$LBIO Form 10-K

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Form 10-K for LION BIOTECHNOLOGIES, INC.


9-Mar-2017

Annual Report

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Business” section and elsewhere in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof and, except as required by law, we assume no obligation to update any such forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to eradicate cancer cells. Our lead program is an adoptive cell therapy utilizing tumor-infiltrating lymphocytes (TIL), which are T cells derived from patients’ tumors, for the treatment of metastatic melanoma.

We have an on-going Phase 2 clinical trial of our lead product candidate, LN-144, TIL for the treatment of metastatic melanoma. This single-arm study is enrolling patients with melanoma whose disease has progressed following treatment with at least one systemic therapy. The trial opened for enrollment during the second half of 2015 and is being conducted at eight sites. The purpose of the study is to evaluate the safety, and efficacy of our autologous TIL infusion (LN-144). The trial’s primary endpoints are characterized by the safety of LN-144. Secondary outcome measures efficacy of LN-144 which include objective response and complete response rates. Additional secondary or exploratory endpoints may be considered as well. Updates from this Phase 2 trial is planned to be released in 2017.

During 2015, we received orphan drug designation for LN-144 in the United States to treat metastatic melanoma. This designation provides seven years of market exclusivity in the United States, subject to certain limited exceptions.

In September 2016, we entered into an exclusive and co-exclusive license agreement PolyBioCept AB for the exclusive right and license to PolyBioCept’s intellectual property to develop, manufacture, market and genetically engineer TIL produced by expansion, selection and enrichment using a cytokine cocktail. We paid PolyBioCept a total of $2.5 million as an up-front exclusive license payment and agreed to make milestone payments to PolyBioCept under the PolyBioCept license agreement if, and when, (i) certain product development milestones are achieved, (ii) certain regulatory approvals have been obtained from the FDA and/or the European Medicines Agency (EMA), and (iii) certain product sales targets are achieved. The milestone payments will be payable both in cash (U.S. dollars) and in shares of our common stock. If all of the foregoing product development, regulatory approval and sales milestone payments are met, we will have to pay PolyBioCept an additional $8.7 million and will have to issue to PolyBioCept a total 2,219,376 shares of unregistered common stock. In addition to these potential payments, we agreed to reimburse PolyBioCept for up to $0.2 million in expenses related to the transfer of know-how and to pay PolyBioCept $0.1 million as a clinical trials management fee.

On November 23, 2016 we entered into that a three-year manufacturing and services agreement with WuXi pursuant to which WuXi agreed to provide manufacturing and other services. Under the agreement, we entered into two statements of work for two cGMP manufacturing suites to be established and operated by WuXi for us, one of which is expected to be capable of being used for the commercial manufacture of our products. The fee payable under the first statement of work for the use of one of the manufacturing suites during the first year of the agreement, including the fees for the necessary personnel, is $2.5 million. The second statement of work, under which WuXi agreed to establish and operate a second, dedicated facility for a late stage/commercial manufacturing cGMP suite requires us to pay approximately $5.85 million during the first year of the agreement.

Results of Operations for the Years Ended December 31, 2016 and 2015

Revenues

As a development stage company that is currently engaged in the development of novel cancer immunotherapy products, we have not yet generated any revenues from our biotechnology business or otherwise since our formation. We currently do not anticipate that we will generate any revenues during 2017 from the sale or licensing of our products. Our ability to generate revenues in the future will depend on our ability to complete the development of our product candidates and to obtain regulatory approval for them.

Costs and expenses

Research and Development Expense (in thousands)



                                           Years Ended December 31,              Increase (Decrease)
                                            2016               2015               $                 %

Research and development                $     28,037       $     15,470            12,567               81 %
Stock-based compensation expense
included in research and development
expense                                        3,267              2,248             1,019               45 %

Research and Development expense for the year ended December 31, 2016 increased by $12.6 million, or 81%, compared to the year ended December 31, 2015, inclusive of stock-based compensation. The increase was primarily attributable to a $2.3 million increase in payroll and related expenses primarily due to an increase in headcount, a $3.2 million increase in drug manufacturing costs, a $0.9 million increase in costs related to our clinical trials, $1.0 million increase in stock-based compensation expense and expenses incurred under the PolyBioCept agreement in the amount of $2.7 million.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase over the next several years as we continue to conduct our clinical trial for our products and as we increase our research and development efforts in other cancer indications. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates.

The duration, costs and timing of our clinical trials and development of our product candidates will depend on a number of factors that include, but are not limited to, the number of patients that enroll in the trial, per patient trial costs, number of sites included in the trial, discontinuation rates of patients, duration of patient follow-up, efficacy and safety profile of the product candidate, and the length of time required to enroll eligible patients. Additionally, the probability of success for our product candidate will depend on a number of factors, including competition, manufacturing capability and cost efficiency, and commercial viability.

