Form 10-K for LION BIOTECHNOLOGIES, INC.
Background on the Company and Recent Events Affecting our Financial Condition and Operations
On October 5, 2011 we licensed certain rights to the adoptive cell therapy from the NIH and to a manufacturing process for a TIL-based therapy (initially for Stage IV metastatic melanoma). In order to develop the adoptive cell immunotherapies we licensed from the NIH, effective August 5, 2011, we signed a Cooperative Research and Development Agreement (“CRADA”) with the NIH and the NCI. Since the initial NIH license, we have amended the initial license and entered into an additional license for additional technologies. In addition, we have amended the CRADA to increase the scope of the research and development conducted thereunder. Under the terms of the CRADA, we now are required to provide $2,000,000 per year (in quarterly installments of $500,000) to support research activities thereunder.
Since we entered into the License Agreement, we have not made any sales that would have required us to make royalty payments to the NIH, nor were there any benchmarks or milestones achieved that would have required us to make lump sum benchmark royalty payments under the NIH license agreement.
In May 2013 we completed a restructuring of our unregistered debt and equity securities (the “Restructuring”) and raised $1.25 million. Creditors holding (i) an aggregate of approximately $7.2 million (including accrued interest and penalties) of the senior secured notes, (ii) an aggregate of approximately $1.7 million (including accrued interest and penalties) of bridge promissory notes, and (iii) an aggregate of approximately $0.3 million of other outstanding debt converted these debts into shares of common stock at a conversion price of $1.00 per share. In connection with the Restructuring, we also sold a total of 3,605,069 shares of common stock for $1,250,000. The effect of the Restructuring and related stock sales and transactions was to extinguish all outstanding secured and unsecured promissory notes (representing liabilities of approximately $8,373,000 in the aggregate) and to raise a total of $1,350,000 of cash from the sale of the securities.
On July 24, 2013, we acquired Lion Biotechnologies, Inc., a privately owned Delaware corporation (“Lion Delaware”), through a merger with our newly formed Delaware subsidiary (the “Lion Merger”). In the Lion Merger, Lion Biotechnologies’ stockholders received, in exchange for all of their issued and outstanding shares of common stock, an aggregate of 2,690,000 shares of our common stock with a fair value of $6,700,000 (of these shares, 1,340,000 were issued at the closing of the merger, and an additional 1,350,000 shares of common stock were issued later in 2013 upon the achievement of certain milestones related to our financial performance and position). The acquisition was done to acquire access to technical and managerial resources to build our current and future products, which we believed would enhance or future operations and enable us to obtain additional funding.
In November 2013, in order to fund our operating expenses, including our expected research and development expenses, we raised a total of $23.3 million in a private placement (the “Private Placement”) from the sale of 3,145,300 shares of our common stock, 17,000 shares of a new series of preferred stock designated as “Series A Convertible Preferred Stock,” and warrants to purchase an aggregate of 11,645,300 shares of common stock. The amount of net proceeds that is available to us from the Private Placement, after placement agent fees, legal fees and other expenses, approximately $21.8 million.
In late 2014 we established our own research and development laboratory at the University of South Florida Research Foundation in Tampa, Florida. We currently employ 9 researchers, scientists and other personnel at that facility.
On December 22, 2014, we sold 6,000,000 shares in an underwritten offering. The net proceeds of that offering, after deducting underwriting discounts and commissions and offering expenses payable by us, were $32.2 million.
On March 3, 2015, we sold 9,200,000 shares of our common stock in an underwritten public offering. The net proceeds to us from the offering were $68.2 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
As a development stage company that is currently engaged in the development of therapeutics to fight cancer, we have not yet generated any revenues from our biopharmaceutical business or otherwise since our formation. We currently do not anticipate that we will generate any revenues during 2014 from the sale or licensing of any products.
