controlled, parallel group, multi-center study, seeking to enroll 42 adult patients with active moderate to severe UC. Eligible patients will be randomly assigned in a 2:1 ratio to one of two treatment groups, bertilimumab 10 mg/kg or matching placebo, respectively. The study consists of three periods: a screening period of up to 2 weeks, an open-label treatment period lasting 4 weeks consisting of IV infusion of bertilimumab on Days 0 and 14 and 28, and a safety and efficacy follow-up period of approximately 8 weeks. Primary end points are safety and efficacy, measured by a reduction in the Mayo Clinic Ulcerative Colitis Disease Index at 8 weeks. Secondary end points include assessment of mucosal injury and clinical remission. Patients are selected based on Mayo score and high levels of tissue eotaxin-1 as well as other standardized clinical criteria. The study is being conducted in 6 sites in Israel and 6 sites in Russia, all actively recruiting.

 

The Company is considering expanding the bertilimumab clinical development program to include severe atopic dermatitis (“AD”). Also, the Company plan to conduct preclinical studies to determine the application of bertilimumab as a possible therapeutic agent for the treatment of nonalcoholic steatohepatitis (“NASH”).

 

The Company believes that if successfully developed and approved by the FDA, bertilimumab could address large underserved markets with limited treatment alternatives, such as BP, an orphan indication, UC, severe AD, and NASH. The Company’s current strategy is to enter into a strategic partnership with a large pharmaceutical or biotechnology company to support and accelerate the development of bertilimumab and maximize its commercial potential.

 

NanoCyclo

 

In January 2016, the Company entered into a worldwide exclusive licensing agreement with BioNanoSim Ltd., an Israeli company led by Professor Simon Benita, former Head of the Drug Research Institute at the Hebrew University of Jerusalem, for the development of a topical nano-capsule formulation of cyclosporine. NanoCyclo is the first stable formulation to leverage nanotechnology to ensure local dermal penetration of and minimize systemic exposure to cyclosporine, a drug used orally for the treatment of psoriasis and AD. NanoCylco has the possibility of development under a 505(b)2 regulatory submission, which is typically a faster process than the traditional 505(b)1 regulatory submission required for new chemical entities, and may successfully address the multi-billion dollar AD and psoriasis markets.

 

Immuno-Oncology

 

The Company's immuno-oncology programs include the following:

 

Ceplene 

 

Ceplene (histamine dihydrochloride), the Company’s lead oncology product candidate, is a first-in-class, small molecule, targeting the Histamine-2 Receptor, to be used in conjunction with low dose Interluken-2 (“IL-2”) as a means to overcome immunosuppression in AML and potentially other malignancies. Ceplene is designed to suppress tumor growth by inhibiting NOX-2, in turn inhibiting macrophage and leukemic cell ROS production, allowing IL-2 activation of Natural Killer (“NK”) cells and T cytotoxic cells (“T cells”) with consequent leukemic cell death. The Company acquired the rights to Ceplene in the U.S. and Israel in the 2013 Merger. Swedish-based Meda Pharmaceuticals own the rights to Ceplene in the rest of the world. Ceplene is approved for marketing in Europe and Israel and has been granted orphan drug status in the United States and European Union.

 

Ceplene functions in AML by reducing the immunosuppressive effects of reactive oxygen species on T cells and NK cells, permitting their effective activation by IL-2 in order to eliminate residual leukemic cells in patients who are in clinical complete remission. Data from a European Phase IV study, presented by researchers from the University of Gothenburg, Gothenburg, Sweden in an abstract at the American Association of Cancer Research Annual Meeting in April 2016 demonstrated that Ceplene/IL-2 treatment is highly efficacious in monocytic forms of AML (FAB M4/M5). The Company’s current research is focused on delineating the value of combining Ceplene with immune checkpoint inhibitors, which may pave the way for future trials and label expansion.

 

The Company has received guidance from the FDA and plans to finalize a Phase III protocol for a single pivotal Overall Survival study, supporting a new drug application in the U.S. for Ceplene in remission maintenance in AML. The study will compare Ceplene in combination with low dose Proleukin® (IL-2) vs placebo with low dose Proleukin. The primary end point is Overall Survival at 2 years with a secondary end point of Leukemia Free survival (LFS). An independent interim analysis will be conducted at one year for both futility, and to assess the one year efficacy based on Event Free Survival (EFS), with an opportunity for accelerated approval based on positive results.

 

 7 

 

 

In April 2017, the Company signed a letter of intent with Pint Pharma GmnH (“Pint”), a pharmaceutical company focused on Latin America and other markets, which binds the parties to seek agreement regarding an exclusive license by Pint of the rights to commercialize Ceplene throughout Latin America, including Argentina, Brazil, Chile, Colombia and Mexico. Pursuant to the anticipated final agreement, Pint will be responsible for registration of Ceplene in Latin American countries based on the existing European marketing authorization and will carry out the full commercialization of the licensed product in the territory, including Ceplene registration, pricing and reimbursement, and sales and marketing activities. In conjunction with the anticipated final agreement, Pint will make an investment of $4.0 million into the Company’s oncology subsidiary, Cytovia, Inc. to be used by Cytovia exclusively for oncology related activities.

 

Crolibulin

 

Crolibulin is a novel small molecule VDA and apoptosis inducer for the treatment of patients with solid tumors and is a novel microtubule destabilizer that is selective for pathologic vasculature. Crolibulin has shown promising vascular targeting activity with potent anti-tumor activity in preclinical in vitro and in vivo studies and in a Phase I clinical trial conducted in part by the National Cancer Research Institute and the Company. The molecule has been shown to induce tumor cell apoptosis and selectively inhibit growth of proliferating cell lines, including multi-drug resistant cell lines. Murine models of human tumor xenografts demonstrated crolibulin inhibits growth of established tumors of a number of different cancer types. In preclinical animal tumor models, combination therapy has demonstrated synergistic activity with cytotoxic drugs as well as anti-angiogenic drugs. This may support further development of crolibulin by the Company or with a partner in a variety of cancers other than anaplastic thyroid cancer, including but not limited to refractory ovarian cancer and neuro-endocrine tumors.

 

Azixa

 

Azixa (verubulin) is a Phase II novel microtubular destabilizer that functions as a VDA. It evades multidrug resistance pumps, thus crossing the blood-brain-barrier and achieving high central nervous system concentrations. In Phase I and II clinical trials in glioblastoma multiforme (“GBM”), evidence of objective response was seen, including in patients who had failed previous bevacizumab (Avastin) therapy. Scientists in the field of angiogenesis have suggested that the combination of anti-angiogenic and VDAs may be synergistic by both disrupting existing tumor vessels and inhibiting the formation of new vessels simultaneously. The Company is continuing preclinical work studying the potential advantages of combining Azixa with immune checkpoint inhibitors. If the results of these studies warrant further investigation, the Company may plan further clinical studies for GBM as well as other solid tumors. Azixa has orphan drug status for GBM in the United States.

 

NanomAbs

 

NanomAbs is an antibody-drug conjugate platform that allows the targeted delivery of combinations of chemotherapeutics into cancer cells. NanomAbs is potentially capable of generating novel drugs with enhanced profiles as compared to stand-alone antibodies. The technology conjugates monoclonal antibodies to drug loaded nanoparticles to target drugs to specific cells. NanomAbs selectively accumulates in diseased tissues and cells, resulting in higher drug accumulation at the site of action with minimal off-target exposure. The Company plans to build a pipeline of NanomAbs for the treatment of cancer and may seek to enter into collaborative agreements with other companies to acquire complementary drugs or technologies to potentially accelerate the development of NanomAbs product candidates.

 

Bispecific Antibodies

 

In December 2015, the Company published data regarding a novel bispecific antibody in a poster presentation at the IBC Life Sciences Antibody Engineering & Therapeutics Conference in San Diego, California. The Company’s poster presentation was titled "Design and Validation of a Novel Tetravalent IgG1-like Bispecific Antibody Format". In this publication, the Company described positive study results with this novel platform for the production of tetravalent IgG1-like bispecific antibodies. The prototype bispecific antibody retained effector functions and mediated redirect killing of target cells by cytokine induced killer T cells demonstrating direct anti-cancer effects in vitro as well as anti-tumor activity and improved survival in a mouse xenograft model of disseminated leukemia. The Company believes that this newly developed platform may be used to generate novel bispecific antibodies against immune-oncology targets. This work was developed by a collaborative European consortium and funded by a European grant.

 

 8 

 

 

Pain

 

AmiKet / AmiKet Nano

 

AmiKet is a prescription topical analgesic cream containing a formulation of two FDA approved drugs: amitriptyline, which is a widely-used antidepressant often used in chronic pain disorders; and ketamine, an N-methyl-D-aspartic acid (“NMDA”) antagonist that is used as an intravenous anesthetic. AmiKet has completed Phase I and II clinical trials involving 1,700 patients for the treatment of neuropathic pain. In 2010, the FDA granted AmiKet orphan drug status for the treatment of postherpetic neuralgia (“PHN”). A PHN Phase III clinical trial has been designed on the basis of two statistically significant Phase II clinical trials, including one trial which has shown comparable efficacy of Amiket and oral gabapentin. In addition to PHN, Amiket may be developed for the treatment of diabetic neuropathic pain and for the treatment of chemotherapy-induced neuropathic pain.

 

The Company is considering developing a new improved formulation of the product utilizing nano-particle technology licensed from Yissum Research Development Company, the technology transfer company of the Hebrew University of Jerusalem, Ltd. (“Yissum”).

 

In October 2016, the Company entered into a consulting agreement with Joseph V. Pergolizzi Jr., MD to form an operational management team, a scientific advisory board, and a board of directors for Maxim Pharmaceuticals, the Company’s wholly-owned subsidiary that holds the rights to AmiKet, AmiKet Nano, and LidoPAIN. In March 2017, the Company and Dr. Pergolizzi agreed to terminate the consulting agreement.

 

The Company is assessing strategic alternatives for this non-core asset.

 

LidoPAIN

 

LidoPAIN is an adhesive-backed, lidocaine-based patch for the treatment of acute lower back pain. For a complete discussion of LidoPAIN, see Material Agreements - LidoPAIN - Endo Pharmaceuticals Inc. below. The Company is assessing strategic alternatives for this non-core asset.

 

Material Agreements

 

Bertilimumab

 

iCo Therapeutics Inc.

 

In December 2010, iCo Therapeutics Inc. (“iCo”) granted Immune an option to sub-license the use of bertilimumab for the use and development of bertilimumab for all human indications, other than ocular indications. iCo obtained exclusive license rights to intellectual property relating to bertilimumab pursuant to a license agreement with Cambridge Antibody Technology Group Plc dated December 20, 2006, and to which the Company became a party. On June 24, 2011, the Company exercised its option and obtained a worldwide license from iCo pursuant to a product sub-license agreement. The Company paid iCo upfront consideration of $0.5 million, plus common stock and warrants to purchase Immune common stock.  In addition, iCo is entitled to $32.0 million in milestone payments plus royalties. Milestones include the first dosing in a Phase III clinical trial, filing a Biologics License Application/Marketing Authorization Application (“BLA/MMA”), approval of a BLA/MAA and the achievement of $100.0 million in aggregate sales of licensed products for use in IBD.  The term of the license lasts until the expiration of all payment obligations on a country-by-country basis, at which point the license will be deemed fully paid, perpetual and irrevocable with respect to that country.  iCo retains the worldwide exclusive right to the use of bertilimumab (iCo-008) for all ocular applications. 

 

Lonza Sales AG

 

In May 2012, Lonza Sales AG (“Lonza”) granted the Company a non-exclusive worldwide license under certain know-how and patent rights to use, develop, manufacture, market, sell, offer, distribute, import and export bertilimumab produced through the use of Lonza’s system of cell lines, vectors and know-how. The license may be sublicensed to any party that manufactures bertilimumab for the Company. Immune is not obligated to manufacture bertilimumab through the use of Lonza’s system.

 

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The Company agreed to pay Lonza (i) a royalty of 1% of the net selling price of bertilimumab manufactured by Lonza; or (ii) an annual payment of approximately $0.1 million (first payable upon commencement of Phase II clinical trials) plus a royalty of 1.5% of the net selling price of bertilimumab if it is manufactured by the Company or one of its strategic partners; or (iii) an annual payment of approximately $0.5 million (first payable upon commencement of the relevant sublicense) plus a royalty of 2% of the net selling price of bertilimumab if it is manufactured by any party other than Lonza, the Company or one of its strategic partners. The royalties are subject to a 50% reduction based on the lack of certain patent protections, including the expiration of patents, on a country-by-country basis.  Unless earlier terminated, the license agreement continues until the expiration of the last enforceable valid claim to the licensed patent rights, which began to expire in 2014 and will continue to expire between 2015 and 2016, or for so long as the System Know How (as defined in the License) is identified and remains secret and substantial, whichever is later. The Company considers the System Know How as secret and substantial as of December 31, 2016 and accordingly, the license remains in effect as of that date.

 

On June 27, 2011, Immune and Lonza entered into an agreement for the manufacture of bertilimumab for use in certain of the Company’s Phase II clinical trials.  See “Manufacturing” below.

 

NanoCyclo

 

BioNanoSim Ltd

 

In January 2016, the Company, through its wholly owned subsidiary, Immune Ltd., entered into a definitive research and license agreement with BioNanoSim Ltd. (“BNS”), a Yissum spin-off company. The license was entered into pursuant to a Memorandum of Understanding, dated June 10, 2015, by and between the Company and Yissum. Under the license, the Company obtained from BNS an exclusive worldwide sublicense, with a right to further sublicense, for the development, manufacturing and commercialization of certain inventions and research results regarding Yissum’s patents in connection with nanoparticles for topical delivery of cyclosporine-A (Nanocyclo) for all topical skin indications. As consideration for the grant of the license, the Company is required to pay the following consideration:

 

·an annual maintenance fee of $30,000, commencing on January 1, 2021, which will increase by 30% each year up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties or milestone payments payable in the same calendar year;
·a license fee in the amount of $0.5 million, to be paid in four equal installments to be made between January 4, 2016 and October 1, 2016;
·royalties on net sales of products (as such term is defined in the License) by the Company of up to 5%, subject to certain possible reductions in certain jurisdictions;
·sublicense fees in the amount of 18% of any non-sales related consideration received by the Company from a sublicense or an option to receive a sublicense for the products and/or the licensed technology (as such terms are defined in the license); and
·milestone payments of up to approximately $4.5 million and 12,500 shares of the Company’s common stock upon the achievement of certain regulatory, clinical development and commercialization milestones, though in the event that the Company receives consideration from a sublicensee for any such milestones, the Company will pay to BNS the higher of either (a) the amount of the particular milestone payment or (b) the amount of the sublicense fees that are due for such sublicensee consideration paid to the Company.

 

In addition, the Company shall reimburse BNS within 60 days for expenses relating to patent fees and will sponsor a 12-month research program to prepare the program for IND submission.

 

For the year ended December 31, 2016, the Company paid a license fee of $0.5 million and approximately $0.2 million in research fees.

 

Immuno-Oncology

 

NanomAbs - Yissum

 

In April 2011, the Company entered into a license agreement with Yissum, which includes patents, research results and know-how developed by Professor Simon Benita related to the NanomAbs technology. Yissum granted the Company an exclusive license, with a right to sub-license, to make commercial use of the licensed technology in order to develop, manufacture, market, distribute or sell products derived from the license. As consideration for the grant of the license, the Company is required to pay the following consideration:

 

·royalties in the amount of up to 4.5% of net sales;

 

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·an annual license maintenance fee between $30,000 for the first year and up to a maximum of $0.1 million from the first year through the sixth year;
·research fees of at least $0.3 million for the first year and at least $0.1 million from the second year through the sixth year (but, not to exceed $1.8 million in the aggregate);
·milestone payments of up to $8.6 million, based on the attainment of certain milestones, including IND application submission, patient enrollment in clinical trials, regulatory approval and commercial sales;
·sub-license fees in amounts up to 18% of any sub-license consideration; and
·equity consideration in the amount of 8% of the Company’s shares of common stock on a fully diluted basis.

 

The license expires, on a country-by-country basis, upon the later of the expiration of (i) the last valid licensed patent, (ii) any exclusivity granted by a governmental or regulatory body on any product developed through the use of the licensed technology or (iii) the 15-year period commencing on the date of the first commercial sale of any product developed through the use of the licensed technology.  Upon the expiration of the license, the Company will have a fully paid, non-exclusive license to the licensed technology.

 

Bispecific Antibodies

 

SATT Sud-Est

 

In January 2017, the Company entered into an exclusive patent sub-license agreement with SATT Sud-Est, (“SATT”) a French technology transfer office of the five universities of the Provence-Alpes-Cote-d’Azur and Corsica regions in France, relating to certain patents covering the development, use, manufacture and commercialization of monoclonal and bispecific antibodies targeting components of the tumor microenvironment and angiogenic factors. In addition, SATT, agreed to grant the Company an exclusive option relating to the pro-angio vascular endothelial growth factor (“VEGF”) invention to be filed as a patent application during the term of the agreement. The Company will have a month after the filing of the patent to exercise the option. In consideration of the sub-license and option agreement, the Company agreed to pay an approximately $0.2 million upfront payment, with $0.1 million payable in January 2017 and the remainder payable in three equal quarterly payments thereafter beginning in March 2017. In addition, the Company agreed to certain milestone and royalty payments for each monoclonal and bispecific product developed.

 

Atlante Biotech SAS

 

In December 2015, the Company entered into an exclusive license with Atlante Biotech SAS (“Atlante”) relating to the patents and know-how for a new format of bispecific antibody platform. The technology, the result of a collaborative European consortium led by Dr. Jean Kadouche and funded by a European grant, developed the novel platform for the production of tetravalent IgG1-like bispecific antibodies. A prototype bispecific antibody utilizing the platform was shown to retain effector functions and mediate redirect killing of target cells by cytokine induced killer T cells. Moreover, the bispecific antibody demonstrated direct in-vitro and in-vivo anti-cancer effects in tumor models and improved survival in a mouse xenograft model of disseminated leukemia. During the year ended December 31, 2016, the Company paid approximately $0.1 million in license fees to Atlante.

 

Pain

 

AmiKet - Dalhousie University

 

In July 2007, Immune entered into a license agreement with Dalhousie University (“Dalhousie”) under which the Company obtained an exclusive license to certain patents for the topical use of tricyclic anti-depressants and N-methyl-D-aspartate (“NMDA”) receptor antagonists as topical analgesics for neuralgia. These and other patents cover the combination treatment consisting of amitriptyline and ketamine in AmiKet. The Company obtained worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection with passive dermal applications. The Company is obligated to make payments to Dalhousie upon achievement of specified milestones and royalties based on annual net sales derived from the products incorporating the licensed technology. The Company is further obligated to pay Dalhousie an annual maintenance fee until the license agreement expires or is terminated or a New Drug Application (“NDA”) for AmiKet is filed with the FDA. The license agreement with Dalhousie terminates upon the expiration of the last to expire licensed patent. In April 2014, the Company entered into a Waiver and Amendment to the license agreement pursuant to which Dalhousie agreed to irrevocably waive the Company’s obligation to pay the $0.5 million maintenance fee that was due on August 27, 2012 and August 27, 2013 and in any subsequent year. In addition, the Company agreed to pay Dalhousie royalties of 5% of net sales of licensed technology in countries in which patent coverage is available and 3% of net sales in countries in which data protection is available. Also, the parties agreed to amend the timing and increase the amounts of the milestone payments payable under the license agreement. As of December 31, 2016, and 2015, no amounts were due to Dalhousie.  Additional milestones payments will become due upon sub licensing and receipt of certain regulatory approvals, none of which have yet been met or received.

 

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AmiKet Nano - Yissum

 

In June 2015, the Company entered into a definitive research and license agreement with Yissum. Under the license, the Company has obtained an exclusive, worldwide license from Yissum, with certain sublicensing rights, to make commercial use of certain of Yissum’s patents and know-how in connection with a topical nano-formulated delivery of AmiKet for the development, manufacturing, marketing, distribution and commercialization of products based on the technology. As consideration for the grant of the license, the Company is required to pay the following consideration:

 

·an annual maintenance fee of $30,000 commencing on June 25, 2020, which maintenance fee shall increase by 30% each year, up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties or milestone payments payable in the same calendar year;

 

·royalties on net sales of products (as such term is defined in the license) by the Company in the amount of up to 3%, subject to certain possible reductions in certain jurisdictions;

 

·milestones payments of up to approximately $4.5 million upon the achievement of certain regulatory, clinical development and commercialization milestone; and

 

·reimbursement of related patent fees

 

In addition, the Company will fund an annual research program in the amount of approximately $0.4 million annually, plus VAT and any applicable taxes, commencing on October 1, 2015 (or such other time as mutually agreed between the parties). The results of the research, including any patents or patent applications will automatically be licensed to the Company.

 

The Company paid $0.1 million and $0.2 million related to research fees for the years ended December 31, 2016 and 2015, respectively.

 

LidoPAIN - Endo Pharmaceuticals Inc.

 

In December 2003, EpiCept entered into a license agreement (“License Agreement”) with Endo Pharmaceuticals Inc. (“Endo”) under, which EpiCept granted Endo (and its affiliates) the exclusive (including as to EpiCept and its affiliates) worldwide right to commercialize LidoPAIN, adhesive-backed, lidocaine-based patch for the treatment of acute lower back pain. EpiCept also granted Endo worldwide rights to use certain of EpiCept’s patents for the development of certain other non-sterile, topical lidocaine patches, including Lidoderm, Endo’s non-sterile topical lidocaine-containing patch for the treatment of chronic lower back pain. The Company assumed the License Agreement upon the Merger.

 

Under the License Agreement, the Company is entitled to receive milestone payments of up to $52.5 million upon the achievement of various milestones relating to product development, regulatory approval and sales based royalties on sales of LidoPAIN and Endo’s own back pain product, if covered by the Company’s patents. Royalties are payable until generic equivalents to the LidoPAIN product are available or until expiration of the patents covering LidoPAIN, whichever is sooner. Also, the Company is eligible to receive milestone payments from Endo of up to $30 million upon the achievement of specified regulatory and net sales milestones of Lidoderm, Endo’s chronic lower back pain product candidate, if covered by the Company’s patents. The License Agreement terminates upon the later of the conclusion of the royalty term, on a country-by-country basis, and the expiration of the last applicable EpiCept patent covering licensed Endo product candidates on a country-by-country basis. Either party may terminate the agreement upon an uncured material breach by the other or, subject to the relevant bankruptcy laws, upon a bankruptcy event of the other.

 

In July 2015, the Company and Endo amended the License Agreement. The Company transferred to Endo its previously licensed patents related to the use of topical lidocaine in acute and chronic back pain and Endo granted to the Company a royalty-free, non-exclusive, fully transferable license to those patents. Endo will make undisclosed milestone payments to the Company if Endo receives approval for a back pain indication for a lidocaine-based product. The Company regained full exclusive rights to develop, commercialize and license LidoPAIN.

 

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Other Material Agreements

 

Dr. Jean Kadouche and Alan Razafindrastita

 

In December 2011, Dr Jean Kadouche sold, assigned and transferred to the Company the entire right, title and interest for all countries, in and to any and all patents and inventions related to mice producing human antibodies and a method of preparation of human antibodies (the “Human Antibody Production Technology Platform”) for 40,000 shares of the Company’s common stock and $20,000 (paid to Dr. Kadouche and Alan Razafindrastita).  Through the Human Antibody Production Technology Platform and additional laboratory work, human immune systems and specific cell lines were introduced in mice, enabling the mice to produce human monoclonal antibodies. 

 

Shire BioChem Inc.

 

In connection with the Merger, the Company acquired a license agreement for the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from Shire BioChem Inc. (“Shire BioChem”), (formerly known as BioChem Pharma, Inc.). Under the license agreement, the Company is required to pay Shire BioChem a portion of any sublicensing payments it receives if it relicenses the series of compounds or make milestone payments to Shire BioChem totaling up to $26.0 million and pay a royalty on product sales if it develops the compounds internally for the treatment of a cancer indication.

 

MabLife SAS

 

In March 2012, the Company acquired from MabLife SAS (“MabLife”), a biotechnology company specializing in research and development of antibody-based therapeutics for the treatment of cancers, autoimmune and inflammatory disorders, all right, title and interest in and to the patent rights, technology and deliverables related to the anti-Ferritin monoclonal antibody (“AMB8LK”), including its nucleotide and protein sequences, its ability to recognize human acid and basic ferritins, or a part of its ability to recognize human acid and basic ferritins.  The consideration was: $0.6 million payable in six equal installments (total payments to date totaled $0.2 million) and royalties of 0.6% of net sales of any product containing AMB8LK or the manufacture, use, sale, offering or importation of which would infringe on the patent rights with respect to AMB8LK.  The Company is required to assign the foregoing rights back to MabLife if it fails to make any of the required payments, is declared insolvent or bankrupt or terminates the agreement.

 

In February 2014, the Company acquired from MabLife all rights, titles and interests in and to the secondary patent rights related to the use of anti-ferritin monoclonal antibodies in the treatment of some cancers, Nucleotide and protein sequences of an antibody directed against an epitope common to human acidic and basic ferritins, monoclonal antibodies or antibody-like molecules comprising these sequences.

 

In the first quarter of 2015, MabLife informed the Company that it had filed for bankruptcy.

 

Intellectual Property and Exclusivity

 

The Company seeks to protect its product candidates and its technology through a combination of patents, trade secrets, proprietary know-how, regulatory exclusivity and contractual restrictions on disclosure.

 

The Company owns or licenses rights with respect to patents and patent applications relating to bertilimumab, AmiKet, Ceplene, antibodies and other product candidates. The patent positions for the Company’s product candidates and platforms include 23 granted U.S. patents, 67 granted foreign patents, 10 pending U.S. applications, and 24 pending foreign patent applications. Where possible, the Company intends to seek patent term extensions in the United States for approved products. The length of the patent term extension will vary and is related to the length of time the drug is under regulatory review while the patent is in force. The Company’s patent positions are as follows:

 

·A license to a patent family that covers a composition of matter of bertilimumab and a method of using bertilimumab to screen for an antibody or antibody fragment that binds eotaxin-1, including: four registered patents in the United States and registered patents in Europe (Switzerland, Germany, France, and Ireland), Brazil, Canada, Israel, Australia, Japan, New Zealand and Singapore, and one pending patent applications in the United States. The foreign patents and patents granted with respect to pending patent applications in this family will expire, without extension, in March 2021.
·All rights, title and interest in and to a patent application family that covers a method for treating an IBD with an anti-human eotaxin antibody, including bertilimumab in the United States, Europe, Australia, Canada, China, Israel, and New Zealand. Any patents granted with respect to the pending patent application will expire, without extension, in March 2034.