General and Administrative Expense (in thousands)



                                           Years Ended December 31,              Increase (Decrease)
                                            2016               2015              $                 %

General and administrative              $     25,602       $     12,390           13,212              107 %
Stock-based compensation expense
included in general and
administrative                                15,637              6,275            9,362              149 %

General and Administrative expense for the year ended December 31, 2016 increased by $13.2 million, or 107%, compared to the year ended December 31, 2015, inclusive of stock-based compensation. The increase was primarily attributable to a $9.3 million increase in stock-based compensation expense primarily due to the accelerated vesting of equity awards upon the termination of employment of our former Chief Executive Officer and our former Chief Financial Officer, and the increase in the number of our employees. A $1.5 million increase in payroll and related expenses primarily due to the increase in headcount, a $0.9 million increase due to severance payments to our former Chief Executive Officer and our former Chief Financial Officer and a $1.3 million increase in consulting and legal related expenses.

General and administrative expenses include personnel costs for our employees engaged in general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses.

Interest Income (in thousands)

Years Ended December 31, Increase (Decrease)
2016 2015 $ %
Interest Income $ 745 $ 200 545 273 %
Interest income results from our interest-bearing cash and investment balances. Interest income for the year ended December 31, 2016 increased due to the higher cash balances in 2016 as a result of the proceeds received from our equity financings in 2015 and June 2016.

Results of Operations for the Years Ended December 31, 2015 and 2014

Revenues

As a development stage company that is currently engaged in the development of novel cancer immunotherapy products, we have not yet generated any revenues from our biotechnology business or otherwise since our formation.

Costs and expenses

Research and Development Expense (in thousands)



                                           Years Ended December 31,              Increase (Decrease)
                                            2015               2014              $                 %

Research and development                $      15,470       $     3,849           11,621              302 %
Stock-based compensation expense
included in research and development
expense                                         2,248             1,144            1,104               97 %

During the year ended December 31, 2015, our research and development costs increased by $11.6 million when compared to the same period in 2014, inclusive of stock-based compensation. The increase is mainly attributable to the expansion of our CRADA in 2015, the general expansion of our research and development efforts, the establishment of our Tampa, Florida, research facility in the fourth quarter of 2014 and the initiation of our Phase II clinical trial in September 2015.

General and Administrative Expense (in thousands)



                                           Years Ended December 31,              Increase (Decrease)
                                            2015               2014              $                 %

General and administrative              $      12,390       $     8,192           4,198                51 %
Stock-based compensation expense
included in general and
administrative                                  6,275             2,670           3,605               135 %

For the year ended December 31, 2015 our general and administrative expenses increased by $4.2 million, or 51%, and for the year ended December 31, 2014 compared to the prior year comparable period, inclusive of stock-based compensation. The increase in our general and administrative expenses during the year ended December 31, 2015 is primarily due to stock-based compensation, and increases in our overall corporate activities, including business development and increases in employment related expenses, insurance costs and legal fees. For the years ended December 31, 2015 and 2014, we incurred $6.3 million and $2.7 million, respectively, of non-cash stock-based compensation costs. Share based compensation includes stock and options granted to our executive officers, our employees, our directors, and our consultants and advisors.

Interest Income (in thousands)

Years Ended December 31, Increase (Decrease)
2015 2014 $ %
Interest Income $ 200 $ 6 194 3233 %
Interest income results from our interest-bearing cash and investment balances. Interest income for the year ended December 31, 2015 increased over 2014 due to the higher cash balances in 2015 as a result of the proceeds received from our equity financings in late 2014 and early 2015.

Net Loss

We had a net loss of $52.9 million, $27.7 million, and $12.0 million for the years ended December 31, 2016, 2015 and 2014, respectively. The increase in our net loss during 2016 is due to the continued expansion of our research and development activities, increased clinical trials and manufacturing activities, and the overall growth of our corporate infrastructure. Our general and administrative expenses increased due to the increase in headcount and due to stock-based equity awards accelerated in 2016 related to the termination of certain executives. The increase in our net loss during 2015 is due to an increase in general and administrative expenses, along with the expansion of our research and development activities. We anticipate that we will continue to incur net losses in the future as we further invest in our research and development activities, including our clinical development. We do not expect to generate any revenues in the near term.

Liquidity and Capital Resources

Corporate Capitalization. As of December 31, 2016, we had outstanding 62,248,074 shares of our $0.000041666 par value common stock, 1,694 shares of our $0.0001 par value Series A Convertible Preferred Stock, and 7,946,673 shares of our $0.0001 par value Series B Convertible Preferred Stock. The outstanding shares of Series A Convertible Preferred Stock are currently convertible into 847,000 shares of our common stock, and the outstanding shares of Series B Convertible Preferred Stock are currently convertible into 7,946,673 shares of our common stock. The shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock do not have voting rights or accrue dividends.

Our major sources of funding have been proceeds from various public and private offerings of our common stock, option and warrant exercises, and interest income.