Costs and expenses
Operating Expenses. Operating expenses include compensation for our employees who are dedicated to research and development, general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses. Our operating expenses were $9,335,772 and $4,655,000 for the fiscal years ended December 31, 2014 (“fiscal 2014”) and 2013 (“fiscal 2013”), respectively. Our operating expenses in fiscal 2014 increased compared to fiscal 2013 as we ramped up our operations, established a new laboratory in Tampa, Florida, and hired additional employees. During most of fiscal 2013 we were engaged in the Restructuring and in raising capital to fund our future operations. We raised $23.3 million in the Private Placement in November 2013, which funds we invested in 2014 in the expansion of our operations. Operating expenses also increased in fiscal 2014 because of a $1,046,000 increase in stock based compensation (stock based compensation was $3,796,000 and $2,750,000 in fiscal 2014 and 2013, respectively). Our operating expenses in fiscal 2014 also increased compared to fiscal 2013 due to increased legal fees related to patent and licensing issues and in connection with responding to the SEC’s subpoena in the “In the Matter of Certain Stock Promotions” investigation being conducted by the SEC (see, “Item 3. Legal Proceedings”, above). Since the Private Placement, we have engaged additional employees and consultants, which will also increase the amount of cash compensation we will pay in 2015 and thereafter.
Cost of Lion Transaction. In July 2013, we entered into an Agreement and Plan of Merger (the “Lion Agreement”) with Lion Biotechnologies, Inc., a privately held Delaware corporation. Under the Lion Agreement, Lion Biotechnologies, Inc.’s stockholders received, in exchange for all of their issued and outstanding shares of common stock, an aggregate of 1,340,000 shares of our common stock with a fair value of $6,700,000. Under the Lion Agreement, we also were obligated to issue an additional 1,350,000 shares of common stock upon the achievement of certain milestones related to our financial performance and position). These other milestones were achieved in the fourth quarter of fiscal 2013 and, as a result, we issued all 1,350,000 shares (having a fair value of $9,956,250) in fiscal 2013. The value of the shares issued under the Lion Agreement was recognized and recorded as an expense in 2013. The purpose of the Lion Agreement was to acquire access to technical and managerial resources to build our current and future products, which we believed would enhance or future operations and enable us to obtain additional funding. The technical resources that we acquired included access to next generation T-cell technologies (including term sheets for such technologies), access to cancer vaccine technologies that Lion Biotechnologies, Inc. was evaluating at Harvard University, NIH, Baylor University and other institutions, and other proprietary technologies and ideas on novel T-cell manufacturing technologies that that company was designing.
Research and Development. Research and development costs were $2,704,597 in fiscal 2014 compared to $1,329,367 for the year ended December 31, 2013. Research and development expenses in both fiscal 2014 and fiscal 2013 included $1,000,000 paid and accrued under the CRADA with the NIH and fees paid to the NIH under the NIH License Agreement. In fiscal 2014 we expanded our research and development activities by engaging Lonza to commence setting up a centralized TIL manufacturing center, through a clinical trial grant agreement with Moffitt Cancer Center to expand an ongoing Phase 1 study of TIL combined with ipilimumab in patients with metastatic melanoma, and through our own research and development activities conducted at our Tampa laboratory. We intend to engage in significant research and development activities in the future, which activities are expected to substantially increase our annual research and development expenses.
Other income (expense)
Interest (expense) income. Interest income represents the income on the funds held during fiscal 2014 in our various bank accounts. Most of the funds we held in fiscal 2014 were the net proceeds from the November 2013 Private Placement. Interest expense of $444,000 in fiscal 2013 represents the amount of interest that accrued in fiscal 2013 on the various promissory notes we issued to fund our operations, including the $5,000,000 of 7% Tranche A Senior Unsecured Convertible Notes and Tranche B Senior Unsecured Convertible Notes we issued in 2011 and the $1,231,000 of 12% secured promissory notes we issued in 2012. As described above, in May 2013 we effected the Restructuring, in which substantially all of our then outstanding indebtedness was converted into shares of our common stock. Because we converted all of our interest-bearing obligations in the 2013 Restructuring, we did not accrue any interest expense in fiscal 2014.
Cost of Exchange Transaction (Restructuring). In May 2013 we effected the Restructuring in which we converted outstanding indebtedness into shares of our common stock, exchanged outstanding warrants into additional shares of common stock, and issued shares of our common stock at discounted prices. We recorded a non-cash expense of $2,296,000 in fiscal 2013 as a result of the Restructuring. No such expenses were incurred in 2014.
We had a net loss of $12,040,369 and $25,381,000 in fiscal 2014 and fiscal 2013, respectively. Our net loss for fiscal 2014 decreased as compared to fiscal 2013 primarily as a result of non-cash cost of the transaction with Lion Biotechnologies, Inc., a Delaware corporation, under the Lion Agreement ($16,656,000). Excluding the effects of the expense realized due to the Lion Agreement transaction, our net loss in fiscal 2014 would have increased by $3,499,000 compared to fiscal 2013, primarily because of increased operating expenses and increased research and development expenses.