 

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·All rights, title and interest in and to the U.S. and European (Germany, Switzerland, Spain, UK, Italy, and France) registered patents that cover antibody composition of matter and/or methods of use for targeting of a molecule to certain tumors and for localizing a tumor in a subject. The European patent granted with respect to the pending patent applications in this family will expire, without extension, in January 2020. The U.S. patent, which benefits from patent term adjustment from the United States Patent and Trademark Office (“USPTO”), will expire in January 2022.
·All rights, title and interest in and to a registered U.S. patent, a registered European patent (Belgium, Switzerland, Germany, Spain, France, UK, Ireland, Italy, and the Netherlands), and two pending patent applications in Canada and the U.S. claiming a chimeric antibody. The granted U.S. patent, which benefits from patent term adjustment from the USPTO, will expire in July 2030. The European patents and any patents granted with respect to the pending patent applications will expire, without extension, in September 2027.
·A license to a patent family that covers polymer-based nanoparticles for the dermal or systemic delivery of therapeutic compounds. Patent applications for this family are pending in Australia, Canada, China, Europe, Israel, India, Japan, South Korea, and the U.S. Any patents granted with respect to this pending patent application will expire, without extension, in January 2032.
·All rights, title and interest in and to a U.S. patent application related to the Human Antibody Production Technology Platform. Any patent granted with respect to the pending patent application will expire, without extension, in May 2033.
·All rights, title and interest in and to several families of patents related to the AmiKet product, including four granted U.S. patents, as well as granted patents in Australia, Canada, China, Hong Kong, Israel, Mexico, and New Zealand. Patent applications for this family are pending in Chile, Japan, Mexico and Venezuela. These granted patents and any patents granted with respect to any pending patent applications will expire, without extension, between 2017 and 2023. These patents and patent application have claims directed to topical uses of tricyclic antidepressants, such as amitriptyline, and NMDA receptor antagonists, such as ketamine, as treatments for relieving pain, including neuropathic pain.
·All rights, title and interest in and to patents covering the synthesis of histamine dihydrochloride (Ceplene) and its use for treating cancer, including three granted U.S. patents, as well as a registered European patent (Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal, Spain, Sweden, Switzerland, and UK). The U.S. patents will expire in May 2016 and January 2019, and the other patents will expire in December 2019.
·All rights, title and interest in and to U.S. Canadian, and Japanese patents and a European patent application related to crolibulin, structurally related analogs, and uses thereof. The U.S. patent will expire, without extension, in November 2029. The granted Canadian patent and any pending patent applications will expire in July 2027.

 

The Company seeks to protect its proprietary information by requiring its employees, consultants, contractors, outside partners and other advisers to execute, as appropriate, nondisclosure and assignment of invention agreements upon commencement of their employment or engagement. Immune also requires confidentiality or material transfer agreements from third parties that receive its confidential data or materials.

 

The Company’s commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of its technologies and product candidates as well as successfully defending these patents against third-party challenges. The Company has various compositions of matter and use patents, which have claims directed to its product candidates or their methods of use. The Company’s patent policy is to pursue, maintain, defend, retain and secure patents and patent rights, whether developed internally or licensed from third parties, for the technology, inventions and improvements related to its core portfolio of product candidates and that are or may be commercially important to the development of its business. The Company also relies on trade secrets, technical know-how and continuing innovation to develop and maintain its competitive position.

 

The pharmaceutical, biotechnology and other life sciences industries are characterized by the existence of a large number of patents and frequent litigation based upon allegations of patent infringement. The Company believes that its current activities fall within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States and Section 55.2(1) of the Canadian Patent Act, each of which covers activities related to developing information for submission to the FDA and its counterpart agency in Canada. As the Company’s product candidates progress toward commercialization, the possibility of an infringement claim against it increases. Although the Company attempts to ensure that its product candidates and the methods it employs to manufacture them do not infringe other parties’ patents and other proprietary rights, competitors or other parties may assert that the Company infringed on their proprietary rights.

 

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Trade Secrets and Proprietary Information

 

In addition to patents, the Company relies on trade secrets and technical know-how to develop and maintain its competitive position. Trade secrets and technical know-how can be difficult to protect. The Company seeks to protect its proprietary processes, in part, by confidentiality agreements and invention assignment agreements with its employees, consultants, scientific advisors, contractors and commercial partners. These agreements are designed to protect its proprietary information. The Company also seeks to preserve the integrity and confidentiality of its data, trade secrets and technical know-how by maintaining physical security of its premises and physical and electronic security of its information technology systems. Although the Company has confidence in these individuals, organizations and systems, such agreements or security measures may be breached, and it may not have adequate remedies for any breach. In addition, the Company’s trade secrets may otherwise become known or be independently discovered by competitors or others.

 

Manufacturing

 

Immune does not own or operate manufacturing facilities for any of its products, nor does it plan to develop its own manufacturing operations in the foreseeable future. The Company currently depends on third party contract manufacture organizations for all of its bulk drug substance and drug candidates for its preclinical and clinical trials.

 

The raw materials that the Company requires to manufacture its product candidates are readily available commodities commonly used in the pharmaceutical industry.

 

On June 27, 2011, Immune signed a manufacturing agreement with Lonza, relating to the Phase II production of bertilimumab using Lonza’s proprietary cell line technology. Under the agreement, Lonza will produce Phase II clinical trial material at its mammalian development and manufacturing facility and prepare documentation required for submission to the FDA, including the applicable clinical trial application.  To date, two clinical batches have been produced and delivered by Lonza under this agreement. A third batch is being manufactured to support additional pilot clinical trials.  The Company relies on certain third parties to perform filling, finishing, labeling, packaging, distribution, laboratory testing and other services related to the manufacture of bertilimumab clinical supply.

 

In 2014, the Company entered into an agreement with Probiogen AG to develop a new Chinese Hamster Ovary (“CHO”) derived cell line with improved characteristics, including higher productivity. In 2015, the Company transferred the cell line to STC Biologics for the development of the new manufacturing process for bertilimumab. The cell line and manufacturing process are fully owned by the Company, without any obligation to pay royalties or further consideration and without restrictions on selection of future manufacturing partners. In 2016, the Company signed an agreement for the transfer of the new manufacturing process of bertilimumab to MassBiologics for scale up and GMP production for clinical trials.

 

Manufacturers of Immune’s products are required to comply with applicable Good Manufacturing Practices (“GMP”) regulations. GMP regulations require, among other things, quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Accordingly, manufacturers must continue to spend time, money, and effort in the area of production and quality control in order to maintain GMP regulatory compliance. In addition, changes to the manufacturing process generally require prior Regulatory Health Authority approval before being implemented.

 

The Company and its contract manufacturers must ensure that all of the processes, methods and equipment are compliant with GMP for drugs on an ongoing basis, as mandated by the FDA and other regulatory authorities, and conduct extensive audits of vendors, contract laboratories and suppliers.

 

Contract Research Organizations

 

Immune outsources clinical trial activities to Clinical Research Organizations (“CROs”). The Company’s clinical CROs comply with guidelines from the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use, which attempt to harmonize the FDA and the European Medicines Agency (“EMA”) regulations and guidelines. Immune creates and implements the drug development plans and manages the CROs according to the specific requirements of the drug candidate under development. To the extent clinical research is conducted by the CROs (or the Company in the future), compliance with certain federal regulations, including but not limited to 21 C.F.R. parts 50, 54, 56, 58 and 318, which pertain to, among other things, institutional review boards, informed consent, financial conflicts of interest by investigators, good laboratory practices and submitting IND applications, may be required.

 

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Marketing, Sales and Commercialization

 

The Company does not have any internal sales, marketing or distribution infrastructure or capabilities. In the event the Company receives regulatory approval for its product candidates, it intends, where appropriate, to pursue commercialization relationships, including strategic alliances and licensing, with pharmaceutical companies and other strategic partners, which are equipped to market and/or sell the Company’s products, if any, through their well-developed sales, marketing and distribution organizations in order to gain access to global markets. In addition, the Company may out-license some or all of its worldwide patent rights to more than one party to achieve the fullest development, marketing and distribution of any products it develops. Over the longer term, the Company may consider ultimately building an internal marketing, sales and commercial infrastructure.

 

Environmental Matters

 

The Company, its agents and its service providers, including its manufacturers, may be subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. The Company believes that its business, operations and facilities, including, to its knowledge, those of its agents and service providers, are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations.

 

Government Regulation

 

The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketing and distribution of drugs, such as those we are developing. These agencies and other federal, state and local entities regulate, among other things, the research and development, testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, distribution, post-approval monitoring and reporting, sampling and export and import of our drug candidates.

 

U.S. Government Regulation

 

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (the “FDCA”) and the implementing of regulations in the FDCA. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending New Drug Applications (“NDAs”) withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.

 

The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

·completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice (“GLP”) regulations;
·submission to the FDA of an IND which must become effective before human clinical trials may begin;
·approval by an independent institutional review board (“IRB”) at each clinical site before each trial may be initiated;
·performance of adequate and well controlled human clinical trials in accordance with good clinical practice (“GCP”) requirements to establish the safety and efficacy of the proposed drug product for each indication;
·submission to the FDA of an NDA;
·satisfactory completion of an FDA advisory committee review, if applicable;
·satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current GMP requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
·FDA review and approval of the NDA.

 

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Preclinical Studies

 

Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.

 

Clinical trials involve the administration of the investigational new drug to human patients under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research patients provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health (the “NIH”) for public dissemination on their www.clinicaltrials.gov website.

 

Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

 

·Phase I clinical trial: The drug is initially introduced into healthy human volunteers or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.
·Phase II clinical trial: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
·Phase III clinical trial: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.

 

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Each of Phase I, Phase II and Phase III clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

 

A drug being studied in clinical trials may be made available to individual patients in certain circumstances. Pursuant to the 21st Century Cures Act (the “Cures Act”) which was signed into law in December 2016, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the latest of 60 calendar days after the date of enactment of the Cures Act or the first initiation of a Phase II or Phase III trial of the investigational drug.

 

Marketing Approval

 

Assuming successful completion of the required clinical testing, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act (“PDUFA”) guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision.

 

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In addition, under the Pediatric Research Equity Act of 2003 (“PREA”) as amended and reauthorized, certain NDAs or supplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.

 

The FDA also may require submission of a risk evaluation and mitigation strategy (“REMS”) plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.

 

The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.

 

The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

 

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with Current Good Manufacturing Practice (“cGMP”) requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCP requirements.

 

After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.

 

Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase IV clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.

 

Orphan Drug Act

 

Under the Orphan Drug Act of 1983, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the name of the sponsor, identity of the drug or biologic and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not shorten the duration of the regulatory review or approval process, but does provide certain advantages, such as a waiver of PDUFA fees, enhanced access to FDA staff and potential waiver of pediatric research requirements.

 

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If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full NDA, to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the application user fee. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

 

The Company intends to pursue orphan drug designation for bertilimumab as a therapeutic agent for BP and potentially for other future drug candidates as we deem it appropriate. Even if we were to obtain orphan drug designation for a drug candidate, we may not obtain orphan exclusivity and that exclusivity may not effectively protect the drug from the competition of different drugs for the same condition, which could be approved during the exclusivity period.

 

Post-Approval Requirements

 

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

 

The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.

 

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

 

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

 

·restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
·fines, warning letters or holds on post-approval clinical trials;
·refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;
·product seizure or detention, or refusal to permit the import or export of products; or
·injunctions or the imposition of civil or criminal penalties.

 

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The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

 

Coverage and Reimbursement

 

Sales of our drug candidates, if approved, will depend, in part, on the extent to which such products will be covered by third-party payors, such as government health care programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly limiting coverage or reducing reimbursements for medical products and services. In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Third-party payors decide which therapies they will pay for and establish reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for any drug candidates that we develop will be made on a payor-by-payor basis. Each payor determines whether or not it will provide coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of its formulary it will be placed. The position on a payor’s list of covered drugs, or formulary, generally determines the co-payment that a patient will need to make to obtain the therapy and can strongly influence the adoption of such therapy by patients and physicians. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our drug candidates or a decision by a third-party payor to not cover our drug candidates could reduce physician usage of our drug candidates, once approved, and have a material adverse effect on our sales, results of operations and financial condition.

 

Other Healthcare Laws

 

Because of our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and third-party payors, we will also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we will conduct our business, including our clinical research, proposed sales, marketing and educational programs. Failure to comply with these laws, where applicable, can result in the imposition of significant civil penalties, criminal penalties, or both.

 

The U.S. laws that may affect our ability to operate, among others, include: the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; certain state laws governing the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; the Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

 

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In addition, many states have similar laws and regulations, such as anti-kickback and false claims laws that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that our product is sold in a foreign country, we may be subject to similar foreign laws.

 

Healthcare Reform

 

Current and future legislative proposals to further reform healthcare or reduce healthcare costs may result in lower reimbursement for our products. The cost containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented in the future could significantly reduce our revenues from the sale of our products.

 

For example, implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, collectively the Affordable Care Act (“PPACA”) has substantially changed healthcare financing and delivery by both governmental and private insurers, and significantly impacted the pharmaceutical industry. The PPACA, among other things, established an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents, revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, and provided incentives to programs that increase the federal government’s comparative effectiveness research. Since its enactment there have been judicial and Congressional challenges to certain aspects of the PPACA. Some of the provisions of the PPACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the PPACA. In addition, the current administration and Congress will likely continue to seek legislative and regulatory changes, including repeal and replacement of certain provisions of the PPACA. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In March 2017, following the passage of the budget resolution for fiscal year 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act, which, if enacted, would have amended or repealed significant portions of the PPACA. However, consensus over the scope of the American Health Care Act could not be reached by its proponents in the U.S. House of Representatives. Thus, the proposed legislation has been withdrawn. Further, the House of Representatives recently passed the American Health Care Act of 2017 (the “AHCA”), which would repeal significant portions of the Healthcare Reform Law, if it becomes law.

 

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals for spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2025 unless additional Congressional action is taken. Additionally, in January 2013, then President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products.

 

The Company expects that additional federal and state, as well as foreign, healthcare reform measures will be adopted in the future, any of which could result in reduced demand for our products or additional pricing pressure.

 

International Regulations

 

Whether or not Immune obtains FDA approval for a product, the Company must obtain approval of a product by the comparable regulatory authorities of foreign countries before it can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the U.S. typically are administered with the three-phase sequential process that was discussed above under “Government Regulation—U.S.” However, the foreign equivalent of an IND is not a prerequisite to performing pilot studies or Phase I clinical trials.

 

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Under European Union regulatory systems, the Company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is required for oncology products and is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all member states. This authorization is a marketing authorization application. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure.

 

In addition, regulatory approval of prices is required in most countries other than the U.S. Immune faces the risk that the resulting prices would be insufficient to generate an acceptable return to the Company, its shareholders or its collaborators.

 

Research and Development

 

We have devoted substantial efforts and resources to advancing our intellectual property estate and scientific research and drug development. Generally, research and development expenditures are allocated to specific research projects. Due to various uncertainties and risks, it is not possible to accurately predict future spending or time to completion by project or project category. Research and Development costs were $8.3 million and $5.9 million during the fiscal years ended December 31, 2016 and 2015, respectively. The Company will require additional investments in research and development to bring its product candidates to market. 

 

Competition 

 

Immune operates in highly competitive segments of the biotechnology and biopharmaceutical markets. The Company faces competition from many different sources, including commercial pharmaceutical and biotechnology companies, academic institutions, government agencies, and private and public research institutions. Many of the Company’s competitors have significantly greater financial, product development, manufacturing and marketing resources than the Company. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. As a result, these companies may obtain marketing approval more rapidly than Immune may be able to and may be more effective in selling and marketing their products. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with the Company. Adequate protection of intellectual property, successful product development, adequate funding and retention of skilled, experienced and professional personnel are among the many factors critical to success in the pharmaceutical industry.

 

Employees

 

As of May 16, 2017, the Company’s workforce consisted of nine full time U.S. and three full time Israeli employees.

 

Corporate and Available Information

 

Immune (formerly EpiCept) was incorporated in Delaware in March 1993. Immune Ltd., incorporated in Israel in July 2010, entered into a definitive merger agreement with Immune in November 2012, which was completed on August 25, 2013. Immune’s principal executive offices are located at 550 Sylvan Avenue, Suite 101, Englewood Cliffs, NJ 07632. The Company’s telephone number is (201) 464-2677, and its website address is www.immunepharma.com. The information contained in, or accessible through, the Company’s website does not constitute a part this Annual Report on Form 10-K. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, are available to you free of charge through the “Investors — SEC Filings” section of its website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the Securities and Exchange Commission. The Company’s shares of common stock are listed on The NASDAQ Capital Market and NASDAQ OMX, First North Premier, Stockholm under the symbol “IMNP.”

 

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ITEM 1A. RISK FACTORS

 

Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business operations.

  

Risks Relating to our Financial Position and Need for Additional Capital

 

We have limited liquidity and, as a result, we may not be able to meet our obligations under existing debt agreements.

 

Since our inception in July 2010, we have incurred significant losses and expect to continue to operate at a net loss in the foreseeable future. For the fiscal year ended December 31, 2016, we incurred net losses of $32.7 million and a total accumulated deficit of $95.6 million. To date, we have financed our operations primarily through private placements of common stock and preferred stock, public offering, convertible debt securities and borrowings under secured loans. Our revenue to date has consisted of royalties on licensed patents. We have devoted substantially all of our financial resources and efforts to developing bertilimumab, our Phase II drug for the treatment of inflammatory diseases and NanomAbs, our platform for the targeted delivery of cancer drugs, manufacturing bertilimumab under cGMPs, conducting preclinical studies and clinical trials. We are still in the early stages of development of our product candidates, and we have not completed development of bertilimumab, NanomAbs or other drugs. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we continue the research and development of our product candidates.

 

We believe that our available cash and short-term investments as of the date of this filing may not be sufficient to fund our anticipated level of operations for at least the next 12 months. Management believes the Company’s ability to continue its operations depends on its ability to access capital markets and generate and grow revenue though management believes that the Company will continue to incur losses for the immediate future. The Company expects to finance its cash needs from additional equity or debt financing, or strategic alliances on products in until it can achieve profitability and positive cash flows from operating activities, if ever.

 

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval, and establishing and managing our collaborations at various stages of each candidate’s development. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability.

 

None of the Company’s drug candidates has received FDA or foreign regulatory marketing approval (except Ceplene). In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that its clinical data and that of its collaborators establish the safety and efficacy of the Company’s drug candidates. Furthermore, the Company’s strategy includes entering into collaborations with third parties to participate in the development and commercialization of its products. In the event that third parties have control over the preclinical development or clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under the Company’s control. The Company cannot forecast with any degree of certainty which of its drug candidates will be subject to future collaborations or how such arrangements would affect its development plan or capital requirements.

 

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA or EMA to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates, our expenses could increase and revenue could be further delayed.

 

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Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our Company could also cause you to lose part or all of your investment.

 

We will require substantial additional funding which may not be available to us on acceptable terms, or at all. If we fail to raise the necessary additional capital, we may be unable to complete the development and commercialization of our product candidates, or continue our development programs.

 

 Our operations have consumed substantial amounts of cash since our inception in 2010. We will require additional capital for the further development and commercialization of our product candidates as well as to fund our other operating expenses and capital expenditures.

 

We cannot be certain that additional funding will be available on acceptable terms or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. We may also seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. Any of these events could significantly harm our business, financial condition and results of operations.

 

The Company expects that a large percentage of its future research and development expenses will be incurred in support of current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. The Company tests its product candidates in numerous preclinical studies for toxicology, safety and efficacy. The Company then conducts early stage clinical trials for each drug candidate. As the Company obtains results from clinical trials, it may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus resources on more promising product candidates or programs. Completion of clinical trials may take several years but the length of time generally varies according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development,

 

In order to carry out our business plan and implement our strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through strategic collaborations, licensing arrangements, public or private equity or debt financing, bank lines of credit, asset sales, government grants, or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us, or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders, and debt or equity financing, if available, may subject us to restrictive covenants and significant interest costs. If we obtain funding through a strategic collaboration or licensing arrangement, we may be required to relinquish our rights to certain of our product candidates or marketing territories.

 

In addition, certain investors, including institutional investors, may be unwilling to invest in our securities if we are unable to maintain the listing of our common stock on a U.S. national securities exchange. Our inability to raise capital when needed would harm our business, financial condition and results of operations, and could cause our stock price to decline or require that we wind down our operations altogether.

 

We are an early stage corporation. Our limited operating history makes it difficult to evaluate our current business and future prospects, and our profitability in the future is uncertain.

 

We commenced operations in 2010. Our limited operating history hinders an evaluation of our prospects, which should be considered in light of the risks, expenses and difficulties frequently encountered in the establishment of a business in a new industry, characterized by a number of market entrants and intense competition, and in the shift from development to commercialization of new products based on innovative technologies.

 

We may incur significant operating losses over the next several years. Our ability to achieve profitable operations in the future will depend in large part upon successful development of our product candidates or in-licensing of products approved by the FDA, selling and manufacturing these products, completing development of our products, obtaining regulatory approvals for these products, and bringing these products to market. The likelihood of the long-term success of our company must be considered in light of the expenses, difficulties and delays frequently encountered in the development and commercialization of new drug products, competitive factors in the marketplace, as well as the regulatory environment in which we operate.

 

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Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel to satisfy needs from expected growth. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability on the part of our management to manage growth could delay the execution of our business plans or disrupt our operations. As a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.

 

We have incurred operating losses since our inception. We expect to incur operating losses for the foreseeable future and may never achieve or maintain profitability.

 

At December 31, 2016, we had a working capital deficit of $8.5 million. Our accumulated deficit amounted to $95.6 million and $63.0 million at December 31, 2016 and December 2015, respectively. Our net loss for the years ended December 31, 2016 and 2015 was $32.7 million and $17.2 million, respectively. Net cash used in operating activities for the years ended December 31, 2016 and 2015 was $12.3 million and $13.9 million, respectively. Operations since inception have been funded primarily with the proceeds from equity and debt financings. As of December 31, 2016, we had cash, and cash equivalents of $0.3 million. We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurance that such capital will be available to us on favorable terms or at all. If we are unable to raise additional funds in the future on acceptable terms, or at all, we may be forced to cease or curtail our development activities. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on existing stockholders.

 

Our auditors have expressed doubt about our ability to continue as a going concern. We have a limited operating history, expect to continue to incur substantial operating losses and may be unable to obtain additional financing, causing substantial doubt about our ability to continue as a going concern.

 

The Independent Registered Public Accounting Firm’s Report issued in connection with our audited financial statements for the year ended December 31, 2016 stated that there is “substantial doubt about the Company’s ability to continue as a going concern”. If we are not able to continue our business as a going concern, we may be forced to liquidate our assets for an amount less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose part or all of their investment. Our ability to continue as a going concern is dependent on a combination of several factors, including, our ability to issue debt or equity securities to investors, license or sell our product candidates to other pharmaceutical companies, and generate revenues from successfully developed products. We have limited capital resources and our operations, since inception, have been funded by the proceeds of equity and debt financings.

 

The terms of our loan and security agreement place restrictions on our operating and financial flexibility. If we raise additional capital through this facility, the terms of any new debt could further restrict our ability to operate our business.

 

As of May 16, 2017, the outstanding principal balance of our loan and security agreement with Hercules Capital, Inc. was $2.5 million. The loan and security agreement contains customary affirmative and negative covenants and events of default applicable to us and our subsidiaries. The negative covenants include, among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making certain investments, incurring liens and selling certain assets in each case subject to certain exceptions. If we default under the facility, the lender may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the lenders right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. Any declaration by the lender of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

 

If we fail to comply with the continued minimum closing bid requirements of the NASDAQ Capital Market LLC (“NASDAQ”) or other requirements for continued listing, our Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.

 

Our Common Stock is listed for trading on the NASDAQ. We must satisfy NASDAQ’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. If a company’s Common Stock trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send a deficiency notice to the company, advising that it has been afforded a "compliance period" of 180 calendar days to regain compliance with the applicable requirements. Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance period may be available.

 

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A delisting of our Common Stock from the NASDAQ could materially reduce the liquidity of our Common Stock and result in a corresponding material reduction in the price of our Common Stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.

 

On January 5, 2016, we received a notification letter from NASDAQ informing us that for the last 30 consecutive business days, the bid price of our securities had closed below $1.00 per share. This notice had no immediate effect on our NASDAQ listing and we had 180 calendar days, or until July 5, 2016, to regain compliance. To regain compliance, the closing bid price of our securities must be at least $1.00 per share for a minimum of ten consecutive business days.

 

On July 6, 2016, we received a notification from the Listing Qualifications Department of The NASDAQ indicating that the Company had been granted an additional 180-calendar day extension, or until January 3, 2017, to regain compliance with the requirements under NASDAQ Listing Rule 5810(c)(3) (the “Rule”). The notification stated that extension determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Capital Market, with the exception of the bid price requirement. The notification had no immediate effect on the NASDAQ listing or trading of the Company’s Common Stock. 

 

On January 4, 2017, the Company received a letter from the NASDAQ Listing Qualifications Staff (the “Staff”) stating that the Staff has determined to delist the Company’s securities from the NASDAQ because the Company is not in compliance with the $1.00 minimum bid price requirement for continued listing set forth in the NASDAQ Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”), unless the Company timely requests a hearing before the NASDAQ’s Hearings Panel (the “Panel”) by January 11, 2017.

 

On March 13, 2017 the Company, announced that following a hearing on March 9, 2017, where the Company presented its plan to regain compliance including ongoing business events, the Nasdaq Hearings Panel (the "Panel") granted the Company's request for additional time to comply with Nasdaq listing requirements, subject to the following: (i) on or before April 14, 2017, the Company must inform the Panel that it has effected a split in a ratio sufficient to cure the deficiency and (ii) on or before May 1, 2017, the Company must have evidenced a closing bid price of $1.00 or more for a minimum of ten prior consecutive trading days. On April 13, 2017, the Company effected a 1-for-20 reverse stock split under a new CUSIP number 45254C200. 

 

Our management has identified internal control deficiencies, which our management believes constitute material weaknesses. Any future material weaknesses or deficiencies in our internal control over financial reporting could harm stockholder and business confidence in our financial reporting, our ability to obtain financing and other aspects of our business.

 

In connection with the preparation of our audited financial statements for the year ended December 31, 2016 and 2015 we concluded that a material weakness existed in internal control over financial reporting. As of December 31, 2016, we carried out an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013), updated and reissued by the Committee of Sponsoring Organizations (2013) (“COSO Framework”). Based on our evaluation under the COSO Framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2016. In connection with the above assessment, Immune management identified a material weakness in the control environment relating to lack of sufficient entity level controls, segregation of duties issues due to lack of sufficient accounting and finance personnel and lack of a sufficient technology infrastructure to support the financial reporting function.

 

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions. Although the Company has attempted to address the identified material weaknesses, management has concluded that the Company's internal controls over financial reporting were not effective at December 31, 2016. Therefore, we cannot be certain that, in the future, additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If our efforts to address the weakness identified are not successful, or if other deficiencies occur, these weaknesses or deficiencies could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price and investor confidence or other material effects on our business, reputation, financial condition or liquidity.

 

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We may be unable to license our product candidate AmiKet on terms that reflect the current carrying value of the asset, or at all, which would negatively affect our financial condition and results of operations.

 

We perform an analysis periodically to determine whether an impairment of our intangible non-depreciable assets. Our most recent impairment analysis determined that a change in the carrying value of in-process research and development (“IPR&D”) related to the AmiKet license agreement was required. As a result, we decreased the carrying value of the IPR&D asset from $27.5 million as of December 31, 2015 to $15.0 million as of December 31, 2016. There is no assurance that future analysis would not result in further impairment of the fair value attributable to the AmiKet IPR&D. We are attempting to license or sell AmiKet. If we are unable to do so or if we sell or license AmiKet on terms materially less favorable than the assumptions used in the current valuation of the AmiKet IPR&D, the carrying value of the asset would be further impaired, which could materially adversely affect our financial condition and results of operations.