We are currently engaged in the development of therapeutics to fight cancer. We do not have any commercial products and have not yet generated any revenues from our biopharmaceutical business. We currently do not anticipate that we will generate any revenues during 2017 from the sale or licensing of any products. As shown in the accompanying financial statements, we have incurred a net loss of $52.9 million for the year ended December 31, 2016 and used $32.7 million of cash in our operating activities during the year ended December 31, 2016. As of December 31, 2016, we had $166.5 million of cash and cash equivalents and short-term investments on hand, stockholders’ equity of $166.9 million and had working capital of $164.5 million.

We expect to further increase our research and development activities, which will increase the amount of cash we will use during 2017. Specifically, we expect increased spending on clinical trials, research and development activities, higher payroll expenses as we increase our professional and scientific staff and continued and expansion of manufacturing activities. However, based on the funds we have available; we believe that we have sufficient capital to fund our anticipated operating expenses for at least 12 months from the date of filing this annual report.

Cash Flows from Operating, Investing and Financing Activities (in thousands):



                                                               Years Ended December 31,
                                                          2016           2015           2014
Net cash (used in) provided by :
Operating activities                                   $  (32,668 )   $  (18,381 )   $   (8,633 )
Investing activities                                        8,894        (71,208 )       (1,592 )
Financing activities                                       96,904         78,267         35,462
Net increase (decrease) in cash and cash equivalents   $   73,130     $  (11,322 )   $   25,237

Net cash used in operating activities of $32.7 million for the year ended December 31, 2016 resulted primarily from our net loss of $52.9 million, adjusted by $18.9 million for stock-based compensation expense, a $2.8 million an increase prepaids due to timing of certain upfront payments associated with our research agreements, and a $3.4 million increase in accrued liabilities primarily due to increases in activities by the Company.

Net cash used in operating activities of $18.4 million for the year ended December 31, 2015 resulted primarily from our net loss of $27.7 million, adjusted by $8.5 million for stock-based compensation expense.

Net cash used in operating activities of $8.6 million for the year ended December 31, 2014 resulted primarily from our net loss of $12.0 million, adjusted by $3.8 million for stock-based compensation expense.

Net cash provided by investing activities of $8.9 million for the year ended December 31, 2016 consisted primarily of $1.5 million used for the purchase of property and equipment, and $110.2 million used for purchases of short-term investments, offset by $120.7 million of proceeds from the maturities of short-term investments.

Net cash used in investing activities of $71.2 million for the year ended December 31, 2015 consisted primarily of $1.1 million used for the purchase of property and equipment, and $140.7 million used for purchases of short-term investments, offset by $70.6 million of proceeds from the maturities of short-term investments.

Net cash used in investing activities of $1.6 million for the year ended December 31, 2014 was solely used for the purchase of property and equipment.

Net cash provided by financing activities of $96.9 million for the year ended December 31, 2016 consisted primarily of net proceeds of $95.7 million from the issuance of shares in a private offering at $4.75 per share after deducting expenses of the offering, $1.2 million of proceeds exercise of warrants, $0.6 million from the exercise of options offset by $0.6 million in connection with tax payments made by the Company in connection with vested restricted stock awards.

Net cash provided by financing activities of $78.3 million for the year ended December 31, 2015 consisted primarily of net proceeds of $68.3 million from the issuance of shares in a private offering at $8.00 per share after deducting expenses of the offering, $9.7 million of proceeds exercise of warrants and $0.3 million from the exercise of options.

Net cash provided by financing activities of $35.5 million for the year ended December 31, 2014 consisted primarily of net proceeds of $32.2 million from the issuance of shares in a private offering at $5.75 per share after deducting expenses of the offering, and $3.2 million of proceeds exercise of warrants.

Significant Accounting Policies and Recent Accounting Standards

See Note 2 of the financial statements for a discussion of our significant accounting policies, including the discussion of recent accounting standards.

Contractual Obligations

We acquire assets still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required, contingent upon the successful achievement of an important point in the development life-cycle of the pharmaceutical product (e.g., approval of the product for marketing by a regulatory agency). If required by the arrangement, we may have to make royalty payments based upon a percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these milestone payments, they are not included in the table of contractual obligations.

These arrangements may be material individually, and in the event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations in any one period. In addition, these arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments.

Our current contractual obligations as of December 31, 2016 that will require future cash payments are as follows (in thousands):

                                                             Payments due by period
Contractual Obligations        Total         2017        2018        2019        2020        2021        Therafter

Operating lease obligations   $  2,860     $    797     $   699     $   700     $   495     $   169     $         -
Purchase commitments             9,820        9,820           -           -           -           -               -
Moffitt obligations                873          873           -           -           -           -               -
CRADA minimum obligations          500          500           -           -           -           -               -

Total                         $ 14,053     $ 11,990     $   699     $   700     $   495     $   169     $         -

Off-Balance Sheet Arrangements

At December 31, 2016, we had no obligations that would require disclosure as off-balance sheet arrangements.

 

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