As a development stage company, we do not expect to generate any revenues during 2015, and we expect to continue to incur net losses.
Liquidity and Capital Resources
As a result of the $32,240,172 of net proceeds that we received on December 22, 2014 in the underwritten offering of 6,000,000 shares of our common stock, as of December 31, 2014 we had cash or cash equivalents of $44,909,000. As of December 31, 2014, we had $43,313,000 of working capital and a current ratio of 28 to 1. On March 3, 2015, we received an additional $68,238,500 of net proceeds from our public offering completed at that time.
During 2015, we expect to further ramp up our operations, which will increase the amount of cash we will use in our operations. Our budget for 2015 includes significantly increased spending for both the development of our LN-144 lead product candidate and on research and development for non-melanoma indications and other TIL enhancements. In addition, we anticipate that we will have higher payroll expenses as we increase our professional staff, as well as higher ongoing payments under the CRADA. Our budget anticipates that we will spend approximately 20 million this year, although that amount may change materially. Based on the funds we had available on December 31, 2014 and the additional net proceeds we received in the March 3, 2015 public offering, we believe that we have sufficient capital to fund our anticipated operating expenses for at least 24 months.
As of December 31, 2014, our long-term obligations consisted of $1,000,000 per year, which amount increased to $2,000,000 per year as a result of the January 2015 amendment to the CRADA, and the benchmark payments we are required to make to the NIH based on the development and commercial release of licensed products using the technology underlying the NIH License Agreement. If we achieve all benchmarks for metastatic melanoma, our current primary focus, up to the product’s first commercial sale in the United States, the total amount of all such benchmark payments payable under the NIH License Agreement will be $9,490,000 for the melanoma indication. Other than the two foregoing contractual obligations to the NCI and the NIH, we had no long-term debt obligations, no capital lease obligations, no material purchase obligations or other similar long-term liabilities. In addition, we have no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of our assets, and we do not engage in trading activities involving non-exchange traded contracts.
Inflation and changing prices have had no effect on our continuing operations over our two most recent fiscal years.
Recent Accounting Pronouncements
On June 10, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-10 (ASU 2014-10), Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU 2014-10 eliminates the requirement to present inception-to-date information about income statement line items, cash flows, and equity transactions, and clarifies how entities should disclose the risks and uncertainties related to their activities. ASU 2014-10 also eliminates an exception provided to development stage entities in Consolidations (ASC Topic 810) for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The presentation and disclosure requirements in Topic 915 are no longer required for interim and annual reporting periods beginning after December 15, 2014. The revised consolidation standards will take effect in annual periods beginning after December 15, 2015, however, early adoption is permitted. The Company adopted the provisions of ASU 2014-10 starting with its quarterly report on Form 10-Q for the six months ended June 30, 2014.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.
In April 2014, the FASB issued Accounting Standards Update No. (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company’s results of operations or financial condition.
In August 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statement presentation and disclosures.
In November 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2014-16 on the Company’s financial statement presentation and disclosures
In January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-01 (Subtopic 225-20) – Income Statement – Extraordinary and Unusual Items. ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.
In February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.
The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We adopted FASB guidance effective January 1, 2006, and are using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date that remain unvested on the effective date. We account for stock option and warrant grants issued and vesting to non-employees in accordance with accounting guidance whereby the fair value of the stock compensation is based on the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) the date at which the necessary performance to earn the equity instrument is complete.
We estimate the fair value of stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is based on the historical volatility of the trading prices of our common stock and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.
Derivative Financial Instruments
We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For stock-based derivative financial instruments, we use both a weighted average Black-Scholes-Merton and Binomial option pricing models to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
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, 2014 that will require future cash payments are as follows:
Payments due by period Less than 1 More than Contractual obligations Total year 1-3 years 3-5 years 5 years Long-Term Debt Obligations - - - - - Capital Lease Obligations - - - - - NIH obligations $ 15,830,000 $ 410,000 $ 6,900,000 $ 1,010,000 $ 7,510,00 CRADA obligations $ 12,000,000 $ 2,000,000 $ 6,000,000 $ 2,000,000 2,000,000 Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP - - - - - Total $ 27,830,000 $ 2,410,000 $ 12,900,000 $ 3,010,000 $ 9,510,000