 

We may be exposed to market risk and interest rate risk that may adversely impact our financial position, results of operations or cash flows.

 

We may be exposed to market risk, i.e. the risk of loss related to changes in market prices, including foreign exchange rates, of financial instruments that may adversely impact our financial position, results of operations or cash flows. In addition, our investments may be exposed to market risk due to fluctuation in interest rates, which may affect its interest income and the fair market value of investments, if any. At present, our investments consist primarily of cash and cash equivalents. We may invest in investment-grade marketable securities with maturities of up to three years, including commercial paper, money market funds, and government/non-government debt securities. The primary objective of our investment activities is to preserve principal while maximizing the income that we receive from our investments without significantly increasing risk of loss.

 

We are exposed to fluctuations in currency exchange rates, which could have an adverse effect on us.

 

Our foreign currency exposures gives rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, mainly against the New Israeli Shekel, (“NIS”), the Euro and the British pound sterling. A significant portion of our expenses are denominated in U.S. dollars (with certain expenses payable to Israeli personnel, including sub-contractors and consultants, in the NIS). Our U.S. dollar expenses consist principally of payments made to personnel in the U.S., including sub-contractors and consultants for preclinical studies, clinical trials and other research and development activities. We anticipate that the bulk of our expenses will continue to be denominated in U.S. dollars and the NIS. If the U.S. dollar fluctuates significantly against the NIS, the Euro or the British pound sterling it may have a negative impact on our results of operations.

 

To date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations. Exchange rate fluctuations resulting in a devaluation of the NIS, the Euro or the British pound sterling compared with the U.S. dollar could have a material adverse impact on our results of operations and share price.

 

Risks Related to Regulatory Development, Approval and other Legal Compliance

 

The use of FDA-approved therapeutics in AmiKet could require us or a licensee to conduct additional preclinical studies and clinical trials, which could increase development costs and lengthen the regulatory approval process.

 

AmiKet utilizes proprietary formulations and topical delivery technologies to administer FDA-approved pain management therapeutics. We may still be required to conduct preclinical trials and clinical trials to determine if our product candidates are safe and effective. In addition, we may also be required to conduct additional preclinical trials and Phase I clinical trials to establish the safety of the topical delivery of these therapeutics and the level of absorption of the therapeutics into the bloodstream. The FDA may also require us to conduct clinical trials to establish that our delivery mechanisms are safer or more effective than the existing methods for delivering these therapeutics. As a result, we may be required to conduct complex clinical trials, which could be expensive and time-consuming and lengthen the anticipated regulatory approval process. In addition, the cost of clinical trials may vary significantly over the life of a project as a result of differences in the design of the clinical trials arising during clinical development.

 

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If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to develop and then commercialize our product candidates or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired.

 

Our product candidates and the activities associated with their development, applications for regulatory approval, and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by the EMA and similar regulatory authorities outside the U.S. and Europe. Failure to obtain approval of clinical trial applications, CTAs, in EU countries may delay or prevent us from developing our drugs in one or more jurisdictions. Similarly, failure to obtain marketing approval for a product candidate (NDA, BLA, or MAA) will prevent us from commercializing our product candidate. While our executives have experience with the IND, NDA, BLA, CTA and MAA processes, we expect to rely on third parties to assist us in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing development and later marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. For example, new drugs frequently are indicated only for patient populations that have not responded to an existing therapy or have relapsed. If any of our product candidates with such an indication receives marketing approval, the accompanying label may limit the approved use of our drug in this way, which could limit sales of the product.

 

The process of obtaining marketing approvals, both in the United States and abroad, is expensive and may take many years. If additional clinical trials are required for certain jurisdictions, these trials can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved, and may ultimately be unsuccessful. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review process for each submitted product application, may cause delays in the review and approval of an application. In addition, there is still uncertainty with respect to the impact President Trump’s administration and the Congress may have, if any, and any changes will likely take time to unfold. Any new laws or regulations that have the effect of imposing additional costs or regulatory burden on pharmaceutical manufacturers, or otherwise negatively affect the industry, could adversely affect our ability to successfully commercialize our products and product candidates. In addition, President Trump has indicated that reducing the price of prescription drugs will be a priority of his administration. The implementation of any price controls or caps on prescription drugs, whether at the federal level or state level, could adversely affect our business, operating results and financial condition.

 

Regulatory authorities have substantial discretion in the approval process and may reject a marketing application as deficient or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical studies and clinical trials could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

Although we have met with the FDA regarding the development of bertilimumab, it is possible that the FDA may change its requirements or require us to conduct additional preclinical studies and/or clinical trials that may delay the development and approval of this drug. Unfavorable data from our clinical trials may restrict the potential development and commercialization of bertilimumab or lead to the termination of its development.

 

Ceplene is approved by the EMA and registered in over 30 countries in Europe and Israel. It also has Orphan Drug status in both the EU and US for AML. The FDA however, refused to file the Ceplene NDA submission due to the lack of an Overall Survival primary endpoint in the study and the lack of an IL-2 treatment alone control arm. Based on new biologic and clinical findings that have been studied and analyzed since the last communication with the FDA, we are planning further formal discussions with the FDA regarding a path forward for registration in the U.S., including the reaching an agreement with the agency on a Special Protocol Assessment (SPA).

 

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Azixa and crolibulin are still in early-mid-stage clinical development and the next steps are being considered. Once those are determined, discussions will ensue with the FDA regarding the developmental pathways for these drugs. Azixa has Orphan Drug status in the US for glioblastoma multiforme (GBM).

 

AmiKet has received Fast Track designation from the FDA for the treatment of chemotherapy-induced peripheral neuropathy (“CIPN”), which allows for guidance, rolling submission of NDA components and a shorter review cycle than with standard applications. However there is no guarantee that the FDA will not change its requirements or that the studies reviewed by FDA will be adequate for marketing approval.

 

NanomAbs are novel nano-therapeutics. Although the FDA and other regulatory authorities have approved nano-therapeutics in the past, the agency is monitoring whether nanotechnology-based therapeutics pose any specific health and human safety risks. While they have not issued any regulations to date, it is possible that the FDA and other regulatory authorities could issue regulations or establish policy positions in the future regarding nano-therapeutics that could adversely affect our product candidates.

 

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.

 

The results from completed preclinical studies and early stage clinical trials may not be predictive of results in later stage trials and may not be predictive of the likelihood of regulatory approval.

 

We or our partners discuss with and obtain guidance from regulatory authorities on clinical trial protocols. Over the course of conducting clinical trials, circumstances may change, such as standards of safety, efficacy or medical practice, which could affect regulatory authorities’ perception of the adequacy of any of our clinical trial designs or the data we develop from our clinical trials. Clinical trial designs that were discussed with regulatory authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval. Changes in circumstances could affect our ability to conduct clinical trials as planned. Even with successful clinical safety and efficacy data, we may be required to conduct additional, expensive trials to obtain regulatory approval. Any failure or significant delay in completing clinical trials for our product candidates, or in receiving regulatory approval for the commercialization of our product candidates, may severely harm our business and delay or prevent us from being able to generate revenue and our stock price will likely decline.

 

If we receive regulatory approval, our marketed products will also be subject to ongoing FDA and/or foreign regulatory agency obligations and continued regulatory review, and if we fail to comply with these regulations, we could lose approvals to market any products, and our business would be seriously harmed.

 

Following initial regulatory approval of any of our product candidates, we will be subject to continuing regulatory review, including review of adverse experiences and clinical results that are reported after our products become commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our product candidates will also be subject to periodic review and inspection by the FDA or foreign regulatory agencies. If a previously unknown problem or problems with a product, manufacturing or laboratory facility used by us is discovered, the FDA or foreign regulatory agency may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. Any changes to an approved product, including the way it is manufactured or promoted, often require FDA approval before the product, as modified, can be marketed. Our manufacturers and we will be subject to ongoing FDA requirements for submission of safety and other post-market information. If we or our manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·issue warning letters;
·impose civil or criminal penalties;
·suspend or withdraw regulatory approval;
·suspend any ongoing clinical trials;
·refuse to approve pending applications or supplements to approved applications;
·impose restrictions on operations;
·close the facilities of manufacturers; or
·seize or detain products or require a product recall.

 

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In addition, the policies of the FDA or other applicable regulatory agencies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature, or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad.

 

Any regulatory approval we receive for our product candidates will be limited to those indications and conditions for which we are able to show clinical safety and efficacy.

 

Any regulatory approval that we may receive for our current or future product candidates will be limited to those diseases and indications for which such product candidates are clinically demonstrated to be safe and effective. For example, in addition to the FDA approval required for new formulations, any new indication to an approved product also requires FDA approval. If we are not able to obtain regulatory approval for a broad range of indications for our product candidates, our ability to effectively market and sell our product candidates may be greatly reduced and may harm our ability to generate revenue.

 

While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by regulatory authorities, our regulatory approvals will be limited to those indications that are specifically submitted to the regulatory agency for review. These “off-label” uses are common across medical specialties and may constitute the best treatment for many patients in varied circumstances. Regulatory authorities in the U.S. generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow regulatory rules and guidelines relating to promotion and advertising may cause the regulatory agency to delay its approval or refuse to approve a product, the suspension or withdrawal of an approved product from the market, recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecutions, any of which could harm our business.

 

The results of our clinical trials are uncertain, which could substantially delay or prevent us from bringing our product candidates to market.

 

Before we can obtain regulatory approval for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies. Clinical trials are very expensive and difficult to design and implement. The clinical trial process is also time consuming. The commencement and completion of our clinical trials could be delayed or prevented by several factors, including:

 

·delays in obtaining regulatory approvals to commence or continue a study;
·delays in reaching agreement on acceptable clinical trial parameters;
·slower than expected rates of patient recruitment and enrollment;
·inability to demonstrate effectiveness or statistically significant results in our clinical trials;
·unforeseen safety issues;
·uncertain dosing issues;
·inability to monitor patients adequately during or after treatment; and
·inability or unwillingness of medical investigators to follow our clinical protocols.

 

We cannot assure you that our planned clinical trials will begin or be completed on time or at all, or that they will not need to be restructured prior to completion. Significant delays in clinical testing will impede our ability to commercialize our product candidates and generate revenue from product sales and could materially increase our development costs. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate.

 

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We rely on third parties over which we have little or no control to conduct clinical trials for our product candidates and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates.

 

The nature of clinical trials and our business strategy requires us to rely on clinical research centers and other third parties to assist us with clinical testing and certain research and development activities. As a result, our success is dependent upon the success of these third parties in performing their responsibilities. We cannot directly control the adequacy and timeliness of the resources and expertise applied to these activities by such third parties. If such contractors do not perform their activities in an adequate or timely manner, the development and commercialization of our product candidates could be delayed. We may enter into agreements from time to time with additional third parties for our other product candidates whereby these third parties undertake significant responsibility for research, clinical trials or other aspects of obtaining FDA approval. As a result, we may face delays if these additional third parties do not conduct clinical studies and trials, or prepare or file regulatory related documents, in a timely or competent fashion. The conduct of the clinical studies by, and the regulatory strategies of, these additional third parties, over which we have limited or no control, may delay or prevent regulatory approval of our product candidates, which would delay or limit our ability to generate revenue from product sales.

 

Our therapeutic product candidates for which we intend to seek approval are primarily biological products and may face competition sooner than expected. This is particularly relevant for our lead product candidate, bertilimumab.

 

With the enactment of the Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) as part of the Health Care Reform Law, an abbreviated pathway for the approval of bio-similar and interchangeable biological products was created. The new abbreviated regulatory pathway establishes legal authority for the FDA to review and approve bio-similar biologics, including the possible designation of a bio-similar as “interchangeable.” The FDA defines an interchangeable bio-similar as a product that, in terms of safety or diminished efficacy, presents no greater risk when switching between the bio-similar and its reference product than the risk of using the reference product alone. Under the BPCIA, an application for a bio-similar product cannot be submitted to the FDA until four years, or approved by the FDA until 12 years, after the original brand product identified as the reference product was approved under a BLA. The new law is complex and is only beginning to be interpreted by the FDA. As a result, its ultimate impact, implementation and meaning are subject to uncertainty. While it is uncertain when any such processes may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

 

We believe that if any of our product candidates were to be approved as biological products under a BLA, such approved products should qualify for the 12-year period of exclusivity. However, there is a risk that the U.S. Congress could amend the BPCIA to significantly shorten this exclusivity period as proposed by President Obama, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a bio-similar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. In addition, a competitor could decide to forego the bio-similar route and submit a full BLA after completing its own preclinical studies and clinical trials. In such cases, any exclusivity to which we may be eligible under the BPCIA would not prevent the competitor from marketing its product as soon as it is approved.

 

We may not be able to obtain orphan drug exclusivity for our product candidates, particularly for bertilimumab in bullous pemphigoid or for NanomAbs in certain infrequent cancer indications.

 

Regulatory authorities in some jurisdictions, including the U.S. and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States. One of our strategic assumptions is that we can obtain Orphan Drug Designation for bertilimumab in bullous pemphigoid, a disease with a patient population of less than 15,000 individuals in the U.S. and for certain formulations of NanomAbs in various cancer indications.

 

Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same drug for that time period. The applicable period is seven years in the U.S. and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

 

Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

 

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AmiKet’s successful partnering and commercialization may be affected by regulations on orphan drug status, patent restoration and data exclusivity.

 

AmiKet’s primary patents are expiring in 2021 and are essentially limited to the U.S. We are assuming that a marketing exclusivity of up to five years will be available under the Patent Term Restoration in the United States and under other forms in Europe and Japan to compensate for the extended development time. This marketing exclusivity may not be deemed to be applicable to AmiKet or may be reduced to less than five years in one or multiple jurisdiction. AmiKet has been granted orphan drug status for Post Herpetic Neuralgia (“PHN”), which confers a seven-year marketing exclusivity in the U.S. for that indication. Orphan drug exclusivity may be reduced or eliminated by regulators before AmiKet enjoys all or part of this protection.

 

Risks Related to Our Dependence on Third Parties

 

Any collaborations that we enter into could be important to our business. If we are unable to maintain any of these collaborations, or if these collaborations are not successful, our business could be adversely affected.

 

We intend to enter into collaborations with other biopharmaceutical companies to develop our product candidates and generate funding for our research programs. Currently, we have no agreement with any commercial partner and we may never secure a commercial partner. These collaborations may pose a number of risks, including:

 

·collaborators may have significant discretion in determining the efforts and resources that they will apply to these collaborations;
·collaborators may not perform their obligations as expected;
·collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;
·collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
·collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
·a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such product or products;
·disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
·collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
·collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;
·collaborations may be terminated for the convenience of the collaborator and, if terminated, we would potentially lose the right to pursue further development or commercialization of the applicable product candidates;
·collaborators may learn about our technology and use this knowledge to compete with us in the future;
·results of collaborators’ preclinical or clinical trials could produce results that harm or impair other products using our technology;
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·there may be conflicts between different collaborators that could negatively affect those collaborations and potentially others; and
·the number and type of our collaborations could adversely affect our attractiveness to future collaborators or acquirers.

 

If any collaborations we enter into do not result in the successful development and commercialization of our products or if one of our collaborators terminates its agreement with us, we may not receive any future research and development funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our continued development of our product candidates could be delayed and we may need additional resources to develop additional product candidates. All of the risks relating to our product development, regulatory approval and commercialization also apply to the activities of our collaborators and there can be no assurance that our collaborations will produce positive results or successful products on a timely basis or at all.

 

Additionally, subject to its contractual obligations to us, if a collaborator of ours is involved in a business combination or otherwise changes its business priorities, the collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed to it by us. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and our perception in the business and financial communities and our stock price could be adversely affected.

 

We may in the future determine to collaborate with additional pharmaceutical and biotechnology companies for development and potential commercialization of therapeutic products. We face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may not be able to access therapeutic payloads that would be suitable to development with our platform, have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our product platform and our business may be materially and adversely affected.

 

We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

 

We currently rely on third-party CROs to conduct our ongoing Phase II clinical trials of bertilimumab and do not plan to independently conduct clinical trials of our other product candidates. We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct and manage our clinical trials. These agreements might terminate for a variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative arrangements, that would delay our product development activities.

 

Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with regulatory standards, commonly referred to as good clinical practices (“GCPs”), for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Other countries’ regulatory agencies also have requirements for clinical trials with which we must comply. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

 

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We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

 

We contract with third parties for the manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

 

We do not have any manufacturing facilities that meet the FDA’s current cGMP requirements for the production of any product candidates used in humans. We rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for the commercial manufacture if any of our product candidates once they receive marketing approval. This reliance on third parties increases the risk that we may not have sufficient quantities of our product candidates on a timely basis or at all or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts. 

 

We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

·failure of third-party manufacturers to comply with regulatory requirements and maintain quality assurance;
·breach of the manufacturing agreement by the third party;
·failure to manufacture our product according to our specifications;
·failure to manufacture our product according to our schedule or at all;
·misappropriation of our proprietary information, including our trade secrets and know-how; and
·termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.

 

Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the U.S. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.

 

Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.

 

Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a second source for required raw materials used in the manufacture of our product candidates, including our lead product candidate bertilimumab. If our current contract manufacturer, Lonza, cannot perform as agreed, we may be required to replace such manufacturer and we may be unable to replace them on a timely basis or at all. Our contract with Lonza imposes restrictions, including additional payments if we elect to work with another contract manufacturer. Additionally, we have not yet secured cGMP manufacturers for NanomAbs, which may delay regulatory development toward an IND authorization and initial of clinical trials.

 

Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

 

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Risks Related to Our Intellectual Property

 

Our ability to protect our intellectual property rights will be critically important to the success of our business, and we may not be able to protect or enforce these rights in the U.S. or abroad.

 

We own or hold licenses to a number of issued U.S. patents and U.S. pending patent applications, as well as foreign patents and patent applications. Our success depends in part on our ability to obtain patent protection both in the U.S. and in other countries for our product candidates, as well as the methods for treating patients in the product indications using these product candidates. Our ability to protect our product candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Even if our product candidates, as well as methods for treating patients for prescribed indications using these product candidates are covered by valid and enforceable patents and have claims with sufficient scope, disclosure and support in the specification, the patents will provide protection only for a limited amount of time. Accordingly, rights under any issued patents may not provide us with sufficient protection for our product candidates or provide sufficient protection to afford us a commercial advantage against competitive products or processes.

 

In addition, we cannot guarantee that any patents issued from any pending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, we cannot guarantee that the claims of these patents are or will be valid or enforceable or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S. and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. Furthermore, different countries have different procedures for obtaining patents, and patents issued in different countries offer different degrees of protection against use of the patented invention by others. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed. 

 

The patent positions of biotechnology companies, including our patent position, involve complex legal and factual questions, and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated, or circumvented. Our patents can be challenged by our competitors who can argue that our patents are invalid, unenforceable, lack utility, or sufficient written description or enablement, or that the claims of the issued patents should be limited or narrowly construed. Patents also will not protect our product candidates if competitors devise ways of making or using these product candidates without legally infringing our patents. The Federal Food, Drug, and Cosmetic Act and FDA regulations and policies create a regulatory environment that encourages companies to challenge branded drug patents or to create non-infringing versions of a patented product in order to facilitate the approval of abbreviated new drug applications for generic substitutes. These same types of incentives encourage competitors to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor, providing a less burdensome pathway to approval.

 

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

 

·Others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed.
·We or our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed.
·We or our licensors or strategic partners might not have been the first to file patent applications covering certain of our inventions.
·Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing on our intellectual property rights.
·It is possible that our pending patent applications will not lead to issued patents.
·Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.
·Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.
·We may not develop additional proprietary technologies that are patentable.
·The patents of others may have an adverse effect on our business.

 

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Should any of these events occur, they could significantly harm our business, results of operations and prospects.

 

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our technologies, product candidates, and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets and we have the funds to enforce our rights, if necessary.

 

The expiration of our owned or licensed patents before completing the research and development of our product candidates and receiving all required approvals in order to sell and distribute the products on a commercial scale can adversely affect our business and results of operations.

 

In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the U.S. If we fail to apply for intellectual property protection or if we cannot adequately protect our intellectual property rights in these foreign countries, our competitors may be able to compete more effectively against us, which could adversely affect our competitive position, as well as our business, financial condition and results of operations.

 

Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the U.S. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

 

Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing product candidates to market and harm our ability to operate.

 

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future and allege that the use of our technologies infringes these patent claims or that we are employing their proprietary technology without authorization.

 

Litigation relating to the ownership and use of intellectual property is expensive, and our position as a relatively small company in an industry dominated by very large companies may cause us to be at a significant disadvantage in defending our intellectual property rights and in defending against claims that our technology infringes or misappropriates third party intellectual property rights. However, we may seek to use various post- grant administrative proceedings, including new procedures created under the America Invents Act, to invalidate potentially overly-broad third party rights. Even if we are able to defend our position, the cost of doing so may adversely affect our ability to grow, generate revenue or become profitable. Although we have not yet experienced any patent litigation, we may in the future be subject to such litigation and may not be able to protect our intellectual property at a reasonable cost, or at all, if such litigation is initiated. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.

 

In addition, third parties may challenge or infringe upon our existing or future patents. Proceedings involving our patents or patent applications or those of others could result in adverse decisions regarding the patentability of our inventions relating to our product candidates and/or the enforceability, validity or scope of protection offered by our patents relating to our product candidates.

 

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may:

 

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·incur substantial monetary damages;
·encounter significant delays in bringing our product candidates to market; and/or
·be precluded from participating in the manufacture, use or sale of our product candidates or methods of treatment requiring licenses.

 

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including Patent Office administrative proceedings, such as inter-party reviews, and reexamination proceedings before the USPTO or oppositions and revocations and other comparable proceedings in foreign jurisdictions. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may give rise to claims of infringement of the patent rights of others.

 

Despite safe harbor provisions, third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents, of which we are currently unaware, with claims to materials, formulations, methods of doing research or library screening, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be published patent applications, which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtain a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product candidate unless we obtain a license, limit our use, or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available to us on commercially reasonable terms or at all.

 

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, limit our use, pay royalties or redesign our infringing product candidates, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

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Third-party claims of intellectual property infringement may prevent or delay our drug discovery and development efforts.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could limit our ability to compete. Because we operate in a highly technical field of research and development of small molecule drugs, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

 

We license patent rights from third-party owners. Such licenses may be subject to early termination if we fail to comply with our obligations in our licenses with third parties, which could result in the loss of rights or technology that are material to our business. 

 

We are a party to licenses that give us rights to third-party intellectual property that is necessary or useful for our business, and we may enter into additional licenses in the future. Under these license agreements we are obligated to pay the licensor fees, which may include annual license fees, milestone payments, royalties, a percentage of revenues associated with the licensed technology and a percentage of sublicensing revenue. In addition, under certain of such agreements, we are required to diligently pursue the development of products using the licensed technology. If we fail to comply with these obligations and fail to cure our breach within a specified period of time, the licensor may have the right to terminate the applicable license, in which event we could lose valuable rights and technology that are material to our business. If the licensor retains control of prosecution of the patents and patent applications licensed to us, we may have limited or no control over the manner in which the licensor chooses to prosecute or maintain its patents and patent applications and have limited or no right to continue to prosecute any patents or patent applications that the licensor elects to abandon. The loss of any such rights provided under our license agreements could materially harm our financial condition and operating results.

 

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

 

We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers, and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

If we are unable to obtain licenses needed for the development of our product candidates, or if we breach any of the agreements under which we license rights to patents or other intellectual property from third parties, we could lose licensing rights that are important to our business.

 

If we are unable to maintain and/or obtain licenses needed for the development of our product candidates in the future, we may have to develop alternatives to avoid infringing on the patents of others, potentially causing increased costs and delays in drug development and introduction or precluding the development, manufacture, or sale of planned products. Some of our licenses provide for limited periods of exclusivity that require minimum license fees and payments and/or may be extended only with the consent of the licensor. We can provide no assurance that we will be able to meet these minimum license fees in the future or that these third parties will grant extensions on any or all such licenses. This same restriction may be contained in licenses obtained in the future.

 

Additionally, we can provide no assurance that the patents underlying any licenses will be valid and enforceable. To the extent any products developed by us are based on licensed technology, royalty payments on the licenses will reduce our gross profit from such product sales and may render the sales of such products uneconomical. In addition, the loss of any current or future licenses or the exclusivity rights provided therein could materially harm our business financial condition and our operations.

 

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If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

 

Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel and our consultants and advisors, as well as our licensors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. Unlike some of our competitors, we maintain our proprietary libraries for ourselves as we believe they have proven to be superior in obtaining strong binder product candidates. To this end, we require all of our employees, consultants, advisors and contractors to enter into agreements, which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

 

From time to time we may need to license patents, intellectual property and proprietary technologies from third parties, which may be difficult or expensive to obtain.

 

We may need to obtain licenses to patents and other proprietary rights held by third parties to successfully develop, manufacture and market our drug products. As an example, it may be necessary to use a third party’s proprietary technology to reformulate one of our drug products in order to improve upon the capabilities of the drug product. If we are unable to timely obtain these licenses on reasonable terms, our ability to commercially exploit such drug products may be inhibited or prevented.

 

Risks Related to Our Business and Industry

 

 We are heavily dependent on the success of our technologies and product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory approval, which is necessary before they can be commercialized.

 

To date, we have invested a significant portion of our efforts and financial resources in the acquisition and development of our product candidates. We have not demonstrated our ability to perform the functions necessary for the successful acquisition, development or commercialization of the technologies we are seeking to develop. As an early stage company, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. Our future success is substantially dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize such product candidates. Our product candidates are currently in preclinical development or in clinical trials. Our business depends entirely on the successful development and commercialization of our product candidates, which may never occur. We currently generate no revenues from the sale of any drugs, and we may never be able to develop or commercialize a marketable drug.

 

The successful development, and any commercialization, of our technologies and any product candidates would require us to successfully perform a variety of functions, including:

 

·developing our technology platform;
·identifying, developing, manufacturing and commercializing product candidates;
·entering into successful licensing and other arrangements with product development partners;
·participating in regulatory approval processes;
·formulating and manufacturing products; and
·conducting sales and marketing activities.

 

Our operations have been limited to organizing our company, acquiring, developing and securing our proprietary technology and identifying and obtaining early preclinical data or clinical data for various product candidates. These operations provide a limited basis for you to assess our ability to continue to develop our technology, identify product candidates, develop and commercialize any product candidates we are able to identify and enter into successful collaborative arrangements with other companies, as well as for you to assess the advisability of investing in our securities. Each of these requirements will require substantial time, effort and financial resources. 

 

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Each of our product candidates will require additional preclinical or clinical development, management of preclinical, clinical and manufacturing activities, regulatory approval in multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization, and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA, or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates. In addition, our product development programs contemplate the development of companion diagnostics by our third-party collaborators. Companion diagnostics are subject to regulation as medical devices and must themselves be cleared or approved for marketing by the FDA or certain other foreign regulatory agencies before we may commercialize our product candidates.

 

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

 

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. It is not uncommon for companies in the biopharmaceutical industry to suffer significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be successful.

 

Product candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates are developed through preclinical to early and late stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve these intended objectives.

 

We have not previously initiated or completed a corporate-sponsored clinical trial. Consequently, we may not have the necessary capabilities, including adequate staffing, to successfully manage the execution and completion of any clinical trials we initiate, in a way that leads to our obtaining marketing approval for our product candidates in a timely manner, or at all.

 

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

 

Delays in clinical testing could result in increased costs to us and delay our ability to generate revenue.

 

Although we are planning for certain clinical trials relating to bertilimumab, we may experience delays in our clinical trials and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:

 

·reaching agreement on acceptable terms with prospective CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
·obtaining IRB, approval at each site;
·recruiting suitable patients to participate in a trial;
·clinical sites deviating from trial protocol or dropping out of a trial;
·having patients complete a trial or return for post-treatment follow-up;

 

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·developing and validating companion diagnostics on a timely basis, if required;
·adding new clinical trial sites;
·manufacturing sufficient quantities of product candidate for use in clinical trials; or
·Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

 

Furthermore, we intend to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and we intend to have agreements governing their committed activities, for which we will have limited influence over their actual performance. We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board (“DSMB”), for such trial or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

 

Competition for patients in conducting clinical trials may prevent or delay product development and strain our limited financial resources.

 

Many pharmaceutical companies are conducting clinical trials in patients with the disease indications that our potential drug products target. As a result, we must compete with them for clinical sites, physicians and the limited number of patients who fulfill the stringent requirements for participation in clinical trials. Also, due to the confidential nature of clinical trials, we do not know how many of the eligible patients may be enrolled in competing studies and who are consequently not available to us for our clinical trials. Our clinical trials may be delayed or terminated due to the inability to enroll enough patients. Patient enrollment depends on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. The delay or inability to meet planned patient enrollment may result in increased costs and delays or termination of the trial, which could have a harmful effect on our ability to develop products.

 

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

 

The time required to obtain approval from the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, review and approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

 

Our product candidates could fail to receive regulatory approval for many reasons, including the following:

 

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

 

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·the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
·the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;
·the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the U.S. or elsewhere;
·the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies;
·the FDA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing with partners; and
·the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval. This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.

 

In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

 

We have not previously submitted a BLA or an NDA to the FDA or similar drug approval filings to comparable foreign authorities for any product candidate, and we cannot be certain that any of our product candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market one or more of our product candidates, our revenues will be dependent, in part, upon our collaborators’ ability to obtain regulatory approval of the companion diagnostics to be used with our product candidates, as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets for patients that we are targeting for our product candidates are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.

 

We plan to seek regulatory approval to commercialize our product candidates both in the United States, the European Union and in additional foreign countries. While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in many other countries we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannot predict success in these jurisdictions.

 

Healthcare reform measures could hinder or prevent our product candidates’ commercial success.

 

In both the U.S. and certain foreign jurisdictions, there have been and we expect there will continue to be a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. The U.S. government and other governments have shown significant interest in pursuing healthcare reform. In particular, the Medicare Modernization Act of 2003 revised the payment methodology for many products under the Medicare program in the United States. This has resulted in lower rates of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Healthcare Reform Law, was enacted. The Healthcare Reform Law substantially changes the way healthcare is financed by both governmental and private insurers. Such government-adopted reform measures may adversely impact the pricing of healthcare products and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third-party payors.

 

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory approval, as well as our ability to set satisfactory prices for our products, to generate revenues, and to achieve and maintain profitability.

 

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

 

We may in the future seek to expand our pipeline and capabilities by acquiring one or more companies or businesses, entering into collaborations or in-licensing one or more product candidates. Acquisitions, collaborations and in-licenses involve numerous risks, including:

 

·potentially dilutive issuance of equity securities;
·substantial cash expenditures;
·incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;
·difficulties in assimilating the operations and technology of the acquired companies;
·potential disputes regarding contingent consideration;
·the assumption of unknown liabilities of the acquired businesses;
·diverting our management’s attention away from other business concerns;
·entering markets in which we have limited or no direct experience; and
·potential loss of our key employees or key employees of the acquired companies or businesses.

 

Our experience in making acquisitions, entering collaborations and in-licensing product candidates is limited. We cannot assure you that any acquisition, collaboration or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions, collaborations and in-licenses. We cannot assure you that we would be able to successfully combine our business with that of acquired businesses, manage a collaboration or integrate in-licensed product candidates or that such efforts would be successful. Furthermore, the development or expansion of our business or any acquired business or company or any collaboration or in-licensed product candidate may require a substantial capital investment by us. We may use our securities as payment for all or a portion of the purchase price or acquisitions. If we issue significant amounts of our equity securities for such acquisitions, this would result in substantial dilution of the equity interests of our stockholders.

 

Risks Related to the Commercialization of Our Product Candidates

 

Even if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

 

If any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments like chemotherapy and radiation therapy are well established in the medical community, and physicians may continue to rely on these treatments. In addition, many new drugs have been recently approved and many more are in the pipeline for the same diseases for which we are developing our product candidates. If our product candidates do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

·efficacy, safety and other potential advantages compared to alternative treatments;
·ability to offer products for sale at competitive prices;
·convenience and ease of administration compared to alternative treatments;
·willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
·strength of marketing and distribution support;
·availability of third-party coverage and adequate reimbursement for our product candidates;

 

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·prevalence and severity of their side effects;
·any restrictions on the use of our products together with other medications;
·interactions of our products with other medicines patients are taking; and
·inability of certain types of patients to take the product.

 

If we are unable to establish effective sales, marketing and distribution capabilities or enter into agreements with third parties with such capabilities, we may not be successful in commercializing our product candidates if and when they are approved.

 

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any product for which we obtain marketing approval, we will need to establish a sales and marketing organization or make arrangements with third parties to perform sales and marketing functions.

 

In the future, we expect to build a focused specialty sales and marketing infrastructure to market or co-promote some of our product candidates in the U.S. and potentially elsewhere, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

 

Factors that may inhibit our efforts to commercialize our products on our own include:

 

·our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
·the inability of sales personnel to obtain access to or educate physicians on the benefits of our products;
·the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines;
·unforeseen costs and expenses associated with creating an independent sales and marketing organization; and
·inability to obtain sufficient coverage and reimbursement from third-party payors and governmental agencies. 

 

Outside the U.S., we expect to rely on third parties to sell, market and distribute our product candidates. We may not be successful in entering into arrangements with such third parties or may be unable to do so on terms that are favorable to us. In addition, our product revenues and our profitability, if any, may be lower if we rely on third parties for these functions than if we were to market, sell and distribute any products that we develop ourselves. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

 

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

 

The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing our product candidates. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

 

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Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources, established presence in the market and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors.

 

Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific, sales and marketing and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

 

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products. Major competing products to our lead drug, bertilimumab, such as Remicade and Humira are expected to become available on a generic basis over the coming years. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium over competitive generic products. Multiple other new drugs will be launched prior to bertilimumab in its various target indications but may limit its potential market acceptance. NanomAbs are competing with other ligand nanoparticle conjugates developed by well-funded companies such as BIND Therapeutics and Merrimack. They are also competing with other types of Bio-Conjugates including antibody drug conjugates developed by Seattle Genetics and Immunogen. Insufficient funding or inability to secure timely corporate partnerships will prevent us from successfully developing the commercial opportunity with NanomAbs. 

 

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

 

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

 

Our ability to commercialize any product candidates successfully also will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for drugs. Coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be sufficient to generate a profit. Reimbursement may affect the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult. We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

 

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

 

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

 

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

·decreased demand for any product candidates or products that we may develop;
·injury to our reputation and significant negative media attention;
·withdrawal of clinical trial participants;
·significant costs to defend the related litigation;
·substantial monetary awards to trial participants or patients;
·loss of revenue;
·reduced resources of our management to pursue our business strategy; and
·the inability to commercialize any products that we may develop. 

 

We currently hold $5.0 million in clinical trial liability insurance coverage in the aggregate and per incident, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commence commercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

Risks Related to Our Common Stock

 

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our shareholders.

 

Our stock price is likely to be volatile. The stock market in general and the market for smaller biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:

 

·the success of competitive products or technologies;
·results of clinical trials of our product candidates or those of our competitors;
·developments related to our existing or any future collaboration;
·regulatory or legal developments in the U.S. and other countries;
·developments or disputes concerning patent applications, issued patents or other proprietary rights;
·the recruitment or departure of key personnel;
·the level of expenses related to any of our product candidates or clinical development programs;
·the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;

 

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·actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
·variations in our financial results or those of companies that are perceived to be similar to us;
·changes in the structure of healthcare payment systems;
·market conditions in the pharmaceutical and biotechnology sectors;
·general economic, industry and market conditions; and
·the other factors described in this “Risk Factors” section.

 

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about our business or us. Three analysts in the U.S. and one in Sweden currently cover our stock. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our target animal studies and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Provisions in our restated certificate of incorporation and amended and restated by-laws and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our Board of Directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Among other things, these provisions include those establishing:

 

·a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our Board of Directors;
·no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
·the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from filling vacancies on our Board of Directors;
·the ability of our Board of Directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
·the ability of our Board of Directors to alter our bylaws without obtaining stockholder approval;
·the required approval of the holders of at least three-quarters (75%) of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our certificate of incorporation regarding the election and removal of directors;
·a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
·the requirement that a special meeting of stockholders may be called only by the Chairman of the Board of Directors, the chief executive officer, the president or the Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
·advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. 

 

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Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, our credit facility currently prohibits us from paying dividends on our equity securities, and any future debt agreements may likewise preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We could be subject to securities class action litigation.

 

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

Risks Related to Employee Matters and Managing Growth and Other Risks Related to Our Business

 

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

 

We are highly dependent on the principal members of our management, scientific and clinical team. Although we have entered into employment letter agreements with our executive officers, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees.

 

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.

 

A variety of risks associated with operating internationally could materially adversely affect our business.

 

In addition to our U.S. operations, we have operations in Israel through our wholly-owned subsidiary, Immune Pharmaceuticals Ltd. We face risks associated with our operations in Israel, including possible unfavorable regulatory, pricing and reimbursement, legal, political, tax and labor conditions, which could harm our business. We are also conducting and in the future plan to continue to conduct clinical trials of product candidates in Israel. We are subject to numerous risks associated with international business activities in Israel and elsewhere, including:

 

·compliance with differing or unexpected regulatory requirements for our products;
·compliance with Israeli laws with respect to our wholly owned subsidiary, Immune Ltd.;
·difficulties in staffing and managing foreign operations;
·foreign government taxes, regulations and permit requirements;

 

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·U.S. and foreign government tariffs, trade restrictions, price and exchange controls and other regulatory requirements;
·economic weakness, including inflation, natural disasters, war, events of terrorism or political instability in particular foreign countries;
·fluctuations in currency exchange rates, which could result in increased operating expenses and reduced revenues;
·compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad;
·changes in diplomatic and trade relationships; and
·challenges in enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States.

 

These and other risks associated with our international operations in Israel and elsewhere may materially adversely affect our business, financial condition and results of operations.

 

Our business and operations would suffer in the event of system failures.

 

Despite the implementation of security measures, our internal computer systems and those of our current and future contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we are not aware of any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

In February 2015, the Company’s corporate headquarters was relocated to New York, NY under a lease agreement with Alexandria Real Estate, which was to expire in 2020. On August 13, 2015, the Company signed an amendment to the New York, NY lease agreement with Alexandria Real Estate for lab space and offices for an additional 1,674 square feet commencing on September 1, 2015 and ending in 2020. The total base rent for offices and lab space, as amended, was to be $30,000 per month, subject to annual rent escalations. On January 15, 2016, Immune Ltd. signed a one year lease agreement with a renewal option for an additional year for new office space in Israel. The Company recorded rent expense of $0.6 million and $0.4 million for the years ended December 31, 2016 and, 2015, respectively.

 

Effective May 1, 2017, the Company terminated the lease agreement with Alexandria Real Estate and forfeited a security deposit in the amount of $177,000 and relocated its headquarters to Englewood Cliffs, NJ and currently occupies office space on a month to month basis. The Company has relocated its drug development activities, most of which are outsourced to third party service providers, to shared office space in New York City.

 

ITEM 3. LEGAL PROCEEDINGS 

 

Immune Pharmaceuticals Inc. was the defendant in litigation involving a dispute with the plaintiffs Kenton L. Cowley and John A. Flores. The complaint alleges breach of contract, breach of covenant of good faith and fair dealing, fraud and rescission of contract with respect to the development of a topical cream containing ketamine and butamben, known as EpiCept NP-2. A summary judgment in Immune’s favor was granted in January 2012 and the plaintiffs filed an appeal in the United States Court of Appeals for the Ninth Circuit in September 2012. A hearing on the motion occurred in November 2013. In May 2014, the court scheduled the trial in November 2014 and a mandatory settlement conference in July 2014. In July 2014, the parties failed to reach a settlement at the mandatory settlement conference. The case was tried by a jury, which rendered a decision on March 23, 2015, in favor of the Company on all causes of action. During the year ended December 31, 2015, in connection with the trial, the Company incurred approximately $0.5 million of legal costs, $0.2 million which were settled in cash, and 5,830 shares of stock, with a fair value of $0.2 million which is included in general and administrative expenses in the consolidated statements of operations. The Company issued an additional 2,000 shares on April 1, 2015 with a fair value of $70,000 to settle current outstanding legal costs. In April 2015, the plaintiffs filed a motion for a new trial, which was heard by the Court on June 8, 2015. In October 2015, the court denied the plaintiff’s motion for a new trial. On October 9, 2015, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit and, as of December 31, 2016, the court has made no ruling. During the years ended December 31, 2016 and 2015, in connection with this litigation matter, the Company incurred approximately $0.1 and $0.4 million, respectively, of legal costs.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

The Company’s common stock has been listed on The NASDAQ Capital Market under the symbol “IMNP” since August 21, 2014. The last reported sale price for the Company’s common stock on May 16, 2017, was $2.61 per share.

 

The table below sets forth closing information on the range of high and low sales prices for the Company’s common stock as reported by The NASDAQ Capital Market during the periods indicated on a post-split basis.

 

   High   Low 
2016        
First Quarter  $16.60   $8.00 
Second Quarter   12.80    4.00 
Third Quarter   11.00    5.00 
Fourth Quarter   7.20    3.20 
           
2015          
First Quarter  $46.40   $30.00 
Second Quarter   45.60    33.80 
Third Quarter   39.40    20.40 
Fourth Quarter   30.80    12.20 

 

Stockholders 

 

As of May 16, 2017, there were approximately 92 stockholders of record of the Company’s 10,027,057 outstanding shares of common stock. This does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

 

Dividends

 

The Company has never declared or paid dividends on its common stock and does not anticipate paying any cash dividends for the foreseeable future. The Company’s ability to pay cash dividends is prohibited by the terms of its credit facility with Hercules Capital.

 

Unregistered Sales of Equity Securities 

 

None

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere in this report and the “Cautionary Note Regarding Forward-Looking Statements” above. 

 

Overview

 

The Company is a clinical stage biopharmaceutical company specializing in the development of novel targeted therapeutic agents in the fields of immuno-inflammation, dermatology and immuno-oncology. The Company’s leading product candidate is bertilimumab, a clinical-stage, first-in-class, fully human antibody, which targets eotaxin-1, a key regulator of immuno-inflammation. The Company’s asset portfolio includes NanoCyclo, a topical nanocapsule formulation of cyclosporine-A, for the treatment of atopic dermatitis and psoriasis. The Company’s immuno-oncology pipeline includes Ceplene, which is effective for the maintenance of remission in patients with Acute Myeloid Leukemia (“AML”) and Azixa and crolibulin, two clinical-stage, vascular disrupting agents (“VDA”), which have demonstrated encouraging preliminary proof of concept study results. In addition, the Company has two immuno- oncology platform assets, consisting of a bispecific antibody platform and a nanotechnology combination platform, which it refers to as “NanomAbs”.

 

The Company’s current product portfolio is summarized below: 

 

Product(s)/
Product Candidate(s)
  Primary Indication(s)   Status   Commercialization Rights
             
IMMUNO-INFLAMMATION and DERMATOLOGY
Bertilimumab  

Bullous Pemphigoid

IBD (Crohn’s and ulcerative colitis)

 

Phase II

Phase II

 

Immune

Immune

NanoCyclo (cyclosporin-A)   Atopic Dermatitis, Psoriasis   Preclinical   Immune
             
IMMUNO-ONCOLOGY
Ceplene/IL-2   Acute Myeloid Leukemia  

Phase III (US)

Approved (EU)

 

Immune (Americas, Israel)

Meda AB (EU, RoW)

Crolibulin   Solid Tumors   Phase II   Immune
Azixa   Glioblastoma multiforme   Phase II   Immune
NanomAbs   Solid Tumors   Preclinical   Immune
Bispecific Antibodies   Oncology   Preclinical   Immune
             
PAIN
AmiKet   Neuropathic Pain   Phase II   Immune
LidoPAIN   Pain   Phase II   Immune

 

Ceplene®, CrolibulinTM, Azixa®, AmiKetTM and LidoPain® are trademarks that the Company owns. Each trademark, trade name or service mark of any other company appearing in this annual report on Form 10-K belongs to its respective holder.

 

Business Strategy

 

The Company’s core business strategy is to build a portfolio of novel immunotherapies and compounds with the potential to treat or prevent severe inflammatory diseases in dermatology, gastroenterology and cancer, develop each compound to pre-determined milestones, and license the compounds to pharmaceutical companies for advanced development and commercialization. Additionally, the Company may seek to acquire commercial stage drugs in the field of immuno-oncology. The Company intends to obtain revenues from licensing fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates or intellectual property for specific therapeutic indications or applications.

 

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In April 2017, the Company announced a corporate restructuring with the objective of prioritizing and segregating its research and development efforts on a focused set of products in inflammatory disease and dermatology and strengthening its financial position. Under this strategy, the Company intends to focus its business on immuno-inflammation in general, and immuno-dermatology in particular, by developing its core asset, bertilimumab, and by developing topical nano-cyclosporine for the treatment of atopic dermatitis and moderate psoriasis. The Company intends to segregate its oncology business into its wholly-owned subsidiary, Cytovia, Inc. (“Cytovia”) and pursue a possible spin-off of Cytovia into a separate, stand-alone company. Cytovia will focus on the development and commercialization of novel immuno-oncology and hematology therapeutics, led by Ceplene, Azixa, crolibulin and the Company’s bispecific antibody platform. Additionally, Cytovia may seek to acquire commercial stage drugs in the field of immuno-oncology.

 

Recent Developments

 

Private Placement Offering

 

On May 4, 2017, the Company announced that it had entered into definitive agreements with several institutional investors for a private placement of up to $3.4 million of convertible debentures. The debentures are convertible at any time into up to 1,245,675 shares of the Company's common stock at a conversion price of $2.89 per share, subject to adjustment.  In addition, the investors will receive up to 680,000 shares of the Company's common stock. The sale of the debentures will be implemented in multiple closings. The Company sold $1.5 million of convertible debentures to the investors at the initial closing of the transaction and will sell the remaining $1.9 million to the investors in subsequent closings linked to the achievement of certain milestones. The initial closing of the transaction took place on May 9, 2017. Maxim Group LLC is acting as the sole placement agent for the offering.

 

Corporate restructuring

 

On April 24, 2017, the Company announced a corporate restructuring with the objective of prioritizing and segregating its research and development efforts on a focused set of products in inflammatory disease and dermatology and strengthening its financial position. In line with this prioritization, the Company's Board of Directors authorized Dr. Daniel Teper to lead the Company's oncology business within the Company's Cytovia, Inc. subsidiary and to pursue a possible spin-off of Cytovia into a separate, stand-alone company independent from Immune. Cytovia will focus on the development and commercialization of Immune’s novel immuno-oncology and hematology therapeutic agents and product candidates, including Ceplene for administration in combination with low dose IL-2 for the remission maintenance of patients with AML, crolibulin, Azixa, NanomAbs and the Company’s bispecific antibody platform technology.

 

In connection with this restructuring, Dr. Daniel Teper resigned as Chief Executive Officer (“CEO”) of Immune in order to focus his efforts exclusively on leading Cytovia. The terms of the resignation are specified in a Separation Agreement entered into by and between Dr. Teper and the Company on April 21, 2017. Dr. Teper remains a member of the Company’s Board.

 

The Company’s Board appointed Elliot Maza, JD, CPA as Interim CEO, to serve until a new CEO of Immune is identified. In connection with his appointment to the position of interim CEO, Mr. Maza resigned from the Audit and Compensation Committees of the Board but continues to serve as a director.

 

Dr. Monica E. Luchi, Executive Vice President Global Drug Development and Chief Medical Officer, has assumed the title of President, Immune Pharmaceuticals Inflammatory Disease and Dermatology Division. Under the leadership of Mr. Maza and Dr. Luchi, Immune will focus its business on immuno-inflammation in general, and immuno-dermatology in particular, by developing its core asset, bertilimumab, a first in class human monoclonal antibody in Phase II development in BP and UC and with application for severe AD. Immune intends to continue to focus on the development of topical nano-cyclosporine the treatment of AD and moderate psoriasis.

 

Reverse stock split

 

On April 12, 2017, the Company announced a reverse stock split of its shares of common stock at a ratio of 1-for-20. Beginning with the opening of trading on April 13, 2017, the common stock began trading on a post-split basis on the NASDAQ. The Company’s stockholders approved the reverse stock split at its 2016 Annual Meeting held on December 20, 2016. The primary purpose of the reverse stock split was to enable Immune to regain compliance with the $1.00 minimum bid price requirement for continued listing on NASDAQ. All share and per share amounts in this Form 10-K have been reflected on a post-split basis.

 

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Results of Operations

 

Year ended December 31, 2016 compared to the year ended December 31, 2015 

 

Revenues

 

The Company recorded no revenue during the years ended December 31, 2016 and 2015. The Company is in the early stages of development of its product candidates, and it has not completed the development of bertilimumab, NanomAbs or other drug candidates. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year.

 

Research and development expense ($ in thousands)

 

   Years ended December 31, 
   2016   2015   Change 
Research and development  $8,333   $5,935   $2,398 

 

Research and development (“R&D”) expenses increased by $2.4 million or 40% during the year ended December 31, 2016 to $8.3 million, compared to $5.9 million during the year ended December 31, 2015. The increase resulted from an increase in pre-clinical and clinical trials costs related to bertilimumab of approximately $1.2 million, license and research fees for the nanocapsule technology licensed from BNS of approximately $0.9 million and an increase in stock-based compensation expense of $0.5 million. This increase in R&D expense was partially offset by a decrease in AmiKet development expense of approximately $0.2 million.

 

General and administrative expense ($ in thousands)

 

   Years ended December 31, 
   2016   2015   Change 
General and administrative  $6,427   $9,789   $(3,362)

 

General and administrative (“G&A”) expenses decreased by $3.4 million or 34% during the year ended December 31, 2016 to $6.4 million, compared to $9.8 million during the year ended December 31, 2015. The decrease was due primarily to a decrease in stock-based compensation, legal fees, rent and business development expenses. Stock-based compensation expense in 2016 was $1.3 million less than the corresponding expense for 2015 as a result of a decrease in the fair value of option and warrants granted during the year. Legal fees in 2016 were $0.8 million lower than in 2015 as a result of a decrease in fees incurred in connection with litigation matters. The reversal of a rent liability related to one of the Company's office locations reduced G&A expense by $0.6 million. Business development expenses in 2016 were $0.6 million less than the corresponding expenses for 2015 because the Company increased its reliance on full time employees for its business development needs rather than external consultants. 

 

In-process research and development impairment expense ($ in thousands)

 

   Years ended December 31, 
   2016   2015   Change 
                
In-process research and development impairment expense  $12,500   $-   $12,500 

 

In-process research and development impairment expenses of $12.5 million in 2016 was related to the write down of the Company’s IPR&D related to AmiKet, based on the following factors: in consideration of the Company’s market capitalization; failure to execute a sale or partnership of AmiKet; and a decision by the Company to postpone any further development of AmiKet.

 

Non-operating expense ($ in thousands)

 

   Years ended December 31, 
   2016   2015   Change 
                
Non-operating expense  $10,257   $1,433   $8,824 

 

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Non-operating expense amounted to $10.3 million during year ended December 31, 2016, compared with non-operating expense of $1.4 million during year ended December 31, 2015, an increase of $8.8 million.

 

Non-operating expense also included interest expense of $1.3 million, primarily relating to cash interest paid and amortization of the debt discount for the Company’s loan and security agreement with Hercules as well as a loss on the change in fair value of derivative liability instruments of $8.7 million. The loss on the change in fair value of derivative liability instruments represents the change in fair value of the derivative liability associated with the Discover Series D Preferred Stock. Interest expense also included $0.3 million in liquidated damages related to the convertible note with HLHW IV, LLC. (See Note 9).

 

Non-operating expense for the year ended December 31, 2015 consisted of interest expense of $0.8 million, primarily relating to cash interest paid and amortization of the debt discount for the Company’s loan and security agreement with Hercules and the senior secured term loan with Midcap, loss on the change in fair value of derivative liability instruments of $0.1 million and loss on extinguishment of debt of $0.5 million. The loss on the change in fair value of derivative liability instruments represents the change in fair value of the Hercules warrants issued in conjunction with the Hercules loan and security agreement and the change in fair value of the derivative liability associated with the Discover Series D Preferred Stock. The Company recorded a loss on extinguishment of debt of $0.5 million, which primarily represented early termination fees related to the repayment of the MidCap loan.

 

Income tax benefit ($ in thousands)

 

   Years ended December 31, 
   2016   2015   Change 
                
Income tax benefit  $4,856   $-   $4,856 

  

Income tax benefit in 2016 was $4.9 million. During the year ended December 31, 2016, the AmiKet IPR&D was written down to $15.0 million resulting in a reduction of the deferred tax liability by $4.9 million from $10.9 million to $5.9 million.

 

Deemed Dividend

 

The Company recorded approximately $8.0 million and $7.0 million in deemed dividends for the years ended December 31, 2016 and 2015, respectively, primarily related to the Company's Series D Preferred Stock. The Series D Preferred Stock accrued dividends and contains a conversion premium that may be settled in cash or stock. For the year ended December 31, 2016, the entire deemed dividend recorded was the result of conversions of the Company’s Series D Preferred Stock. For the year ended December 31, 2015 the Company recorded approximately $5.4 million in deemed dividend relating to the Series D Preferred Stock and $1.6 million in deemed dividend relating to the Series C Preferred Stock.

 

Impact of Inflation

 

The impact of inflation upon our revenue and loss from continuing operations during each of the past two fiscal years has not been material to our financial position or results of operations for those years.

 

Liquidity and Capital Resources

 

 We have generated losses from operations since inception and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. At December 31, 2016, we had a working capital deficit of approximately $8.5 million. Accumulated deficit amounted to $95.6 million and $63.0 million at December 31, 2016 and 2015, respectively. Net loss for the years ended December 31, 2016 and 2015 was $32.7 million and $17.2 million, respectively. Net cash used in operating activities was $12.3 million and $13.9 million for years ended December 31, 2016 and 2015, respectively.

 

We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of December 31, 2016, we had $0.3 million in cash. If we fail to raise additional capital or obtain substantial cash inflows from potential partners within the next few months, we may be forced to curtail or cease operations. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all.

 

On April 13, 2017, we entered into a securities purchase agreement dated as of April 10, 2017 (the “Closing Date”), with EMA Financial, LLC (the “Investor” or “EMA”) pursuant to which the Investor purchased an aggregate principal amount of $525,000 of Convertible Notes for an aggregate purchase price of $450,000 (the “Notes”). The Notes included a 10% origination fee and a 5% original issue discount that was added to the face amount of the Notes. Net proceeds from the offering were $0.4 million The Notes bear interest at a rate of 6.0% per annum, payable in arrears on the maturity date of April 10, 2018 (the “Maturity Date”). The Notes are convertible into shares of the Company’s common stock, after the effectiveness of the related registration Statement, at a conversion price equal to seventy five percent (75%) of the lowest trading price of the Company’s common stock during 15 trading days immediately preceding conversion (“Conversion Date”). In addition, we issued 83,333 warrants at an exercise price of $4.00 which are exercisable on a cashless basis.

 

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 In May 2017, the Company entered into definitive agreements with several institutional investors for a private placement of up to $3.4 million of convertible debentures. The debentures are convertible at any time into 1,245,675 shares of the Company's common stock at a conversion price of $2.89 per share, subject to adjustment.  In addition, the investors will receive up to 680,000 shares of the Company's common stock. The sale of the debentures will be implemented in multiple closings. The Company sold $1.5 million of convertible debentures to the investors at the initial closing of the transaction on May 9, 2017, and will sell the remaining $1.9 million to the investors in subsequent closings linked to the achievement of certain milestones.

 

Management has evaluated whether there is substantial doubt about the Company’s ability to continue as a going concern and has determined that substantial doubt existed as of the date of this filing. This determination was based on the following factors: (i) the Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months; (ii) the Company may not identify commercial partners to support development of its drug candidates; (iii) the Company will require additional financing in fiscal 2017 to continue at its expected level of operations; (iv) if the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its R&D programs or perhaps cease operations. In the opinion of management, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern.

 

The Company will require additional financing in fiscal 2017 to continue at its expected level of operations. If the Company fails to obtain the needed capital, it will be forced to delay, scale back, sell or out-license or eliminate some or all of its R&D programs. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2017. The Company anticipates that it will continue to issue equity and/or debt securities as a source of liquidity, until it begins to generate positive cash flow to support its operations. Any future sales of securities to finance operations will dilute existing stockholders' ownership. The Company cannot guarantee when or if it will generate positive cash flow.

 

The audit report prepared by our independent registered public accounting firm relating to the Company’s consolidated financial statements for the year ended December 31, 2016 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

 

The following table summarizes select balance sheet and working capital amounts as of December 31, 2016 and December 31, 2015 ($ in thousands):

 

   As of   As of     
   December 31,   December 31,     
   2016   2015   Change 
             
Cash and cash equivalents  $271   $4,543   $(4,272)
Working capital deficit  $(8,521)  $(1,370)  $(7,151)
Notes and loans payable, current portion  $(2,739)  $(997)  $(1,742)

 

Cash Flow Activities

 

The following table summarizes the Company’s cash flows for the periods set forth below ($ in thousands):

 

   For the year ended December 31, 
   2016   2015   Change 
             
Net cash used in operating activities  $(12,307)  $(13,905)  $1,598 
Net cash used in investing activities  $(50)  $(177)  $127 
Net cash provided by financing activities  $8,085   $11,859   $(3,774)

 

Operating Activities

 

Net cash used in operating activities for the year ended December 31, 2016 was $12.3 million as compared with net cash used in operating activities of $13.9 million for the year ended December 31, 2015, a decrease of $1.6 million. The Company’s decreased operating cash outflows in 2016 relative to 2015 were driven by an increase in accounts payable of approximately $1.3 million related to clinical trials expense for bertilimumab. The Company’s net cash used in operating activities may increase if it engages in future business development activities.

 

Investing Activities

 

During the year ended December 31, 2016, the Company’s net cash used in investing activities was $0.1 million, primarily driven an increase in computer hardware and software. During the year ended December 31, 2015, the Company’s net cash used in investing activities amounted to $0.2 million, primarily driven by the acquisition of office and laboratory equipment. The Company expects that net cash used in investing activities will increase if it acquires additional intellectual property, and other assets.

 

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Financing Activities

 

For the year ended December 31, 2016, the Company’s net cash provided by financing activities was $8.1 million. This amount primarily was comprised of proceeds from the sale of equity securities of the Company’s common stock of approximately $7.7 million and proceeds from the issuance of the convertible note to HLHW IV, LLC (“HLHW”) for $1.0 million. In addition, the Company received $1.5 million advances from related parties of which $0.3 million was repaid during the year (see Note 15). This was offset by the repayment of notes and loans payable of $1.2 million and the payment of fees related to sales of the Company’s common stock of $0.5 million.

 

For the year ended December 31, 2015, the Company’s net cash provided by financing activities was $11.9 million. This amount primarily was comprised of proceeds from the Company’s July 2015 financing transaction, which included proceeds from the issuance of Series D Convertible Preferred Stock of $12.0 million and proceeds from the loan and security agreement with Hercules Capital Inc. of $4.5 million. This was offset by the repayment of the Midcap senior secured term loan in the amount of $3.2 million and the payment of $1.6 million in financing costs related to the July 2015 financing transaction. 

 

Historically, the Company has funded its operations through the sale of debt and equity securities. The Company anticipates issuing equity and/or debt as a source of liquidity, when needed, until it starts generating positive cash flow to support its operations. The Company cannot give any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2016, the Company did not have any off-balance sheet arrangements. We have no guarantees or obligations other than those, which arise, out of our ordinary business operations.

 

Critical Accounting Policies and Estimates

 

The Company’s discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements and related disclosures in compliance with U.S. GAAP requires the application of appropriate technical accounting rules and guidance as well as the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The application of these policies involves judgments regarding future events, including the likelihood of success of particular product candidates, regulatory challenges, and the fair value of certain assets and liabilities. These judgments, in and of themselves, could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment may also have a significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies have not changed.

 

On an ongoing basis, the Company evaluates these estimates, utilizing historic experience, consultation with experts and other methods the Company considers reasonable. In any event, actual results may differ substantially from the Company's estimates. Any effects on the Company's business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the information that gives rise to the revision becomes known.

 

Immune's significant accounting policies are summarized in Item 15 — Note 3, Summary of Significant Accounting Policies, Note 4, Derivative Financial Instruments and Note 5, Fair Value Measurements to the Consolidated Financial Statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. 

 

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Accounting Policy   Judgments/Uncertainties Affecting Application
Derivative Instruments   Assumptions used in valuation techniques
    Assumptions used in forecasting borrowings
    Market maturity and economic conditions
    Ability to be sustained upon audit examination of taxing authorities
Income Taxes and Valuation Allowance for Deferred Tax Assets   Interpret existing tax statute and regulations upon application to transactions
    Ability to utilize tax benefits through carry backs to prior periods and carry forwards to future periods
Impairment of Long Lived Assets   Recoverability of investment through future operations
    Regulatory and political environments and requirements
    Estimated useful lives of assets
    Estimates of future cash flows
    Estimates of fair value
    Judgment about triggering events indicating impairment
Intangible Assets   Estimated useful lives for intangible assets
    Judgment about impairment triggering events
    Estimates of fair value
    Fair value estimate of intangible assets acquired in business combinations
Contingencies   Estimated financial impact of event(s)
    Judgment about likelihood of event(s) occurring
    Regulatory and political environments and requirements

 

Recent Accounting Pronouncements

 

See Item 15 — Note 3 to the Consolidated Financial Statements, Summary of Significant Accounting Policies, for a discussion of recent accounting pronouncements. 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company. Accordingly, we are not required to provide the information required by this Item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See the Company’s consolidated financial statements filed with this Annual Report on Form 10-K under Item 15 below.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None. 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

  (a) Evaluation of Disclosure Controls and Procedures

 

Immune’s management, with the participation and supervision of its Principal Executive Officer and Principal Financial Officer, are responsible for the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to its principal executive officer and its principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

The Company’s management, including its Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2016. Based on this evaluation, the Company’s Interim Chief Executive Officer and Principal Financial Officer concluded that as of December 31, 2016, the Company’s disclosure controls and procedures were not effective at a reasonable assurance level due to the material weaknesses identified in the Company’s internal control over financial reporting as of December 31, 2016 (discussed in paragraph (b) to this Item 9A), which the Company’s management views as an integral part of the Company’s disclosure controls and procedures.

 

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  (b) Management’s Annual Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s Interim Chief Executive Officer and Principal Financial Officer and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions. 

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. Management’s assessment identified the following material weaknesses in the Company’s internal control over financial reporting: lack of sufficient entity level controls, lack of segregation of duties due to lack of sufficient accounting and finance personnel and lack of a sufficient technology infrastructure to support the financial reporting function. 

 

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) as the framework to evaluate effectiveness. Because of the material weaknesses described above, management believes that, as of December 31, 2016, the Company’s internal control over financial reporting was not effective based on those criteria. 

 

Management intends to undertake a remediation plan in fiscal year 2017 in response to the identified material weakness in financial reporting. Our planned remediation efforts include (i) leveraging external resources with specific expertise in properly segregating duties in accounting departments with few employees, (ii) implementing a new accounting and financial reporting system with improved functionality; and (iii) leveraging the financial reporting expertise of our interim CEO who has served as CFO for similarly sized biotechnology companies. We believe that these remediation efforts, if successfully implemented, will improve our internal control over financial reporting.

 

  (c) Changes in Internal Controls

 

There were no changes in the Company’s internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of the Company’s last fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

ITEM 9B. OTHER INFORMATION

 

None. 

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 

 

Directors and Executive Officers

 

The table below sets forth the name, age and position of each of our current directors and executive officers as of May 16, 2017.

 

Name Age Position
     
Directors and Executive Officers    
Elliot Maza(4) 61

Interim Chief Executive Officer and Director

(Principal Executive Officer)

John C. Militello 43 Vice President of Finance, Controller and Chief Accounting Officer (Principal Financial Officer)
Daniel Kazado 52 Director
Cameron Durrant, M.D. (1) (2) (3) 56 Lead Director
John Neczesny (1) (3) (4) 53 Director
Daniel Teper (4) 57 Director
Jeffrey Paley, M.D. (1) (2)  (3) 49 Director

 

 

 

(1)Member of our Audit Committee.
(2)Member of our Compensation Committee.
(3)Member of our Nominating and Corporate Governance Committee.
(4)Member of our Transactions Committee.

 

Business Experience

 

The following is a brief account of the education and business experience of our current directors and executive officers:

 

Elliot M. Maza, JD, MBA, CPA, 61, has been the Interim Chief Executive Officer of the Company since April 21, 2017 and he became a director of the Company on January 14, 2015. Prior to joining the Board, Mr. Maza served as a consultant to the Company from November 2014 to January 2015. Mr. Maza has been the Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer of Intellect Neurosciences, Inc., a biotechnology company focused on the development of therapeutics for neurodegenerative diseases since July 2014. From May 2006 to June 2014, Mr. Maza has served in several management positions at Intellect Neurosciences, Inc. Mr. Maza served as the Executive Vice President of Intellect Neurosciences, Inc. from May 2006 to March 2007 and as President from March 2007 to October 2011. He has served as Chief Financial Officer of Intellect Neurosciences, Inc. from May 2006 to the present. Mr. Maza was appointed to the board of directors of Intellect Neurosciences, Inc. on June 26, 2007. From July 2011 until January 2014, Mr. Maza served as Chief Executive Officer and CFO of Biozone Pharmaceuticals, Inc., Pittsburg, CA (OTCBB: BZNE) (now known as CoCrystal Inc.), a manufacturer of prescription and over-the-counter (OTC) drug products and anti-aging and skin care products. From December 2003 to May 2006, Mr. Maza served as Chief Financial Officer of Emisphere Technologies, Inc., a biopharmaceutical company specializing in oral drug delivery. From March 1999 to December 2003, he was a partner at Ernst and Young, LLP. During the period from May 1989 to March 1999, Mr. Maza served as an Associate and subsequently Vice President in the Fixed Income divisions of Goldman Sachs, Inc. and JP Morgan Securities, Inc. Mr. Maza practiced tax and corporate law at Sullivan and Cromwell in New York from September 1985 to April 1989. We believe that Mr. Maza is qualified to serve as the Interim Chief Executive Officer and director of the Company based on his experience as a senior executive in several biotech and biopharma companies.

 

Dr. Monica E. Luchi, 57, has been the Chief Medical Officer of the Company since November 2015, and the President of its dermatology division since April 21, 2017. Dr. Luchi is a Board-certified rheumatologist with over 17 years of industry experience, at both large pharmaceutical and small biotech companies. Prior to joining the Company, Dr. Luchi held senior positions at Novartis, Incyte and Mesoblast, where she led cross-functional teams and drove strategy across all phases of clinical development in a variety of therapeutic areas including inflammation, dermatology, oncology and immunology. In addition, Dr. Luchi has been instrumental in driving business interests of the biotech companies where she worked in order to engage development partners and to strengthen financial assets which supported further progress of the companies’ development activities. She is adjunct Clinical Assistant Professor on faculty at the University of Pennsylvania where she completed her fellowship, and continues active patient care one half day per week. She has recently served on the Metro chapter board for the Healthcare Businesswoman’s Association. Dr. Luchi obtained undergraduate degrees in Biology and in Health Science Policy at the University of Maryland, Baltimore Co. Campus. She received her MD from Northeastern Ohio Universities, College of Medicine, and an MBA with a concentration in healthcare from George Washington University.

 

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John Militello, CPA, 43, was appointed as our Vice President of Finance, Controller and Chief Accounting Officer, effective January 1, 2016. Mr. Militello also serves as the Company’s Principal Financial Officer and Principal Accounting Officer. Mr. Militello joined the Company in April 2015 as our Executive Director of Finance and Corporate Controller. Prior to that, Mr. Militello was an Assistant Controller with Retrophin, Inc. (NASDAQ GM: RTRX), a San Diego based biotech company, and the Manager, External Reporting & Compliance at Volt Information Sciences, Inc. (NYSE MKT: VISI), a publicly traded staffing company. Prior to Volt Information Sciences, Inc., Mr. Militello was a Senior Manager with BDO USA, LLP, an accounting, tax, audit and consulting services company, serving multi-national SEC registrants. Mr. Militello is a Certified Public Accountant and earned his Bachelor of Science degree in Accounting from St. Joseph’s College.

 

Daniel Kazado, 52, became a Director of the Company on October 10, 2013 and and served as Chairman of the Board of Directors from December 15, 2014 to October 19, 2016. Mr. Kazado has served as a senior advisor to Melini Capital Corp., a family owned private and public equity firm investing internationally in several industries, since its incorporation in 2010.  Melini Capital Corp. has been an early and significant investor in Immune Pharmaceuticals. From March 2011 to August 2013, Mr. Kazado served as a director. In 1992, Mr. Kazado founded DMA Altiam, a management consulting firm that advised boards of directors and senior management in multiple industries.  DMA Altiam grew to include 25 professionals over the course of fifteen years, and in 2002 Mr. Kazado sold the company to Altran Technologies, a global engineering and management consulting group with revenues of over $1.0 billion. Mr. Kazado holds a bachelor’s degree in Business Administration and a master’s degree in Management from Lyon University in France. We believe that Mr. Kazado is qualified to serve on our board of directors based on his experience with advising boards of directors and senior management of in multiple industries, including our industry, with respect to management and other business aspects.

 

Cameron Durrant, MD, MBA, 56, joined our board of directors in July 2014. Dr. Durrant is CEO and Chairman of the Board of KaloBios Pharmaceuticals, Inc., effective as of March 1, 2016. Dr. Durrant  served as President and Chief Executive Officer of ECR Pharmaceuticals Co., Inc. (“ECR”) a subsidiary of Hi-tech Pharmacal Co., Inc. (NASDAQ: HITK), from September 2012 to April 2014. From January 2010 to September 2012, Dr. Durrant served as a consultant to several biopharma companies, as the Founder, CEO and CFO of PediatRx, Inc. (subsequently divested) and on several biotech and medical device company boards. As well as holding CEO and CFO roles, he has acted as Chairman, Treasurer and Chief Accounting Officer and convened, sat on or chaired the audit, nominating, governance, compensation and special board committees of PediatRx, Inc. He has been an executive at blue-chip big pharma, including Johnson and Johnson, Pharmacia Corporation (until its acquisition by Pfizer), GSK and Merck. He is a founding director of Bexion Pharmaceuticals, a private company with a Phase I, novel lipid/protein nanotech oncology therapeutic and a board member of Alcyone Life Sciences, a private medical device company. He has served as a founding investor, Chairman, CEO and CFO of PediatRx (a public company), Executive Chairman and CEO of Anavex (a public company), former CEO of PediaMed Pharmaceuticals (acquired by Connetics Corporation) and former board member of Topaz Pharmaceuticals (acquired by sanofi-aventis). He was the 2005 winner of the Ernst and Young Ohio and Kentucky ‘Entrepreneur of the Year’ winner and a national finalist, named in the PharmaVoice 2005, 2006, 2007 and 2010 list of one of the ‘100 most inspiring people in the pharmaceutical industry’ and by Pharmaceutical Executive in 2008 as part of the ‘Change generation - young leaders to watch in pharma’. Dr. Durrant earned his MD from the Welsh National School of Medicine, Cardiff, UK, his DRCOG from the Royal College of Obstetricians and Gynecologists, London, UK, his MRCGP from the Royal College of General Practitioners, London, UK, his DipCH from the Melbourne Academy, Australia and his MBA from Henley Management College, Oxfordshire, UK. We believe that Dr. Durrant is qualified to serve on our board of directors based on his experience advising companies in the pharmaceutical industry and his vast experience as an executive and director of several pharmaceutical companies.​

 

John Neczesny, MBA, 53, became a Director of the Company on February 23, 2016.   Mr. Neczesny has been a Managing Director at Oberon Securities, LLC, a boutique investment bank, since 2012, where he advises on and executes M&A and financing transactions principally for healthcare companies.  Previously, he was Vice President, Corporate Development at Par Pharmaceutical Companies from 2009 to 2011.  From 1998 to 2008, Mr. Neczesny was an investment banker at Bear Stearns & Co. Inc. in the Healthcare group, where he rose to Managing Director and was involved in numerous M&A and capital markets transactions for pharmaceutical, biotechnology and medical technology companies. Mr. Neczesny earned an MBA in Finance from New York University Stern School of Business and a Bachelor of Science degree in Chemistry from the University of Delaware. We believe that Mr. Neczesny is qualified to serve as a director of the Company based on his experience with numerous transactions involving pharmaceutical and biotechnology companies.

 

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Daniel Gedeon Teper, Pharm. D., MBA, 57, was the Chief Executive Officer of the Company from August 25, 2013 until April 21, 2017. He was appointed as a director in connection with the merger transaction between the Company and Immune Ltd, in August 2013. From August 25, 2013 to December 15, 2014, Dr. Teper also served as Chairman of our Board of Directors. Dr. Teper founded Immune Ltd., a wholly-owned subsidiary of the Company, and served as its chairman and chief executive officer from January 2010 to August 2013.  From 2005 to 2009, Dr. Teper served as New York-based Managing Partner and Head of North America at Bionest Partners, a global management consulting firm, where he advised pharmaceutical and public biotechnology companies with respect to corporate strategy, business development, mergers and acquisitions, new product development and commercialization. From 2000 to 2004, Dr. Teper held various senior management roles in the U.S., including senior vice president of sales and business development at Softwatch, an Internet healthcare company, where he assisted in raising $30 million in venture capital and expanding the company to over 150 employees. From 1996 to 1999, Dr. Teper served as global president of HAVAS-Euro Rscg Healthcare Worldwide, where he expanded operations internationally and advised pharmaceutical companies on global launches of major new drugs in multiple disease areas. Dr. Teper worked for Novartis from 1984 to 1990, serving at the headquarters in Basel, Switzerland from 1984 to 1985 and serving out of the U.S. from 1985 to 1990, during which time he held management responsibilities in sales and marketing and was appointed head of new product development for Cardiovascular Products. From 1990 to 1992, Dr. Teper held general management positions in France, including Senior Vice President and head of marketing and sales of Laboratories at GlaxoSmithKline and President and Chief Operating Officer of Laboratories at Delagrange (which was acquired by Synthelabo, a predecessor to Sanofi). Dr. Teper holds a Doctor of Pharmacy degree from Paris XI University and an MBA from INSEAD, where he was a J. Salmon scholar. We believe that Dr. Teper is qualified to serve as on our board of directors due to his many years of service as our former Chief Executive Officer, his extensive knowledge of our Company and his extensive experience within our industry.

 

Jeffrey Paley, MD, 49, became a Director of the Company on February 23, 2016. Dr. Paley brings over 19 years of experience in the healthcare industry. Dr. Paley has been an active clinician and consultant for over 30 analysts and portfolio managers in the biotechnology, pharmaceutical, specialty pharmaceutical and medical technology arenas, reviewing the clinical, preclinical and regulatory pedigrees of numerous therapeutics and devices. Dr. Paley has also consulted for several biotechnology and specialty pharmaceutical companies, most notably in the areas of clinical development and business development and he has engineered transactions worth over $600 million. Dr. Paley founded Access Medical Associates in 2003, after spending five years on the full-time academic faculty of Weill Cornell Medical College, where he served as a Director of Clinical Research at the Cornell Internal Medicine Associates. At Weill Cornell, Dr. Paley was a Principal or Co-Principal Investigator on several studies of diabetes, hypertension, and cholesterol disorders. He has served as a Director of Kellbenx and Retrophin and currently serves as a Director of Kalytera, Avenue Therapeutics and Remote Radiology Inc. Dr. Paley trained at Harvard Medical School and completed a residency in Internal Medicine at Massachusetts General Hospital. We believe that Dr. Paley is qualified to serve as a Director of the Company based on his extensive experience in the healthcare industry.

 

Family Relationships

 

There are no family relationships among any of our current or former directors or executive officers.

 

Arrangements between Officers and Directors

 

To our knowledge, there is no arrangement or understanding between any of our officers or directors and any other person, including Directors, pursuant to which the officer or director was selected to serve as an officer or director.

 

Involvement in Certain Legal Proceedings

 

The Company is not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses), or being subject to any of the items set forth under Item 401(f) of Regulation S-K.

 

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Corporate Governance

 

General

 

The Company believes that good corporate governance is important to ensure that the Company is managed for the long-term benefit of our stockholders. This section describes key corporate governance practices that we have adopted.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely upon a review of Forms 3, 4, and 5 furnished to us during the fiscal year ended December 31, 2016, we believe that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements during the fiscal year ended December 31, 2016.

 

Code of Conduct and Ethics

 

The Company has adopted a Code of Business Conduct and Ethics that applies to all its employees, including the Company’s Principal Executive Officer and Principal Financial Officer, and a Supplemental Code of Ethics that specifically applies to our Chief Executive Officer and Principal Financial Officer. The text of the Code of Business Conduct and Ethics and the Supplemental Code of Ethics are publicly available on our website at www.immunepharma.com.

 

Disclosure regarding any amendments to, or waivers from, provisions of the code of conduct and ethics that apply to our directors, principal executive and financial officers will be posted on the “Investors-Corporate Governance” section of our website at www.immunepharma.com or will be included in a Current Report on Form 8-K, which we will file within four business days following the date of the amendment or waiver.

 

Audit Committee and Financial Experts

 

The Audit Committee of the Board is composed entirely of directors who are not our current or former employees, each of whom meets the applicable definition of “independent” as promulgated by the Securities and Exchange Commission and as defined by the rules of The NASDAQ Capital Market as such standards apply specifically to members of audit committees. The current members of the Compensation Committee are Cameron Durrant, M.D. (Chairman) and Messrs. Paley and Neczesny. The Board of Directors has determined that Dr. Durrant is an “audit committee financial expert” as the Securities and Exchange Commission has defined that term in Item 407 of Regulation S-K based on his experiences as a Chief Executive Officer and Chief Financial Officer of several publicly traded biopharmaceutical companies.

 

Mr. Maza served on the Audit Committee during the fiscal year ended December 31, 2016 until his resignation from the Audit Committee on April 21, 2017. Dr. Durrant was elected Chairman on May 10, 2017 following the resignation of Mr. Maza. Mr. Neczesny was appointed to the Board of Directors and to our Audit Committee on February 2, 2016. Mr. Paley was elected to the Audit Committee on May 10, 2017. Our Audit Committee met four times during the fiscal year ended December 31, 2016.

 

The Audit Committee is responsible for retaining and overseeing our independent registered public accounting firm, approving the services performed by our independent registered public accounting firm and reviewing our annual financial statements, accounting policies and our system of internal controls. A copy of the Audit Committee’s written charter is publicly available on the “Investors-Corporate Governance-Committees” section of our website at www.immunepharma.com.

 

Compensation Committee

 

The Compensation Committee of the Board is composed entirely of directors who are not our current or former employees, each of whom meets the applicable definition of “independent” as defined by the rules of The NASDAQ Capital Market. The current members of the Compensation Committee are Dr. Durrant, M.D. (Chairman), and Dr. Paley. Mr. Maza served on the Compensation Committee prior to his appointment as the Company’s Interim Chief Executive Officer.

 

None of the members of the Compensation Committee during fiscal 2016 (i) had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of related party transactions or (ii) was an executive officer of a company of which an executive officer of the Company is a director.

 

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The Compensation Committee is responsible for establishing and administering our executive compensation policies. The role of the Compensation Committee is to (i) formulate, evaluate and approve compensation of the Company’s directors, executive officers and key employees, (ii) oversee all compensation programs involving the use of the Company’s stock, and (iii) produce, if required under the securities laws, a report on executive compensation for inclusion in the Company’s proxy statement for its annual meeting of stockholders. The duties and responsibilities of the Compensation Committee under its charter include:

 

·Annually reviewing and setting compensation of executive officers;
·Periodically reviewing and making recommendations to the Board with respect to compensation of non-employee directors;
·Reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, and setting the Chief Executive Officer’s compensation levels based on this evaluation;
·Reviewing competitive practices and trends to determine the adequacy of the executive compensation program;
·Approving and overseeing incentive compensation and equity-based plans for executive officers that are subject to Board approval;
·Making recommendations to the Board as to the Company’s compensation philosophy and overseeing the development and implementation of compensation programs;
·Periodically reviewing and making recommendations to the Board with respect to compensation of non-employee directors; and
·Reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, and setting the Chief Executive Officer’s compensation levels based on this evaluation;

 

When appropriate, the Compensation Committee may, in carrying out its responsibilities, form and delegate authority to subcommittees. This process leads to a recommendation for any changes in salary, bonus terms and equity awards, if any, based on performance, which recommendations are then reviewed and approved by the Compensation Committee.

 

The Compensation Committee has the authority, at the Company’s expense, to select, retain, terminate and set the fees and other terms of the Company’s relationship with any outside advisors who assist it in carrying out its responsibilities, including compensation consultants or independent legal counsel.

 

Nominating and Governance Committee

 

The Board has a standing Nominating and Governance Committee, which consists of Jeffrey Paley, M.D. (Chairman), Cameron Durrant, M.D. and John Neczesny. The Nominating and Governance Committee may employ a variety of methods for identifying and evaluating nominees for director. The current members of the Nominating and Governance Committee qualify as independent as defined by the rules of the NASDAQ Stock Market.

 

The Nominating and Governance Committee regularly assesses the size of the Board, the need for particular expertise on the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. Candidates may be evaluated at regular or special meetings of the Nominating and Governance Committee, and may be considered at any point during the year.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth the total compensation earned, paid or accrued during the last two fiscal years ended December 31, 2016 and 2015 by (i) our Chief Executive Officer, and (ii) our two next most highly compensated former executive officers who earned more than $100,000 during the fiscal year ended December 31, 2016 and 2015, collectively referred to as the “named executive officers.”

 

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Name/Principal
Position
  Year  Salary ($)   Stock
Awards
($)
   Option
Awards($)  (1)
   All Other
Compensation
($)
   Total ($) 
                        
Daniel G. Teper,  2016   360,000    -    139,364(2)   -    499,364 
Chief Executive Officer  2015   362,575    -    352,055(3)   -    714,630 
                             
Monica Luchi,           -                
Chief Medical Officer  2016   360,000    -    54,056(4)   -    414,056 
                             
John Militello,           -                
VP Finance and Controller  2016   220,000    -    36,037(5)   -    256,037 

 

(1)Amounts represent the aggregate grant date fair value in accordance with FASB ASC Topic 718. See Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2016.

 

(2)On June 1, 2016, the Company’s Board, pursuant to the recommendation of the Compensation Committee granted to Dr. Teper an option to purchase up to 9,000 shares of the Company’s common at an exercise price of $8.00 per share, vesting over a three-year period, with one-third vesting after the first year and the remaining options vesting quarterly therafter. On June 24, 2016, the Company’s Board, pursuant to the recommendation of the Compensation Committee, granted an option to Dr. Teper to purchase up to 15,000 shares of the Company’s common stock at an exercise price of $7.60 per share and vesting immediately.

 

(3)On June 6, 2015, the Company’s Board, pursuant to the recommendation of the Compensation Committee granted an option to Dr. Teper to purchase up to 12,500 shares of the Company’s common stock as performance-based compensation.  The performance-based options were granted at an exercise price of $37.40 per share and vest upon the Company’s achievement of certain operational, financing, and partnership objectives that were determined by the Compensation Committee.

 

(4)On June 1, 2016, the Company’s Board, pursuant to the recommendation of the Compensation Committee granted an option to Dr. Luchi to purchase up to 9,000 shares of the Company’s common at an exercise price of $8.00 per share and vesting over a three-year period, with one-third vesting after the first year and the remaining options vesting quarterly.

 

(5)On June 1, 2016, the Company’s Board, pursuant to the recommendation of the Compensation Committee granted to Mr. Militello an option to purchase up to 6,000 shares of the Company’s common stock at an exercise price of $8.00 per share and vesting over a three-year period, with one-third vesting after the first year and the remaining options vesting quarterly.

 

Narrative Disclosure to Summary Compensation Table

 

Dr. Daniel G. Teper

 

On June 4, 2014, the Company entered into an employment agreement with Dr. Teper (the “Teper Employment Agreement”). Under the terms of the Teper Employment Agreement, Dr. Teper is entitled to receive an annual base salary of $260,000. In addition, Dr. Teper is eligible to receive, subject to the board of directors’ approval, an annual incentive award, contingent upon his achievement of goals mutually agreed upon by Dr. Teper and us, of up to $360,000 for each calendar year of his term of employment, which may be granted in cash or in equity equivalent and an annual bonus of up to 100% of his base salary. During fiscal years 2015 and 2016, no bonus was paid to Dr. Teper. Under the term of the Employment Agreement, Dr. Teper is also eligible to participate in all employee benefit plans, programs and arrangements, and all fringe benefits and perquisites that are made available to our senior executives, including but not limited to, health insurance coverage in accordance with the terms of our health insurance plan.

 

The Teper Employment Agreement may be terminated upon death, disability, by us with or without Cause (as defined in the Teper Employment Agreement), or by Dr. Teper with or without Good Reason (as defined in the Teper Employment Agreement). In the event the Teper Employment Agreement is terminated for Good Reason by Dr. Teper, he shall be entitled to receive his base salary for a period of three (3) months. If the Teper Employment Agreement is terminated by the Company without Cause, Dr. Teper shall be entitled to receive his base salary for a period of six (6) months. In each case, payment is contingent upon Dr. Teper’s signature of a release that is satisfactory to the Company in form and in substance. The Teper Employment Agreement does not provide for any payments in the event that it is terminated by the Company for Cause or by Dr. Teper without Good Reason.

 

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On June 23, 2014, Immune Ltd. and Dr. Teper entered into an amendment to that certain employment agreement, by and between Immune Ltd. and Dr. Teper, dated September 1, 2011 (the “Amendment”). The Amendment was effective as of June 1, 2014. Pursuant to the Amendment, (i) Dr. Teper’s base annual salary will be $100,000 (or NIS 20,500 per month) increased to $141,463 (or NIS 29,000 per month) on January 1, 2015, for services rendered by Dr. Teper to Immune Ltd. (ii) the notice period for termination by employee was reduced to three months and by Immune Ltd. was reduced to six months, and (iii) Dr. Teper is entitled to up to 10 paid vacation days, which can be accumulated, subject to certain conditions. The employment agreement of Dr. Teper with Immune Ltd. was in addition to the existing Employment Agreement between us and Mr. Teper entered into on June 4, 2014, as described above. However, on February 28, 2015, Dr. Teper and Immune Ltd. terminated, effective as of January 1, 2015, Mr. Teper’s employment agreement with Immune Ltd., pursuant to which Dr. Teper was paid, among other benefits, an annual base salary of $100,000. In connection with the termination, we and Dr. Teper amended Dr. Teper’s Employment Agreement. Pursuant to the amendment, effective as of January 1, 2015, Dr. Teper’s annual base salary increased from $260,000 to $360,000.

 

Effective as of April 21, 2017, the Board accepted the resignation of Daniel Teper as Chief Executive Officer. Dr. Teper will remain a member of the Board and will focus his efforts, in conjunction with the Board, on developing and beginning execution of a plan to establish Cytovia, Inc., a subsidiary of the Company, as an independent oncology business.

 

In connection with Dr. Teper’s resignation from the Company, the Company and Dr. Teper entered into a Separation Agreement (the “Separation Agreement”), which provides, among other things, that the parties recognize that Dr. Teper has an interest in pursuing opportunities in the field of oncology research and development and commercialization as currently being contemplated or pursued through the Company or its subsidiary, Cytovia, Inc. (“Cytovia”). The Separation Agreement provides that the parties anticipate that they will cooperate in good faith to assist Dr. Teper in developing Cytovia or a company to be formed by Dr. Teper (“NewCo”), and the Company agrees that it will, for a period of three months from the termination date, use commercially reasonable efforts – consistent with the best interests of the Company and its stockholders and subject to the fiduciary duties of the Board – to develop and begin execution of a plan to establish an independent oncology business, either through Cytovia or NewCo, which may involve the transfer by Immune of some or all of its oncology assets to Cytovia or NewCo, as applicable. In addition, the Separation Agreement gives Dr. Teper a right of first negotiation, for a period of six months, with respect to any sale or license of the Company’s oncology assets at a price reasonably acceptable to the Company. The Separation Agreement includes a cooperation provision, a non-disparagement covenant as well as a release of claims by Dr. Teper.

 

Dr. Monica Luchi

 

On November 2, 2015, the Company entered into an employment agreement with Dr. Luchi (the “Luchi Employment Agreement”). Under the terms of the Luchi Employment Agreement, Dr. Luchi is entitled to receive an annual base salary of $360,000. In addition, Dr. Luchi is eligible to receive, subject to the board of directors’ approval, an annual incentive award, contingent upon her achievement of goals mutually agreed upon by Dr. Luchi and the Company, of up to $180,000 for each calendar year of her term of employment, which may be granted in cash or in equity equivalent. During fiscal years 2015 and 2016, no bonus was paid to Dr. Luchi. Under the terms of the Employment Agreement, Dr. Luchi is eligible to participate in all employee benefit plans, programs and arrangements, and all fringe benefits and perquisites that are made available to our senior executives, including but not limited to, health insurance coverage in accordance with the terms of our health insurance plan.

 

 The Luchi Employment Agreement may be terminated upon death, disability, by us with or without Cause (as defined in the Luchi Employment Agreement), or by Dr. Luchi with or without Good Reason (as defined in the Luchi Employment Agreement). In the event the Luchi Employment Agreement is terminated for Good Reason by Dr. Luchi, she is entitled to receive her base salary for a period of three (3) months. If the Luchi Employment Agreement is terminated by the Company without Cause, Dr. Luchi is entitled to receive her base salary for a period of three (3) months. In each case, payment is contingent upon Dr. Luchi’s signature of a release that is satisfactory to the Company in form and in substance. The Luchi Employment Agreement does not provide for any payments in the event that it is terminated by the Company for Cause or by Dr. Luchi without Good Reason. Upon termination for a change in control, Dr Luchi is entitled to receive her base salary for a period of six (6) months.

 

Effective October 28, 2015, Dr. Luchi was granted an option to purchase 20,000 shares of our common stock, at an exercise price of $19.60, the closing price of the shares of the Company’s common stock on the date of the grant by the Board. The options vest over a three-year period, with one third vesting on the first year anniversary and the remaining vesting quarterly thereafter, subject to acceleration in the event of (i) Change of Control (as defined in the Luchi Employment Agreement); or (ii) termination by us without Cause.

 

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On June 1, 2016, the Company’s Board, pursuant to the recommendation of the Compensation Committee granted an option to Dr. Luchi to purchase up to 9,000 shares of the Company’s common at an exercise price of $8.00 per share and vesting over a three-year period, with one-third vesting after the first year and the remaining options vesting quarterly.

 

John Militello

 

On December 31, 2015, the Company entered into an employment agreement with Mr. Militello (the “Militello Employment Agreement”). Under the terms of the Militello Employment Agreement, Mr. Militello is entitled to receive an annual base salary of $220,000. In addition, Mr. Militello is eligible to receive, subject to the Board’s approval, an annual incentive award, contingent upon his achievement of goals mutually agreed upon by Mr. Militello and the Company, of up to $77,000 for each calendar year of his term of employment, which may be granted in cash or in equity equivalent. During fiscal year 2016, no bonus was paid to Mr. Militello. Under the terms of the Employment Agreement, Mr. Militello is eligible to participate in all employee benefit plans, programs and arrangements, and all fringe benefits and perquisites that are made available to our senior executives, including but not limited to, health insurance coverage in accordance with the terms of our health insurance plan.

 

 The Militello Employment Agreement may be terminated upon death, disability, by us with or without Cause (as defined in the Militello Employment Agreement), or by Mr. Militello with or without Good Reason (as defined in the Militello Employment Agreement). In the event the Militello Employment Agreement is terminated for Good Reason by Mr. Militello, he is entitled to receive his base salary for a period of three (3) months. If the Militello Employment Agreement is terminated by the Company without Cause, Mr. Militello is entitled to receive his base salary for a period of three (3) months. In each case, payment is contingent upon Mr. Militello’s signature of a release that is satisfactory to the Company in form and in substance. The Militello Employment Agreement does not provide for any payments in the event that it is terminated by the Company for Cause or by Mr. Militello without Good Reason. Upon termination for a change in control, Mr. Militello is entitled to receive his base salary for a period of six (6) months.

 

Effective December 31, 2015, Mr. Militello was granted an option to purchase 6,250 shares of our common stock, at an exercise price of $14.60, the closing price of the shares of the Company’s common stock on the date of the grant by the Board, which options vest over a three-year period, with one third vesting on the first year anniversary and the remaining vesting quarterly thereafter subject to acceleration in the event of (i) Change of Control (as defined in the Militello Employment Agreement); or (ii) termination by us without Cause, pursuant to the terms and subject to the conditions of the Company’s stock option plan.

 

On June 1, 2016, the Company’s Board, pursuant to the recommendation of the Compensation Committee granted to Mr. Militello an option to purchase up to 6,000 shares of the Company’s common stock at an exercise price of $8.00 per share and vesting over a three-year period, with one-third vesting after the first year and the remaining options vesting quarterly.

 

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Outstanding Equity Awards at Fiscal Year End

 

The following table sets forth information for each named executive officer regarding outstanding stock options on the last day of the fiscal year ended December 31, 2016:

 

   Option Awards     
   Number of Securities Underlying
Unexercised Options (#)
    Option
Name  Number
Exercisable (1)
   Number
Unexercisable
   Option
Exercise Price
   Expiration
Date
                
Daniel G. Teper (2)   1,546 (3)   -   $14.20   07/10/22
    618 (4)   -   $19.80   04/11/23
    34,375 (5)   3,125   $47.60   02/02/24
         12,500 (7)        
    -    9,000 (6)  $8.00   06/01/26
    -    15,000   $7.60   06/24/26
                   
Monica Luchi   6,667    13,333   $19.60   11/19/25
    -    9,000 (6)  $8.00   06/01/26
                   
John Militello   2,125    1,125   $39.60   04/17/25
    208    292   $36.80   07/19/25
    2,083    4,167   $14.60   12/31/25
    -    6,000 (6)  $8.00   06/01/26

 

1)The options have not been, and may never be, exercised and actual gains, if any, on exercise will depend on the value of the shares of common stock on the date of exercise.
2)Effective as of April 21, 2017, the Board accepted the resignation of Dr. Teper as Chief Executive Officer. Dr. Teper will remain a member of the Board and will focus his efforts, in conjunction with the Board, on developing and beginning execution of a plan to establish Cytovia.
3)These options were fully vested on August 24, 2012.
4)These options were fully vested on the date of grant.
5)These options vest quarterly over three years from date of grant.
6)These options vest over three years from the date of grant with one-third vesting after the first year and the remaining options vesting quarterly thereafter.
7)On May 6, 2015, the Company’s Board granted an option to purchase up to 12,500 shares of the Company’s common stock to Dr. Teper, as performance-based compensation. The performance-based options were granted at an exercise price of $37.40 per share and will vest upon the Company’s achievement of certain operational, financing, and partnership objectives. As a result of Dr. Teper’s resignation as Chief Executive Officer on April 21, 2017, these options have been forfeited.

 

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Director Compensation

 

The following table sets forth the total compensation paid or accrued during the fiscal year ended December 31, 2016 to our non-employee members of our board of directors who serve on the Company’s board of directors.

  

Name  Fees
Earned or
Paid in
Cash
($) (1)
   Option
Awards
($) (2)
   Total
($)
 
Elliot Maza (3)   60,000    33,289    93,289 
                
Daniel Kazado (4)    60,000    33,289    93,289 
                
John Neczesny (5)   37,278    56,255    93,533 
                
Jeff Paley (6)   34,944    48,863    83,807 
                
Cameron Durrant (7)   89,167    33,289    122,456 

  

(1)All non-employee directors receive an annual cash fee of $40,000 for their service on our board of directors. Such cash fee is for a 1-year term from October 2016 through October 2017.

 

(2)Amounts represent the aggregate grant date fair value in accordance with FASB ASC Topic 718. For the assumptions made in the valuation of our equity awards see Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2016.

 

(3)Effective April 21, 2017, Mr. Maza was appointed interim Chief Executive Officer and as such Mr. Maza resigned as Chairman of the Audit Committee and as a member of the Compensation Committee.

 

(4)Mr. Kazado was elected as the Chairman of the Board of Director’s effective December 15, 2014 until October 19, 2016, and was entitled to receive an additional annual fee of $80,000 in addition to the $40,000 fee for service on our board of directors. Mr. Kazado still continues to be a director. Mr. Kazado was paid $60,000 of his board fees in the Company common stock in 2016.

 

(5)Mr. Neczesny was appointed to the Board of Directors effective February 23, 2016. As Chairman of the Transactions Committee, Mr. Neczesny is entitled to receive an additional annual fee of $20,000 in addition to the $40,000 fee for service on the Company’s Board of Directors.

 

(6)Dr. Paley was appointed to the Board of Directors effective February 23, 2016. As Chairman of the Governance and Nominating Committee, Dr. Paley is entitled to receive an additional annual fee of $20,000 in addition to the $40,000 fee for service on the Company’s Board of Directors.

 

(7)Dr. Durrant was appointed to the Board of Directors effective July 14, 2014. As the Chairman of the Compensation Committee, Dr. Durrant is entitled to receive an additional annual fee of $20,000 for services on the Company’s Board of Directors.  Also, on January 10, 2015, Dr. Durrant was appointed the Lead Director of the Company and is entitled to receive an additional annual fee of $20,000.

 

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Narrative to Director Compensation Table

 

In October 2013, our Board adopted a director compensation plan applicable to our non-employee directors, pursuant to which, we compensate our non-employee directors in cash and stock options. Our non-employee members of the Board are entitled to cash compensation of $40,000 per year as a base fee plus $20,000 per year for service as a chairperson of a committee of the Board, other than the nominating and corporate governance committee, and up to 50% of the base fee for service as the Vice Chair/Lead Independent Director of the Board. In addition to the cash compensation, each member of the Board will be granted stock options to purchase 2,500 shares of our common stock that vest on the date of grant and stock options to purchase 2,500 shares of our common stock that vest quarterly over a three-year period. The exercise price of all of the foregoing options will be the fair market value on the date of the grant. In addition, we will reimburse our non-employee directors for their out-of-pocket expenses incurred in connection with attending board and committee meetings.

 

Equity Compensation Plan Information

 

The following table provides certain aggregate information, as of December 31, 2016, with respect to all of the Company’s equity compensation plans then in effect:

 

Plan Category  (a)
No. of securities
to be issued upon
exercise of
outstanding
options
and
rights
   (b)
Weighted-average
exercise price of
outstanding
options,
warrants and
rights
($)
   (c)
No. of securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
 
Equity compensation plan approved by security holders (1)   250,000   $11.00    27,018 
        $12.40      

 

(1)2015 Employee Stock Option Plan.  For further information, see Note 10 to the consolidated financial statements.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

Reference is made to the information contained in the Equity Compensation Plan Information table contained in Item 11 of this Annual Report.

 

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Security Ownership of Certain Beneficial Holders and Management

 

The following table sets forth certain information regarding the beneficial ownership of our common stock by (i) each person who, to our knowledge, owns more than 5% of our common stock, (ii) each of our current directors and the named executive officer identified under the heading “Executive Compensation” and (iii) all of our current directors and executive officers as a group. We have determined beneficial ownership in accordance with applicable rules of the SEC, and the information reflected in the table below is not necessarily indicative of beneficial ownership for any other purpose. Under applicable SEC rules, beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60 days after May 16, 2017 through the exercise of any option, warrant or right or through the conversion of any convertible security. Unless otherwise indicated in the footnotes to the table below and subject to community property laws where applicable, we believe, based on the information furnished to us that each of the persons named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

 

 

The information set forth in the table below is based on 10,027,057, shares of our common stock issued and outstanding on May 15, 2017. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options, warrants, rights or other convertible securities held by that person that are currently exercisable or will be exercisable within 60 days after May 16, 2017. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the principal address of each of the stockholders below is in care of Immune Pharmaceutical Inc., 550 Sylvan Avenue, Suite 101, Englewood Cliffs, NJ 07632.

 

Name and Address of Beneficial Owner  Number of
Shares
Beneficially
Owned
   Percentage
Beneficially
Owned
 
         
5% + Stockholders:          
    -     -%
           
Executive Officers and Directors:          
Daniel G. Teper (2)   346,191    4.26%
           
John Militello (3)   4,517    * 
           
Daniel Kazado (4)   56,177    * 
           
Cameron Durrant (5)   7,950    * 
           
Elliot Maza (6)   5,250    * 
           
John Neczesny (7)   5,250    * 
           
Jeff Paley (8)   8,650    * 
           
All current executive officers and directors as a group (7 persons) (9)   433,984    5.34%

 

*Represents beneficial ownership of less than 1% of the shares of common stock.

 

(1)This information is based solely on the Company’s records and may not reflect the current beneficial ownership of Melini Capital Corp. Includes warrants to purchase 20,741 shares of our common stock that are exercisable within the next 60 days and options to purchase 23,184 shares of our common stock that are exercisable within the next 60 days.

 

(2)Includes 48,938 shares issuable upon the exercise of stock options that are exercisable within the next 60 days and warrants to purchase 1,388 shares of our common stock that are exercisable within the next 60 days.

 

(3)Consists of 1,750 shares issuable upon the exercise of stock options that are exercisable within the next 60 days.

 

(4)Consists of 8,000 shares issuable upon the exercise of stock options that are exercisable within the next 60 days, warrants to purchase 562 shares of our common stock that are exercisable within the next 60 days.

 

(5)Consists of 5,700 shares issuable upon the exercise of stock options that are exercisable within the next 60 days.

 

(6)Consists of 3,000 shares issuable upon the exercise of stock options that are exercisable within the next 60 days.

 

(7)Consists of 2,500 shares issuable upon the exercise of stock options that are exercisable within the next 60 days.

 

(8)Includes 2,500 shares issuable upon the exercise of stock options that are exercisable within the next 60 days granted as a Director of the Company.  Also includes 3,000 options granted in connection with a consulting agreement prior to becoming a Director of the Company that are fully vested.

 

(9)See footnotes 2 through 8.

 

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Change in Control

 

The Company is not aware of any arrangement that might result in a change in control in the future. The Company has no knowledge of any arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in the Company’s control.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The following is a description of transactions since January 1, 2015 to which we have been a party, in which the amount involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at year end for the last two years, and in which any of our executive officers, directors or holders of more than 5% of our common stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest other than compensation arrangements, which are described in the section above titled “Executive Officer and Director Compensation.”

 

(a) Promissory Notes issued to Certain Related Parties

 

Daniel Kazado

 

On July 15, 2016, the Board approved and the Company issued a $0.3 million promissory note to Daniel Kazado. The note bears interest at a rate of 5% per year and matures one year from the date of issuance. The outstanding balance of the note may be paid in cash or, at the option of either party, converted into shares of the Company’s common stock at a conversion rate of $9.00 per share, the last bid price of the Company’s common stock on the date of approval. On August 4, 2016, the Company exercised its option to pay off the promissory note in full by issuing 33,333 restricted shares of the Company’s common stock. Pursuant to applicable securities laws these restricted shares may not be transferred or sold at least for a period of six months or unless they have been registered for sale pursuant to the Securities Act of 1933, as amended.

 

Daniel Teper

 

On June 24, 2016, the Company’s Board of Directors approved and the Company issued a $0.4 million promissory note to Daniel G. Teper, the Company’s then Chief Executive Officer and an Immune director. The note bears interest at a rate of 5.0% per year and matures one year from the date of issuance. The outstanding balance of the note may be paid in cash or, at the option of either party, converted into shares of the Company’s common stock at a conversion rate of $8.20 per share, the last bid price of the Company’s common stock on the date of approval. On August 4, 2016, the Company exercised its option to pay off the promissory note in full by issuing 43,445 restricted shares of the Company’s common stock. Pursuant to applicable securities laws these restricted shares may not be transferred or sold at least for a period of six months and unless they have been registered for sale pursuant to the Securities Act of 1933, as amended.

 

During 2016, Dr. Teper, also made advances of $0.9 million to the Company of which the Company had repaid $0.7 million prior to December 31, 2016, including $0.4 million which was paid in shares of the Company’s common stock as discussed above. The balance of $0.2 million owed to Dr. Teper as of December 31, 2016 has been reflected in advances from related parties in the consolidated balance sheets.

 

Monica Luchi

 

On July 15, 2016, the Company’s Board of Directors approved and the Company issued a $0.4 million promissory note to Monica Luchi, the Company’s Chief Medical Officer. The note bears interest at a rate of 5.0% per year and matures one year from the date of issuance. The outstanding balance of the note may be paid in cash or, at the option of either party, converted into shares of the Company’s common stock at a conversion rate of $0.45 per share, the last bid price of the Company’s common stock on the date of approval. On August 4, 2016, the Company exercised its option to pay off the promissory note in full by issuing 38,889 restricted shares of the Company’s common stock. Pursuant to applicable securities laws these restricted shares may not be transferred or sold at least for a period of six months and unless they have been registered for sale pursuant to the Securities Act of 1933, as amended.

 

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(b) Daniel Kazado and Melini Capital Corp (“Melini”)

 

Daniel Kazado was the Company’s Chairman of the Board until October 19, 2016 and is a member of the Board of Directors. In April 2014, the Company entered into a $5.0 million revolving line of credit with Melini Capital Corp., an existing stockholder who is related to Mr. Kazado. Borrowings under the revolving line of credit were to incur interest at a rate of 12% per year, payable quarterly. The revolving line of credit was unsecured and subordinated to the Loan Agreement with Hercules. The revolving line of credit expired on November 30, 2016. No amounts were drawn from the revolving line of credit.

 

Director Independence

 

The Board has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based upon this review, the Company believes that Dr. Durrant, Mr. Neczesny, and Dr. Paley qualify as independent directors in accordance with the standards set by the NASDAQ and Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following table presents fees for professional audit services rendered by BDO USA LLP, our independent registered public accounting firm, for the audit of our consolidated financial statements for the year ended December 31, 2016 and 2015 and fees billed for other services rendered by BDO USA LLP (“BDO”).

 

   2016   2015 
         
Audit fees (1)  $449,265   $365,550 
Audit related fees   -    - 
Tax fees (2)   32,280    10,000 
All other fees   -    - 
Total  $481,545   $375,550 

 

(1)Audit fees consist of fees for professional services rendered for the audit of our consolidated financial statements and review of the interim financial statements included in the quarterly reports, including for comfort letters and registration statements.

 

(2)Tax fees in 2016 and 2015 include $12,030 and $10,000, respectively for tax advisory projects.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors

 

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation, and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor.

 

Prior to the engagement of the independent auditor for the next year’s audit, management will submit to the Audit Committee for approval a summary of the services expected to be rendered during that year for each of four categories of services.

 

1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.

 

2. Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.

 

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3. Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.

 

4. Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from the independent auditor.

 

Prior to the engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent registered public accounting firm.

 

The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1) Financial Statements. For the financial statements included in this annual report, see “Index to the Financial Statements” on page F-1.

 

(a)(2) Financial Statement Schedules. All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto.

 

(a)(3) Exhibits. The list of exhibits filed as a part of this annual report is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated by reference in this Item 15(a)(3).

 

(b) Exhibits. See Exhibit Index.

 

(c) Separate Financial Statements and Schedules. None.

 

EXHIBIT INDEX

 

Exhibit
Number
  Description
2.1   Merger Agreement and Plan of Reorganization, dated as of November 7, 2012, by and among EpiCept Corporation, EpiCept Israel Ltd. and Immune Pharmaceuticals Ltd.; Amendment to Merger Agreement and Plan of Reorganization, dated as of November 27, 2012; Amendment No. 2 to Merger Agreement and Plan of Reorganization, dated as of February 11, 2013; Amendment No. 3 to Merger Agreement and Plan of Reorganization, dated as of March 14, 2013; and Amendment No. 4 to Merger Agreement and Plan of Reorganization, dated as of June 17, 2013; (incorporated by reference to the Company’s Definitive Proxy Statement on Form DEF 14A filed with the SEC on June 18, 2013).
2.2   Agreement and Plan of Merger, dated as of September 6, 2005, among EpiCept Corporation, Magazine Acquisition Corp. and Maxim Pharmaceuticals, Inc. (incorporated by reference to Exhibit 2.1 to Maxim Pharmaceuticals Inc.’s Current Report on Form 8-K filed with the SEC on September 6, 2005).
3.1   Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 21, 2008).
3.2   Amendment to the Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 9, 2009).
3.3   Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 14, 2010).
3.4   Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2013).
3.5   Certificate of Designation of Preferences, Rights and Limitations of Series C 8% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 11, 2014).
3.6   Certificate of Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series C 8% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 23, 2014).

 

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3.7   Certificate of Designations of Preferences, Rights and Limitations of Series D Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015).
3.8   Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2010).
3.9   Certificate of Amendment to Articles of Incorporation, dated April 12, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 19, 2017).
4.4   Common Stock Purchase Warrant, dated August 23, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 29, 2013).
4.5   Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed March 11, 2014).
4.6   Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 23, 2014).
4.7   Form of Restated Series A Warrant and Restated Series B Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 14, 2014).
4.8   Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2014).
4.9   Form of Warrant (July 16, 2015) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 17, 2015).
4.10   Form of Warrant to be issued to Hercules Capital (July 2015) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015).
10.1   Loan and Security Agreement, dated May 27, 2011, by and among MidCap Funding III, LLC, EpiCept Corporation, Maxim Pharmaceuticals, Inc. and Cytovia, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2011.
10.2   Consent Agreement, dated June 18, 2012, by and among MidCap Funding III, LLC, EpiCept Corporation, Maxim Pharmaceuticals, Inc. and Cytovia, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2012).
10.3   First Amendment to Loan and Security Agreement dated August 27, 2012, by and among MidCap Funding III, LLC, EpiCept Corporation, Maxim Pharmaceuticals, Inc. and Cytovia, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2012).
10.4   Second Amendment to Loan and Security Agreement with Midcap Funding III, LLC, dated July 31, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2013).
10.5   Third Amendment to Loan and Security Agreement with Midcap Funding III, LLC, dated August 23, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 29, 2013).
10.6   Fourth Amendment, Consent and Waiver to Loan and Security Agreement by and among Immune Pharmaceutical Inc., Maxim Pharmaceuticals Inc., Cytovia, Inc. and MidCap Funding III, LLC (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 11, 2014).
10.7†   Amended and Restated 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 30, 2007).
10.8†   Immune Pharmaceuticals Inc. 2013 Stock Ownership and Option Plan (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8 filed with the SEC on September 2, 2014).
10.9†   Form of incentive stock option granted under Amended and Restated 2005 Equity Incentive Plan (incorporated by reference to Exhibit 99.3 to the Company’s Registration Statement on Form S-8 filed with the SEC on September 2, 2014).
10.10†   Form of 102 capital gains stock option award agreement, granted in Israel, under Amended and Restated 2005 Equity Incentive Plan (incorporated by reference to Exhibit 99.4 to the Company’s Registration Statement on Form S-8 filed with the SEC on September 2, 2014).
10.11†   Immune Pharmaceuticals Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the SEC on December 24, 2015).
10.12†   Form of Stock Option Award Agreement under the Registrant’s 2015 Equity Incentive Plan (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8 filed with the SEC on December 24, 2015).
10.13†   Employment Letter Agreement dated June 4, 2014, by and between Immune Pharmaceuticals Inc. and Daniel G. Teper (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2014).

 

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10.14†   Employment Agreement dated as of September 1, 2011, between Immune Pharmaceuticals Ltd. and Daniel G. Teper (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
10.15†   Amendment to Employment Agreement dated June 23, 2014, by and between Immune Pharmaceuticals Ltd. and Daniel G. Teper (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2014).
10.17   Securities Purchase Agreement dated March 10, 2014, by and among the Company and the Purchasers part thereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 11, 2014).
10.18   Services Agreement, dated as of August 6, 2013, by and between Immune Pharmaceuticals Ltd. and Melini Capital Corp (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 19, 2013).
10.19   Option Agreement, dated as of August 10, 2013, by and between Immune Pharmaceuticals Ltd. and Melini Capital Corp (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 19, 2013).
10.21   Consulting Services Agreement, dated as of August 10, 2013, by and between Immune Pharmaceuticals Ltd. and Jean Kadouche (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 19, 2013) (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
10.22   Research and License Agreement, dated as of April 6, 2011, by and between Immune Pharmaceuticals Ltd. and Yissum Research Development Company of The Hebrew University of Jerusalem, Ltd. (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
10.23   First Amendment to the Research and License Agreement dated September 26, 2011, between Immune Pharmaceuticals Ltd. and Yissum Research Development Company of The Hebrew University of Jerusalem, Ltd. (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
    Research and License Agreement, dated as of June 25, 2015, by and between Yissum Research Development Company of The Hebrew University of Jerusalem, Ltd. and Immune Pharmaceuticals Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 29, 2015).
10.24±   Product Sublicense Agreement dated as of December 7, 2010, by and between Immune Pharmaceuticals Ltd., Immune Pharmaceuticals Corporation and iCo Therapeutics Incorporated (incorporated by reference to Exhibit 10.30 to the Company’s Amendment No. 2 to the Company’s Annual Report on Form 10-K filed with the SEC on October 3, 2013).
10.25   Assignment Agreement, dated as of March 28, 2012, by and between Immune Pharmaceuticals Ltd. and Mablife S.A.S. (f/k/a Monoclonal Antibodies Therapeutics M.A.P.) (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
10.26   Assignment Agreement Amendment, dated as of February 8, 2014, by and between Immune Pharmaceuticals Ltd. and Mablife S.A.S. (f/k/a Monoclonal Antibodies Therapeutics M.A.P.) (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
10.27   Sublicense Agreement, dated as of August 27, 1999, between Epitome Pharmaceuticals Limited (Dalhousie University) and American Pharmed Labs, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 3, 2005).
10.28   License Agreement, dated as of March 1, 2004, by and between Shire Biochem Inc., Maxim Pharmaceuticals, Inc. and Cytovia, Inc., as amended (incorporated by reference to Exhibit 10.1 to each of Maxim Pharmaceuticals, Inc.’s Quarterly Reports on Form 10-Q filed with the SEC on May 7, 2004 and May 5, 2005, respectively).
10.29   Waiver and Amendment to License Agreement, dated as of April 3, 2014, by and between Immune Pharmaceuticals Inc. and Dalhousie University (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2014).
10.30   Revolving Line of Credit, dated as of April 17, 2014, by and between Immune Pharmaceuticals Inc. and Melini Capital Corp. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 11, 2014).
10.31   Form of Amendment Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 14, 2014).
10.32   Lease Agreement, dated as of December 30, 2014, by and between Immune Pharmaceuticals Inc. and ARE-East River Science Park, LLC (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2015).
10.33   Second Amendment to Lease Agreement, dated as of August 31, 2015, by and between Immune Pharmaceuticals Inc. and ARE-East River Science Park, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 16, 2015).

 

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10.34†   Employment Letter Agreement dated January 21, 2015, by and between Immune Pharmaceuticals Inc. and Gad Berdugo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report Form 8-K filed with the SEC on January 21, 2015).
10.35   License Agreement, dated as of December 18, 2003, by and between Endo Pharmaceuticals Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 3, 2005). 
10.36   Amendment, by and between Immune Pharmaceuticals Inc. and Endo Pharmaceuticals Inc., dated July 7, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on with the SEC on July 8, 2015).
10.37†   First Amendment to Employment Agreement, dated February 28, 2015, by and between Immune Pharmaceuticals Inc. and Daniel G. Teper (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2015).
10.38†   Termination Agreement and General Release, dated February 28, 2015, by and between Immune Pharmaceuticals, Ltd. and Daniel G. Teper (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2015).
10.39   Form of Securities Exchange Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 17, 2015).
10.40   Loan and Security Agreement, dated July 29, 2015, by and among Immune Pharmaceuticals Inc. and Immune Pharmaceuticals USA Corp., Immune Pharmaceuticals Ltd., as guarantor, and Hercules Capital, as agent for itself and lender (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015).
10.41   Stock Purchase Agreement, dated as of July 28, 2015, by and between Immune Pharmaceuticals Inc. and the investor named therein (registered direct offering) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015).
10.42   Stock Purchase Agreement, dated as of July 28, 2015, by and between Immune Pharmaceuticals Inc. and the investor named therein (private placement) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015).
10.43   Form of Voting Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015). 
10.44†   Employment Agreement dated November 1, 2015, by and between Immune Pharmaceuticals Ltd. and Miri Ben-Ami (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2016).
10.45†   Employment Agreement dated November 18, 2015, by and between Immune Pharmaceuticals Inc. and Monica E. Luchi (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2016).
10.46†   Employment Agreement, dated as of December 31, 2015, by and between Immune Pharmaceuticals Inc. and John Militello (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 31, 2015).
10.47†   Release and Consulting Agreement, dated as of December 28, 2015, by and between Immune Pharmaceuticals Inc. and Gad Berdugo (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 31, 2015).
10.48   Research and License Agreement, dated as of January 1, 2016, by and between BioNanoSim Ltd. and Immune Pharmaceuticals Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2016).
10.49   Capital Access Agreement, dated as of April 19, 2016, by and between the Company and Regatta Select Healthcare, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on April 20, 2016).
10.50   Amendment to Capital Access Agreement, dated as of June 10, 2016, by and between the Company and Regatta Select Healthcare, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on June 13, 2016).
10.51   June Capital Access Agreement, dated as of June 10, 2016, by and between the Company and Regatta Select Healthcare, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K with the SEC on June 13, 2016).
10.52   Amendment No. 1 to License Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on July 19, 2016).
10.53   Form of Note (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on July 19, 2016).
10.54   Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on August 3, 2016).
10.55   Form of Warrant (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K with the SEC on August 3, 2016).
10.56   Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on September 7, 2016).

 

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10.57   Agreement dated September 15, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on September 16, 2016).
10.58   Securities Purchase Agreement, dated as of November 17, 2016, by and between the Company and HLHW, IV LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on November 22, 2016).
10.59   Form of Convertible Note, dated as of November 17, 2016 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K with the SEC on November 22, 2016).
10.60   Registration Rights Agreement, dated as of November 17, 2016, by and between the Company and HLHW, IV LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K with the SEC on November 22, 2016).
10.61   Common Stock Purchase Agreement, dated as of November 17, 2016, by and between the Company and HLHW IV, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K with the SEC on November 22, 2016).
10.62   Common Stock Purchase Agreement, dated as of February 3, 2017, by and between the Company and HLHW IV, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on February 3, 2017).
10.63   Common Stock Purchase Agreement, dated as of March 22, 2017, by and between the Company and HLHW IV, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on March 23, 2017).
10.64   Securities Purchase Agreement, dated as of April 10, 2017, by and between the Company and EMA Financial, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on April 19, 2017).
10.67   Convertible Note, dated as of April 10, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K with the SEC on April 19, 2017).
10.68   Registration Rights Agreement, dated as of April 10, 2017, by and between the Company and EMA Financial, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K with the SEC on April 19, 2017).
10.69   Common Stock Purchase Warrant dated as of April 10, 2017, by and between the Company and EMA Financial, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K with the SEC on April 19, 2017).
10.70   Separation Agreement, dated April 21, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K with the SEC on April 27, 2017).
10.71   Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2017).
10.72   Form of Convertible Debenture (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2017).
10.73   Form of Convertible Debenture (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2017).
10.74   Letter Agreement between Elliot Maza and Immune Pharmaceuticals Inc., dated May 10, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 16, 2017).
21.1*   List of Subsidiaries of Immune Pharmaceuticals Inc.
23.1*   Consent of BDO USA, LLP. Independent registered public accounting firm.
31.1*   Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a- 14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a- 14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBLR Instance Document
101.SCH*   XBLR Taxonomy Extension Schema Document
101.CAL*   XBLR Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBLR Taxonomy Extension Definition Linkbase Document
101.LAB*   XBLR Taxonomy Extension Label Linkbase Document
101.PRE*   XBLR Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

** Furnished herewith.

† Management contract or compensatory plan or arrangement.

± Confidential treatment has been granted with respect to certain portions of this exhibit.

 

 77 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  IMMUNE PHARMACEUTICALS INC.
   
  By: /s/ Elliot M. Maza
    Elliot M. Maza
    Interim Chief Executive Officer
    May 17, 2017

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated and on the dates indicated:

 

Signature   Title   Date
         
/s/Elliot M. Maza   Interim Chief Executive Officer and Director (Principal Executive Officer)   May 17, 2017
Elliot M. Maza        
         
/s/ John Militello   VP Finance, Controller and Chief Accounting Officer   May 17, 2017
John Militello   (Principal Financial Officer and Principal Accounting Officer)    
         
/s/ Daniel Kazado   Director   May 17, 2017
Daniel Kazado        
         
/s/ Dr. Cameron Durrant   Director   May 17, 2017
Dr. Cameron Durrant        
         
/s/ Dr. Daniel G. Teper   Director   May 17, 2017
Dr. Daniel G. Teper        
         
/s/ John A. Neczesny   Director   May 17, 2017
John A. Neczesny        
         
/s/ Dr. Jeffrey Paley   Director   May 17, 2017
Jeffrey Paley        

 

 78 

 

 

INDEX TO FINANCIAL STATEMENTS

 

IMMUNE PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS  
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2016 and 2015 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015 F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 F-6
Notes to Consolidated Financial Statements F-7

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Immune Pharmaceuticals Inc.

New York, New York

 

We have audited the accompanying balance sheets of Immune Pharmaceuticals Inc. as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Immune Pharmaceuticals Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has negative working capital, an accumulated deficit, recurring losses from operations and expects continuing future losses that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 2 to the consolidated financial statements, on April 12, 2017, the Company approved a reverse stock split with a ratio of 1-for-20. As a result, common stock share amounts included in these consolidated financial statements have been retrospectively adjusted.

 

/s/ BDO USA, LLP

 

New York, New York

May 17, 2017

 

 F-2 

 

 

Immune Pharmaceuticals Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except share and per share amounts)

 

   December 31,   December 31, 
   2016   2015 
ASSETS          
Current assets          
Cash and cash equivalents  $271   $4,543 
Restricted cash   59    31 
Other current assets   314    258 
Total current assets   644    4,832 
Property and equipment, at cost, net of accumulated depreciation of $165 and $77   316    371 
In-process research and development acquired   15,000    27,500 
Intangible assets, net   2,806    3,111 
Other assets   339    370 
Total assets  $19,105   $36,184 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $3,522   $2,439 
Accrued expenses   2,620    2,660 
Advances from related parties   236    - 
Derivative financial instruments, warrants   -    84 
Notes and loans payable, current portion, net of debt discount   2,739    997 
Obligations under capital lease, current portion   48    106 
Total current liabilities   9,165    6,286 
Notes and loans payable, net of current portion   1,442    2,886 
Obligations under capital lease, net of current portion   52    91 
Series D Preferred Stock derivative liability   -    6,529 
Deferred tax liability   5,933    10,870 
Total liabilities   16,592    26,662 
           
Series D Preferred Stock, net of discount, par value $0.0001, 12,000 shares authorized, 0 shares issued and outstanding as of December 31, 2016 and 963 shares issued and outstanding as of December 31, 2015   -    1,659 
Commitments and contingencies          
           
Stockholders’ Equity          
Common stock, $0.0001 par value; authorized 225,000,000 shares; 8,123,766 and 1,621,747 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively   1    - 
Additional paid-in capital   98,159    70,849 
Accumulated deficit   (95,647)   (62,986)
Total stockholders’ equity   2,513    7,863 
Total liabilities and stockholders’ equity  $19,105   $36,184 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 F-3 

 

  

Immune Pharmaceuticals Inc. and Subsidiaries

Consolidated Statements of Operations

($ in thousands, except share and per share amounts)

 

   For The Years Ended 
   December 31, 
   2016   2015 
         
Revenue  $-   $- 
           
Operating expenses:          
Research and development   8,333    5,935 
General and administrative   6,427    9,789 
In-process research and development impairment expense   12,500    - 
Total operating expenses   27,260    15,724 
Loss from operations   (27,260)   (15,724)
           
Non-operating expense:          
Interest expense   (1,555)   (827)
Change in fair value of derivative instruments   (8,656)   (128)
Loss on extinguishment of debt   -    (463)
Other expense, net   (46)   (15)
Total non-operating expense:   (10,257)   (1,433)
Net loss before income taxes   (37,517)   (17,157)
Income tax benefit   4,856    - 
Net loss   (32,661)   (17,157)
Deemed dividend   (7,973)   (6,959)
Loss attributable to common stockholders  $(40,634)  $(24,116)
Basic and diluted loss per common share  $(9.58)  $(18.04)
           
Weighted average common shares outstanding - basic and diluted   4,240,075    1,337,070 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 F-4 

 

 

Consolidated Statement of Stockholders’ Equity

For the Years Ended December 31, 2016 and 2015

($ in thousands, except share amounts)

 

   Series C Preferred Stock   Common Stock   Additional
Paid-In
   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                             
Balance at January 1, 2015   2,821   $821    1,198,768   $-   $62,552   $(45,829)  $17,544 
Exercise of options and warrants   -    -    19,403    -    143    -    143 
Conversion of Series C Preferred Stock and associated dividends   (2,832)   (821)   131,378    -    1,071    -    250 
Conversion of Series D Preferred Stock to common stock and accretion of deemed dividend   -    -    225,586    -    2,439    -    2,439 
Stock-based compensation   -    -    29,408    -    2,833    -    2,833 
Shares issued to settle liabilities   -    -    14,530    -    537    -    537 
Shares issued for financing costs   -    -    2,674    -    100    -    100 
Warrants issued in connection with debt financing   -    -    -    -    416    -    416 
Warrants issued in connection with Series D financing   -    -    -    -    758    -    758 
Loss for the period   -    -    -    -    -    (17,157)   (17,157)
                                    
Balance at December 31, 2015   -    -    1,621,747    -   $70,849    (62,986)   7,863 
                                    
Conversion of Series D Preferred Stock to common stock and accretion of deemed dividend   -    -    4,735,589    1    16,882    -    16,883 
Shares Sold in HLHW Equity Financing   -    -    625,000    -    2,445    -    2,445 
Shares Issued per the Capital Access Agreements   -    -    360,000    -    1,924    -    1,924 
Share Purchase Agreements   -    -    407,063    -    3,348    -    3,348 
Costs related to equity financing   -    -    201,711    -    (603)   -    (603)
Promissory note converted to common stock   -    -    115,667    -    1,006    -    1,006 
Reclassification of Hercules warrants derivative liability to additional paid-in capital   -    -    -    -    46    -    46 
Common stock issued to settle liabilities   -    -    28,670    -    240    -    240 
Exercise of stock options   -    -    10,819    -    16    -    16 
Share-based compensation   -    -    17,500    -    2,006    -    2,006 
Loss for the period   -    -    -    -    -    (32,661)   (32,661)
Balance at December 31, 2016   -   $-    8,123,766   $1   $98,159   $(95,647)  $2,513 

  

The accompanying notes are an integral part of the consolidated financial statements.

 

 F-5 

 

 

Immune Pharmaceuticals Inc. and Subsidiaries

Consolidated Statements of Cash Flows

($ in thousands)

 

   For the Year Ended
December 31,
 
   2016   2015 
Cash flows from operating activities:          
Net loss  $(32,661)  $(17,157)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   393    331 
Amortization of debt discount and debt issuance costs   606    318 
Stock-based compensation expense   2,006    2,833 
Issuance of common stock to consultant   -    280 
Change in fair value of derivative instruments   8,656    128 
In-process research and development impairment   12,500    - 
Change in deferred taxes   (4,937)   - 
Decrease in long term grants payable   -    (469)
Changes in operating assets and liabilities:          
Increase in other current assets   (25)   (160)
Increase in security deposit   -    (177)
Increase in accounts payable   1,253    1,447 
Decrease in accrued expenses   (98)   (1,250)
Decrease in due to related parties   -    (30)
Net cash used in operating activities   (12,307)   (13,906)
Cash flows from investing activities:          
Change in restricted cash   (29)   (10)
Purchase of property and equipment   (21)   (167)
Net cash used in investing activities   (50)   (177)
Cash flows from financing activities:          
Proceeds received from issuance of common stock related to HLHW financing   2,445    - 
Proceeds received from issuance of common stock related to Capital Access Agreements   1,924    - 
Proceeds received from issuance of common stock related to Share Purchase Agreements   3,348    - 
Payment of financing fees   (505)   (1,593)
Proceeds from Series D Preferred Stock   -    12,000 
Proceeds received from exercise of options and warrants   16    143 
Proceeds from issuance of debt   -    4,500 
Proceeds received from sale of convertible note   1,000    - 
Repayment of notes and loans payable   (1,229)   (3,191)
Payment of capital lease   (96)   - 
Repayment of related party loans   (280)   - 
Proceeds from related party loans   1,462    - 
Net cash provided by financing activities   8,085    11,859 
Net decrease in cash   (4,272)   (2,224)
Cash and cash equivalents at beginning of year   4,543    6,767 
Cash at end of year  $271   $4,543 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $416   $378 
Cash paid for income taxes   81    - 
Supplemental disclosure of non-cash financing activities:          
Deemed dividend   7,973    6,959 
Conversion of promissory notes to common stock   1,006    - 
Shares issued to settle liabilities   240    537 
Reclassification of Hercules warrants derivative liability to additional paid in capital   46    - 
Settlement of liability with promissory note   60    - 
Warrants issued to Series D Preferred Stock placement agents   -    758 
Warrants issued to July 2015 debt financing placement agent   -    416 
Series D Preferred Stock original issue discount   -    632 
Shares issued for financing costs   -    100 
Conversion of Series C Preferred Stock reclassified from mezzanine to equity   -    821 

 

The accompanying notes are an integral part of the consolidated financial statements.  

 

 F-6 

 

 

Immune Pharmaceuticals Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 1.   Business Description

 

Immune Pharmaceuticals Inc., together with its subsidiaries (collectively, “Immune” or the “Company”), is a clinical stage biopharmaceutical company specializing in the development of novel targeted therapeutic agents in the fields of immuno-inflammation, dermatology and immuno-oncology. The Company’s leading product candidate is bertilimumab, a clinical-stage, first-in-class, fully human antibody, which targets eotaxin-1, a key regulator of immuno-inflammation. The Company’s asset portfolio includes NanoCyclo, a topical nanocapsule formulation of cyclosporine-A, for the treatment of atopic dermatitis and psoriasis. The Company’s immuno-oncology pipeline includes Ceplene, which is effective for the maintenance of remission in patients with Acute Myeloid Leukemia (“AML”) and Azixa and crolibulin, two clinical-stage, vascular disrupting agents (“VDA”), which have demonstrated encouraging preliminary proof of concept study results. In addition, the Company has two immuno- oncology platform assets, consisting of a bispecific antibody platform and a nanotechnology combination platform, which it refers to as “NanomAbs”.

 

The Company’s core business strategy is to build a portfolio of novel immunotherapies and compounds with the potential to treat or prevent severe inflammatory diseases in dermatology, gastroenterology and cancer, develop each compound to pre-determined milestones, and license the compounds to pharmaceutical companies for advanced development and commercialization. Additionally, we may seek to acquire commercial stage drugs in the field of immuno- oncology. The Company intends to obtain revenues from licensing fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates or intellectual property for specific therapeutic indications or applications.

 

As of December 31, 2016, the Company did not have any self-developed or licensed products approved for sale by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that the Company’s research and development efforts will be successful, that any of its products will obtain necessary government regulatory approval or that any approved products will be commercially viable.

 

On April 12, 2017, the Company announced a reverse stock split of its shares of common stock at a ratio of 1-for-20. Beginning with the opening of trading on April 13, 2017, the common stock began trading on a post-split basis on the Nasdaq Capital Market (“NASDAQ”) under the symbol IMNP. All share and per share amounts in this Form 10-K have been reflected on a post-split basis (see Note 16).

 

History – Reverse Merger. On August 25, 2013, Immune Pharmaceuticals Inc. (formerly known as, EpiCept Corporation), a Delaware corporation, or Immune, closed a merger transaction (the “Merger”) with Immune Pharmaceuticals Ltd., a privately held Israeli company (“Immune Ltd.”), pursuant to a definitive Merger Agreement and Plan of Reorganization, dated as of November 7, 2012, as amended (the “Merger Agreement”) by and among Immune, EpiCept Israel Ltd., an Israeli company and a wholly-owned subsidiary (“Merger Sub”) and Immune Ltd. Pursuant to the Merger Agreement, Merger Sub merged with and into Immune Ltd., following which Immune Ltd. became a wholly-owned subsidiary of Immune and the former stockholders of Immune Ltd. received shares of Immune that constituted a majority of the outstanding shares of Immune.

 

 Note 2. Going Concern

 

These consolidated financial statements are presented on the basis that the Company will continue as a going concern.  The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a “going concern” despite insufficient available cash as of the date of this filing to fund the anticipated level of operations for at least the next 12 months is dependent on the Company’s ability to raise capital and monetize assets through sale or licensing of drug candidates under development.

 

The Company has limited capital resources and its operations have been funded by the proceeds of equity and debt offerings. The Company has devoted substantially all of its cash resources to research and development (“R&D”) programs and incurred significant general and administrative expenses to enable it to finance and grow its business and operations. To date, the Company has not generated any significant revenue and may not generate any revenue for a number of years, if at all. If the Company is unable to raise additional funds in the future on acceptable terms, or at all, it may be forced to curtail its development activities or cease operations.

 

 F-7 

 

 

The Company has generated losses from operations since inception and it anticipates that it will continue to generate significant losses from operations for the foreseeable future. As of December 31, 2016, the Company had negative working capital of approximately $8.5 million and its accumulated deficit was $95.6 million. The Company’s net loss was $32.7 million and $17.2 million for the fiscal years ended December 31, 2016 and 2015, respectively. The Company’s cash used in operations was $12.3 million and $13.9 million for the years ended December 31, 2016 and 2015, respectively.

 

The Company has limited capital resources and operations, and since inception have been funded with the proceeds from equity and debt financings and license fee arrangements.  As of December 31, 2016, the Company had approximately $0.3 million in cash.

 

The Company will require additional financing in fiscal 2017 to continue at its expected level of operations. If the Company fails to obtain the needed capital, it will be forced to delay, scale back, sell or out-license or eliminate some or all of its R&D programs. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2017. The Company anticipates that it will continue to issue equity and/or debt securities as a source of liquidity, until it begins to generate positive cash flow to support its operations. Any future sales of securities to finance operations will dilute existing stockholders' ownership. The Company cannot guarantee when or if it will generate positive cash flow.

 

The Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months. If the Company fails to raise additional capital or obtain substantial cash inflows from potential partners within the next few months, it may be forced to curtail or cease operations. The Company cannot provide any assurance that financing will be available in a timely manner, on favorable terms or at all. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern

 

The Company has adopted Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This ASU requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures.

 

Note 3.   Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Immune and its subsidiaries: Immune Pharmaceuticals Ltd. (“Immune Ltd.”), Immune Pharmaceuticals USA Corp., Maxim Pharmaceuticals, Inc., Cytovia, Inc., Immune Oncology Pharmaceuticals Inc. and EpiCept GmbH (closed January 2015). All material inter-company transactions and balances have been eliminated in consolidation.

 

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and instructions to Form 10-K.

 

Use of Estimates 

 

In preparing consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and expenses during the reported periods. Significant estimates include impairment of long lived assets (including intangible assets and In-Process R&D (“IPR&D”), amortization period of intangible assets, fair value of stock based compensation, fair value of warrants and derivative liabilities and valuation of uncertain tax position. Actual results could differ from those estimates. 

 

Cash and Cash Equivalents

 

The Company considers investments with original maturities of three months or less to be cash equivalents. Restricted cash primarily represents cash not available for immediate and general use by the Company. The Company maintains cash and cash equivalents with certain major financial institutions in the United States and Israel. At certain times during the year cash may exceed U.S. federally insured limits.

 

 F-8 

 

 

Intangible Assets

 

The Company accounts for the purchases of intangible assets in accordance with the provisions of Accounting Standards Classification (“ASC”) 350, Intangibles. Intangible assets are recognized based on their acquisition cost. Intangible assets determined to have indefinite lives are not amortized, but rather tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may no longer be recoverable. If any of the Company’s intangible assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value. Intangible assets with definitive lives are also reviewed for impairment only if indicators exist in accordance with ASC 360, Property, Plant and Equipment, and are amortized or depreciated over the shorter of their estimated useful lives or the statutory or contractual term, and in the case of patents on a straight-line basis. 

 

The Company performs an analysis annually to determine whether an impairment of intangible assets has occurred. In particular, the Company evaluated the AmiKet IPR&D as of December 31, 2016 for impairment and determined that it is more likely than not that the AmiKet IPR&D is impaired. See In-Process Research and Development below for a further discussion of the Company’s determination that an impairment has occurred.

 

Property and Equipment

 

Property and equipment are carried at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the useful live of the related asset. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized.

 

 

    Method   Estimated Useful
Life (Years)
Computers and accessories   Straight-line   3 - 5
Equipment   Straight-line   3 - 5
Furniture and fixtures   Straight-line   3 - 7

 

Property and equipment consisted of the following ($ in thousands):

 

   December 31, 
   2016   2015 
Computers and software  $103   $85 
Equipment   284    273 
Furniture and fixtures   94    90 
    481    448 
Less accumulated depreciation   (165)   (77)
   $316   $371 

 

Depreciation expense amounted to $88,000 and $26,000 for the years ended December 31, 2016 and 2015, respectively. 

 

In-Process Research and Development

 

IPR&D represents the estimated fair value assigned to R&D projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use.  IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated R&D efforts. During the period prior to completion or abandonment, these acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired.

 

The Company recorded an asset, IPR&D, with an initial book value of $27.5 million, related to the acquisition of AmiKet in August 2013 as part of the merger with Epicept. Management completed an impairment analysis of the IPR&D as of December 31, 2016 and concluded that the following factors indicate that the IPR&D asset was impaired: a decision by management to delay any further development of AmiKet; the failure to sell or license AmiKet to a third party; and in consideration of the Company’s market capitalization. For the year ended December 31, 2016, the Company recorded an impairment charge of $12.5 million in its consolidated statement of operations, which represents the excess of the IPR&D asset’s carrying value over its estimated fair value. The estimated fair value of the IPR&D asset is based upon the value ascribed to AmiKet in an arm’s length agreement negotiated by the Company with an unrelated third party.

 

 F-9 

 

 

Segment Information 

 

The Company operates in one reportable segment: acquiring, developing and commercializing prescription drug products. Accordingly, the Company reports the accompanying consolidated financial statements in the aggregate, including all of its activities in one reportable segment. As of December 31, 2016 and 2015, approximately 9% and 8%, respectively, of the Company's assets were located outside of the U.S.  

 

Research and Development

 

R&D expenses consist primarily of the cost of the Company’s development and operations personnel, the cost of its clinical trials, manufacturing costs, as well as the cost of outsourced services and are expensed as incurred. 

 

Translation into U.S. dollars

 

The Company’s functional currency is the U.S. dollar. The Company conducts certain transactions in foreign currencies, particularly, the Israeli Shekel and the Euro, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected as non-operating income or expense in the statement of operations, as they arise.

 

Stock-based Compensation 

 

The Company recognizes compensation expense for all equity-based payments. Stock based compensation issued to employees is accounted for under ASC 718, Compensation – Share Compensation (“ASC 718”). The Company utilizes the Black-Scholes valuation method to recognize compensation expense over the vesting period. Certain assumptions need to be made with respect to utilizing the Black-Scholes valuation model, including the expected life, volatility, risk-free interest rate and anticipated forfeiture of the stock options. The expected life of the stock options were calculated using the short cut method per the provisions of ASC 718. The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the options. As the Company’s common stock does not have an adequate length of trading history, coupled with significant changes to the business since the Merger, the expected stock price volatility for the Company’s common stock was estimated by taking the average historical price volatility for industry peers combined with the Company’s historical data based on daily price observations. Estimates of pre-vesting option forfeitures are based on the Company’s experience. The Company adjusts its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and also impacts the amount of compensation expense to be recognized in future periods. 

 

The Company accounts for stock-based transactions with non-employees in which services are received in exchange for equity instruments based upon the fair value of the equity instruments issued, in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Factors that most significantly affect the expense related to equity-based payments to non-employees include the estimated fair market value of the common stock underlying the stock options and the estimated volatility of such fair market value. The value of such options is re-measured every quarter until performance is complete and income or expense is recognized during the vesting terms. Accounting for equity-based payments to non-employees granted by the Company requires fair value estimates of the equity instrument grant. When stock-based grants are granted in exchange for the receipt of services, the Company estimates the value of the stock-based compensation based upon the value of its common stock at the date of grant. 

 

Reverse Stock Split

 

On April 12, 2017, the Company effected a one-for-twenty reverse stock split (the “Reverse Split”) of its issued and outstanding shares of common stock (“Common Stock”). Every twenty shares of issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share of Common Stock. All share and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital.

 

The Reverse Split affected all issued and outstanding shares of Common Stock, as well as Common Stock underlying stock options, warrants and convertible instruments outstanding immediately prior to the effectiveness of the Reverse Split. The Reverse Split reduced the total number of shares of Common Stock outstanding from approximately 194.3 million to approximately 9.7 million.  

 

 F-10 

 

 

No fractional shares were issued in connection with the Reverse Split. Any fractional share of common stock that would otherwise have resulted from the reverse stock split was rounded up to the nearest whole share.

 

Income Taxes 

 

The Company accounts for income taxes in accordance with ASC 740 “Income Taxes.” The Company is required to file income tax returns in the appropriate U.S. federal, state and local jurisdictions, including New York State and New York City and in Israel. Since the Company had losses in the past, all prior years that generated net operating loss carry-forwards are open and subject to audit examination.

 

Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based upon the differences arising from carrying amounts of the Company’s assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s net deferred tax assets as of December 31, 2016 and 2015, due to projected losses and because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. ASC 740 prescribes how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Additionally, for tax positions to qualify for deferred tax benefit recognition under ASC 740, the position must have at least a “more likely than not” chance of being sustained upon challenge by the respective taxing authorities, which criteria is a matter of significant judgment. The Company had gross liabilities recorded of $60,000 and $50,000 for the years ended December 31, 2016 and 2015, respectively, to account for potential state income tax exposure. The Company’s policy is to record interest and penalty related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision, of which such amounts were immaterial for the years ended December 2016 and 2015.

 

Patents

 

The Company expenses external costs, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent applications pending. The Company also expenses costs associated with maintaining and defending patents subsequent to their issuance in the period incurred. 

 

Clinical Trial Accruals

 

The Company’s preclinical and clinical trials are performed by third party contract research organizations (CROs) and/or clinical investigators, and clinical supplies are manufactured by contract manufacturing organizations (CMOs). Invoicing from these third parties may be monthly based upon services performed or based upon milestones achieved. The Company accrues these expenses based upon its assessment of the status of each clinical trial and the work completed, and upon information obtained from the CROs and CMOs. The Company’s estimates are dependent upon the timeliness and accuracy of data provided by the CROs and CMOs regarding the status and cost of the studies, and may not match the actual services performed by the organizations. This could result in adjustments to the Company’s research and development expenses in future periods. To date the Company has had no significant adjustments.

 

Recently Issued Accounting Pronouncements

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The amendments of ASU No. 2016-18 were issued to address the diversity in classification and presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows which is currently not addressed under Topic 230. The ASU would require an entity to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and the adoption of the ASU should be applied retrospectively. The Company is evaluating the impact of the standard on the Company’s statement of cash flows.

 

 F-11 

 

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. The ASU was issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party which has resulted in diversity in practice and increased complexity within financial reporting. The ASU would require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and the adoption of the ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is not early adopting and is evaluating the impact of the standard on the Company’s financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The ASU was issued to address eight specific cash flow issues for which stakeholders have indicated to the FASB that a diversity in practice existed in how entities were presenting and classifying these items in the statement of cash flows. The ASU is effective for public entities for fiscal years beginning after December 15, 2017 and interim periods in those fiscal years. Early adoption is permitted, including adoption in an interim fiscal period with all amendments adopted in the same period. The adoption of the ASU is required to be applied retrospectively. The Company is evaluating the impact of the standard on the Company's statement of cash flows.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting ("ASU 2016-09") as part of the FASB simplification initiative. The new standard provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax expense in the reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) increase tax withholding requirements threshold to qualify for equity classification. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The Company is evaluating the impact of the standard on the Company’s financial statements.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact of the standard on its consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for public companies for interim and annual periods beginning after December 15, 2017. The Company is evaluating the impact that the standard will have on its consolidated financial statements.

 

Note 4. Derivative Financial Instruments  

 

The Company accounts for derivative financial instruments in accordance with ASC 815-40, “Derivative and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”), instruments that do not have fixed settlement provisions are deemed to be derivative instruments.

 

 F-12 

 

 

Hercules Warrants

 

On July 29, 2015, the Company and Immune Pharmaceuticals USA Corp., a wholly-owned subsidiary of the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Hercules Capital (“Hercules”) pursuant to which Hercules agreed to lend $4.5 million to the Company with an option to borrow an additional $5.0 million prior to June 15, 2016, subject to the achievement of certain clinical milestones and satisfaction of certain other conditions. As of June 15, 2016, the Company had not met certain of the milestones as defined in the Hercules agreement in order to draw down upon the additional $5.0 million and as a result the option expired. In connection with the execution of the Loan Agreement, the Company has issued to Hercules a five-year warrant (“Hercules Warrant”) to purchase an aggregate of 10,743 shares of its common stock at an exercise price of $34.00 per share, subject to certain adjustments, including, if lower, the effective price of any financing occurring six months after the issuance date (the “Hercules Warrants”).

 

The Company determined the fair value of the Hercules Warrants to be $0.3 million on July 29, 2015 using the Binomial Lattice pricing model and recorded that amount as part of debt discount in its consolidated balance sheets since the Hercules Warrant was considered part of the cost of the financing and is being amortized over the life of the Hercules Loan Agreement using the effective interest method. The Hercules Warrants were re-measured at each balance sheet date until the expiration of the anti-dilution provision on January 29, 2016. For the year ended December 31, 2016 and 2015, the Company recorded a gain on the change in the estimated fair value of the Hercules Warrants of $38,000 and $0.2 million, respectively, which was recorded as non-operating expense in its consolidated statements of operations. Upon the expiration of the anti-dilution provision on January 29, 2016, the remaining balance of $46,000 of the derivative liability associated with the Hercules Warrant was reclassified to additional paid-in-capital in the Company’s consolidated balance sheets (see Note 5). 

 

Discover Series D Convertible Preferred Stock

 

In 2015, the Company issued Series D Redeemable Convertible Preferred Stock (“Series D Preferred Stock”) to Discover Growth Fund (“Discover”), with a conversion price of $50.00 per share. The Company received total gross proceeds of $12.0 million in connection with the issuance of the Series D Preferred Stock to Discover after taking into account a 5% original issue discount. Discover could convert at any time and at conversion Discover receives a conversion premium equal to the amount of dividends it would have received with respect to the Series D Preferred Stock if the Series D Preferred Stock had been held to the term of agreement of 6.5 years. The Series D Preferred Stock dividend rate included an adjustment feature that fluctuated inversely to the changes in the value of the Company’s common stock price. The conversion premium and dividends are redeemed upon conversion of the Series D Preferred Stock.  The Company determined that the conversion premium and dividends with the features described above required liability accounting. Accordingly, the conversion premium and the dividend feature were bifurcated from the Series D Preferred Stock on the Company’s consolidated balance sheet and were recorded as a derivative liability at fair value. Changes in the fair value of the derivative liability are recognized in the Company’s consolidated statement of operations for each reporting period. For the year ended December 31, 2016, Discover converted its remaining 963 shares of the Company’s Series D Preferred Stock outstanding. For the year ended December 31, 2015, Discover converted 300 shares of the Company’s Series D Preferred Stock. For the years ended December 31, 2016 and 2015, the Company recorded a loss of $8.7 million and $0.3 million, respectively, on the change in the estimated fair value of the Discover derivative liability, which was recorded as a non-operating expense in the Company’s consolidated statements of operations. The fair value of the Discover derivative liability as of December 31, 2016 and 2015 was $0 and $6.5 million, respectively (see Notes 5 and 11). 

 

Note 5. Fair Value Measurements

 

Financial Instruments and Fair Value 

 

The Company accounts for financial instruments in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below: 

 

·Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

·Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

 

·Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

 F-13 

 

 

The financial instruments recorded in the Company’s consolidated balance sheets consist primarily of cash, restricted cash, current debt and accounts payable. The carrying amounts of the Company’s cash and accounts payable approximate fair value due to their short-term nature. The fair value of the Company’s long-term debt approximates its gross carrying value of approximately $1.9 million (which has been presented net of issuance costs) due to its remaining maturity of less than two years.  In estimating the fair value of the Company’s derivative liabilities associated with the Hercules Warrant and the Series D Preferred Stock issued to Discover, the Company used the Binomial Lattice options pricing model at inception and on each subsequent valuation date. Based on the fair value hierarchy, the Company classified the derivative liability associated with the Hercules Warrant and the Series D Preferred Stock issued to Discover within Level 3 as of December 31, 2015. The Company had no other financial liabilities or assets that were measured at fair value as of December 31, 2016.

 

The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2015 ($ in thousands).

 

   As of December 31,
2015
             
   Total carrying and
estimated fair value
   Quoted prices in
active markets
(Level 1)
   Significant other
observable inputs
(Level 2)
   Significant
unobservable
inputs (Level 3)
 
Liabilities:                    
Derivative liability related to Series D Preferred Stock  $6,529   $-   $-   $6,529 
Derivative liability related to Hercules Warrants  $84   $-   $-   $84 

 

Hercules Warrants

 

The following table sets forth a summary of changes in the estimated fair value of the Company’s Hercules Warrant derivative liability for the periods presented ($ in thousands): 

 

   Fair Value Measurements of
Hercules
Common Stock Warrants
Using Significant
Unobservable Inputs (Level 3)
 
Balance at January 1, 2015    
Warrants issued with July 2015 debt financing  $315 
Change in estimated fair value of liability classified warrants   (231)
Balance at January 1, 2016   84 
Change in estimated fair value of liability classified warrants   (38)
Reclassification from liability to additional paid-in capital   (46)
Balance at December 31, 2016  $- 

 

Series D Preferred Stock

 

The following table sets forth a summary of changes in the estimated fair value of the Company’s Series D Preferred Stock derivative liability for the periods presented ($ in thousands):

 

   Fair Value Measurements of
Series D Preferred Stock
Derivative Liability
Using Significant
Unobservable Inputs (Level 3)
 
Balance at January 1, 2015    
Series D Preferred Stock derivative liability at inception- July 28, 2015 ($9.0 million financing)  $5,930 
Series D Preferred Stock derivative liability at inception- September 29, 2015 ($3.0 million financing)   2,077 
Series D Preferred Stock conversions   (1,836)
Change in estimate fair value of Series D Preferred Stock derivative liability   358 
Balance at January 1, 2016  $6,529 
Change in estimated fair value of Series D Preferred Stock derivative liability   8,694 
Series D Preferred Stock conversions   (15,223)
Balance at December 31, 2016  $- 

 

 F-14 

 

 

Note 6. Licensing Agreements

 

BioNanoSim Ltd - Nano Cyclosporine-A

 

In January 2016, the Company through its wholly owned subsidiary, Immune Ltd. entered into a definitive research and license agreement with BioNanoSim Ltd. (“BNS”). The license was entered into pursuant to an existing Memorandum of Understanding, dated June 10, 2015, by and between the Company and Yissum. Under the license, the Company obtained from BNS an exclusive, worldwide sublicense, with a right to further sublicense, for the development, manufacturing and commercialization of certain inventions and research results regarding Yissum’s patents in connection with nanoparticles for topical delivery of cyclosporine-A (Nanocyclo), for all topical skin indications. In consideration for the License, the Company will pay BNS the following payments throughout the term of the License:

 

·an annual maintenance fee of $30,000, commencing on January 1, 2021, which maintenance fee is subject to an increase by 30% each year, up to a maximum annual maintenance fee of $0.1 million, and may be credited against royalties or milestone payments payable in the same calendar year;

 

·a license fee in the amount of $0.5 million, to be paid in four equal installments to be made between January 4, 2016 and October 1, 2016;

 

·royalties on net sales of products (as such term is defined in the License) by the Company in the amount of up to 5%, subject to certain possible reductions in certain jurisdictions;

 

Sublicense fees in the amount of 18% of any non-sales related consideration received by the Company from a sublicense or an option to receive a sublicense for the products and/or the licensed technology (as such terms are defined in the license); and milestones payments of up to approximately $4.5 million and 12,500 shares of the Company’s common stock upon the achievement of certain regulatory, clinical development and commercialization milestones, though in the event that the Company receives consideration from a sublicensee for any such milestones, the Company will pay to BNS the higher of either (a) the amount of the particular milestone payment or (b) the amount of the sublicense fees that are due for such sublicensee consideration paid to the Company. In addition, the Company shall reimburse BNS within 60 days for expenses relating to patent fees and will sponsor a 12-month research program to prepare the program for investigational new drug (“IND”) submission. For the year ended December 31, 2016, the Company paid $0.5 million for the license fee and paid $0.2 million related to research fees.

 

Yissum Research Development Company of the Hebrew University of Jerusalem Ltd. – AmiKet Nano 

 

On June 25, 2015, the Company entered into a definitive research and license agreement with Yissum Research Development Company of the Hebrew University of Jerusalem Ltd. (“Yissum”). Under the license, the Company has obtained an exclusive, worldwide license from Yissum, with certain sublicensing rights, to make commercial use of certain of Yissum’s patents and know-how in connection with a topical nano-formulated delivery of AmiKet for the development, manufacturing, marketing, distribution and commercialization of products based on the technology. In consideration for the license, the Company will pay Yissum the following payments throughout the term of the license:

 

·an annual maintenance fee of $30,000 commencing on June 25, 2020, which maintenance fee shall increase by 30% each year, up to a maximum annual maintenance fee of $0.1 million and may be credited against royalties or milestone payments payable in the same calendar year;

 

·royalties on net sales of products (as such term is defined in the license) by the Company in the amount of up to 3%, subject to certain possible reductions in certain jurisdictions;

 

·milestones payments of up to approximately $4.5 million upon the achievement of certain regulatory, clinical development and commercialization milestone; and

 

·reimbursement of related patent fees.

 

 F-15 

 

 

Furthermore, the Company will fund an annual research program in the amount of approximately $0.4 million annually, plus VAT and any applicable taxes, commencing on October 1, 2015 (or such other time as mutually agreed between the parties). The results of the research, including any patents or patent applications shall automatically be licensed to the Company. During the year ended December 31, 2015, the Company recorded an expense for the research fee of $0.2 million, which was paid in 2016. For the year ended December 31, 2016, no expense related to the research fee had been accrued as the parties could not mutually agreed on the next phase of the research studies.

 

Atlante Biotech SAS

 

On December 28, 2015, the Company entered into an exclusive license with Atlante Biotech SAS (“Atlante”), to the patents and know-how for a new format of bispecific antibodies. The R&D work on the bispecific antibodies will be performed at the Company’s recently established Immunology R&D unit at the Alexandria Center for Life Sciences in New York City, under the leadership of Dr. Boris Shor, Executive Director of R&D of Immune. In recently presented data, the platform prototype bispecific antibody was shown to retain effector functions and mediate redirect killing of target cells by cytokine induced killer T cells. The bispecific antibody demonstrated direct anti-cancer effects in vitro, as well as in vivo anti-tumor activity and improved survival in a mouse xenograft model of disseminated leukemia. A collaborative European consortium led by Dr. Kadouche and funded by a European grant developed the novel platform for production of tetravalent IgG1-like bispecific antibodies. During the year ended December 31, 2016, the Company paid approximately $0.1 million in license fees to Atlante.

 

Dr. Jean Kadouche and Alan Razafindrastita 

 

In March 2011, Dr. Jean Kadouche, a related party, sold, assigned and transferred to Immune the entire right, title and interest for all countries, in and to any and all patents and inventions related to mice producing human antibodies and a method of preparation of human antibodies, collectively, the Human Antibody Production Technology Platform. Immune Ltd paid Dr. Kadouche and Alan Razafindrastita  total consideration of: (i) $20,000 in cash and (ii) 40,000 ordinary shares of Immune Ltd, which were valued at approximately $0.7 million. Through the Human Antibody Production Technology Platform and additional laboratory work, human immune systems and specific cell lines are introduced in mice, enabling them to produce human monoclonal antibodies. 

 

Endo Pharmaceuticals Inc.

 

On July 7, 2015, the Company amended its 2003 Licensing Agreement with Endo Pharmaceuticals Inc. (“Endo”). As a result, Immune transferred to Endo its previously licensed patents related to the use of topical lidocaine in acute and chronic back pain and Endo granted to Immune a royalty-free, non-exclusive, fully transferable license to those patents. Endo will make undisclosed milestone payments to Immune if Endo receives a back-pain indication for a lidocaine-based product, as per the original 2003 Licensing Agreement. The Company re-gained full exclusive rights to develop, commercialize and license LidoPAIN. The Company is assessing strategic alternatives for this non-core asset.

 

Dalhousie University

 

In connection with the Merger, the Company entered into a direct license agreement with Dalhousie University (“Dalhousie”) under which the Company has an exclusive license to certain patents for the topical use of tricyclic anti-depressants and N-methyl-D-aspartate (“NMDA”) receptor antagonists as topical analgesics for neuralgia. These, and other patents, cover the combination treatment consisting of amitriptyline and ketamine in AmiKet. 

 

The Company has been granted worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection with passive dermal applications. The Company is obligated to make payments to Dalhousie upon achievement of specified milestones and to pay royalties based on annual net sales derived from the products incorporating the licensed technology. The Company is further obligated to pay Dalhousie an annual maintenance fee until the license agreement expires or is terminated, or a New Drug Application (“NDA”) for AmiKet is filed with the FDA, or Dalhousie will have the option to terminate the agreement. The license agreement with Dalhousie terminates upon the expiration of the last to expire licensed patent. On April 3, 2014, the Company entered into a Waiver and Amendment to the license agreement pursuant to which Dalhousie agreed to irrevocably waive the Company’s obligation to pay the $0.5 million maintenance fee that was due on August 27, 2012 and August 27, 2013 and in any subsequent year. In addition, the Company has agreed to pay Dalhousie royalties of 5% of net sales of licensed technology in countries in which patent coverage is available and 3% of net sales in countries in which data protection is available. The parties have also agreed to amend the timing and increase the amounts of the milestone payments payable under the license agreement. As of December 31, 2016 and 2015, no amounts were due to Dalhousie. Additional milestones payments will become due upon sub licensing and receipt of certain approvals, none of which have yet been met or received. 

 

 F-16 

 

 

Shire BioChem Inc.

 

In connection with the Merger, the Company acquired a license agreement for the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from Shire BioChem Inc. (“Shire”) (formerly known as BioChem Pharma, Inc.). Under the agreement, the Company is required to provide Shire BioChem a portion of any sublicensing payments the Company receives, if the Company relicenses the series of compounds or make milestone payments to Shire BioChem totaling up to $26.0 million assuming the successful commercialization of the compounds by the Company for the treatment of a cancer indication, as well as pay a royalty on product sales. As of December 31, 2016 and 2015, no amounts were due to Shire.  

 

Lonza Sales AG

 

On May 2, 2012, Lonza Sales AG (“Lonza”) granted the Company a sub-licensable, non-exclusive worldwide license under certain know-how and patent rights to use, develop, manufacture, market, sell, offer, distribute, import and export bertilimumab, as it is produced through the use of Lonza’s system of cell lines, vectors and know-how. The Company is not obligated to manufacture bertilimumab through the use of Lonza’s system.

 

The Company agreed to pay Lonza (i) a royalty of 1% of the net selling price of bertilimumab manufactured by Lonza; or (ii) an annual payment of approximately $0.1 million (first payable upon commencement of Phase II clinical trials) plus a royalty of 1.5% of the net selling price of bertilimumab if it is manufactured by the Company or one of its strategic partners; or (iii) an annual payment of approximately $0.5 million (first payable upon commencement of the relevant sublicense) plus a royalty of 2% of the net selling price of bertilimumab if it is manufactured by any party other than Lonza, the Company or one of its strategic partners. The royalties are subject to a 50% reduction based on the lack of certain patent protections, including the expiration of patents, on a country-by-country basis. Unless earlier terminated (including, but not limited to, the reasons set forth below), the license agreement continues until the expiration of the last enforceable valid claim to the licensed patent rights, which began to expire in 2014 and will continue to expire between 2015 and 2016, or for so long as the System Know How (as defined in the License) is identified and remains secret and substantial, whichever is later. As of December 31, 2016 and 2015, no amounts were due under the license agreement. 

 

MabLife SAS

 

In March 2012, Immune Ltd. acquired from MabLife SAS (“MabLife”), through an assignment agreement, all rights, titles and interests in and to the patent rights, technology and deliverables related to the anti-Ferritin mAb, AMB8LK, including its nucleotide and protein sequences, its ability to recognize human acid and basic ferritins, or a part of its ability to recognize human acid and basic ferritins The consideration was as follows: (i) $0.6 million payable in six equal installments of which $0.2 million had been paid through December 31, 2016; and (ii) royalties of 0.6% of net sales of any product containing AMB8LK or the manufacture, use, sale, offering or importation of which would infringe on the patent rights with respect to AMB8LK.  The Company is required to assign the foregoing rights back to MabLife if it fails to make any of the required payments, are declared insolvent or bankrupt or terminate the agreement. In February 2014, the Company acquired from MabLife, through an irrevocable, exclusive, assignment of all rights, titles and interests in and to the secondary patent rights to (i) the use of anti-ferritin monoclonal antibodies in the treatment of some cancers, (ii) nucleotide and protein sequences of an antibody directed against an epitope common to human acidic, and (iii) basic ferritins, monoclonal antibodies or antibody-like molecules comprising these sequences for $0.1 million (see Notes 7 and 9).

 

During 2015, MabLife informed the Company that it had filed for bankruptcy. As of December 31, 2016, the bankruptcy had no impact on the Company’s Anti-ferritin Antibody intangible asset.

 

iCo Therapeutics Inc.

 

In December 2010, iCo Therapeutics Inc. (“iCo”) granted Immune Ltd. an option to sub-license the use of bertilimumab from iCo, which obtained certain exclusive license rights to intellectual property relating to bertilimumab pursuant to a license agreement with Cambridge Antibody Technology Group Plc, and to which Immune became a party. In June 2011, Immune exercised its option and obtained a worldwide license from iCo for the use and development of bertilimumab for all human indications, other than ocular indications, pursuant to a product sub-license agreement. iCo retained the worldwide exclusive right to the use of bertilimumab for all ocular applications. Under the agreement, Immune Ltd. paid an initial consideration of $1.7 million comprised of (i) $0.5 million in cash, (ii) 30,000 ordinary shares, which were valued at approximately $1.0 million and (iii) 10,000 warrants, which were valued at approximately $0.2 million. In addition to this consideration, iCo received anti-dilution rights equal to 6.14% of the Company’s issued and outstanding share capital on a fully diluted basis. As of December 31, 2016, and 2015, iCo held 32,724 shares and 6,182 of the Company’s common stock and warrants, respectively. 

 

 F-17