ONCOBIOLOGICS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |
You should read this section in conjunction with our unaudited interim
consolidated financial statements and related notes included in Part I. Item 1
of this report and our audited consolidated financial statements and related
notes thereto and management's discussion and analysis of financial condition
and results of operations for the years ended , 2017and 2016
included in our Annual Report on Form 10-K for the year ended , filed with the Securities and Exchange Commission, or SEC, on , as amended to date.



Forward-Looking Statements



This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
identified by words such as "believe," "may," "could," "will," "estimate,"
"continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would,"
"potentially" or the negative of these terms or similar expressions in this
report. You should read these statements carefully because they discuss future
expectations, contain projections of future results of operations or financial
condition, or state other "forward-looking" information. These statements relate
to our future plans, objectives, expectations, intentions and financial
performance and the assumptions that underlie these statements. These
forward-looking statements are subject to certain risks and uncertainties that
could cause a difference include, but are not limited to, those discussed under
the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended
, filed with the SEC on , as amended to date,
and elsewhere in this report. Forward-looking statements are based on our
management's current beliefs and assumptions and based on information currently
available to our management. These statements, like all statements in this
report, speak only as of their date, and we undertake no obligation to update or
revise these statements in light of future developments.



Overview



We are a clinical-stage biopharmaceutical company focused on identifying,
developing, manufacturing and commercializing complex biosimilar therapeutics.
Our current focus is on technically challenging and commercially attractive
monoclonal antibodies, or mAbs, in the disease areas of immunology and oncology.
A mAb is a type of protein that is produced by a single clone of cells or cell
line and made to bind to a specific substance in the body. Our strategy is to
cost-effectively develop these biosimilars on an accelerated timeline, which is
fundamental to our success and we believe positions us to be a leading
biosimilar company. We have leveraged our team's biopharmaceutical expertise to
establish fully integrated in-house development and manufacturing capabilities,
which we refer to as our BioSymphony Platform. We believe this platform
addresses the numerous complex technical and regulatory challenges in developing
and commercializing mAb biosimilars and was designed to provide significant
pricing flexibility. We have advanced two of our product candidates through
Phase 1 clinical trials and into preparations for Phase 3 clinical trials:
ONS-3010, a biosimilar to adalimumab (Humira®), and ONS-1045, a biosimilar to
bevacizumab (Avastin®). We plan to advance ONS-3010 and ONS-1045 upon entering
into a license or co-development agreement with a partner. Similarly, we are
developing other earlier stage biosimilar development candidates that we intend
to take through the pre-clinical stage with the goal of entering into clinical
trials upon securing a development partner for major markets such as the United
States and the EU.


We have made a strategic decision to maximize the value of our BioSymphony
Platform to assist development stage biopharmaceutical and biotechnology
companies with the development and manufacturing of their drug product
candidates for clinical trials on a contract basis. We believe that this
strategy to leverage the BioSymphony Platform and its capabilities will generate
funding for our biosimilar development programs while we continue to develop our
pipeline by providing a flexible and cost-effective alternative to the larger
contract manufacturing organizations currently serving this market.



Through , we have funded substantially all of our operations
through the sale and issuance of $180.3 million in net proceeds of our equity
and debt securities. We have also received $29.0 million pursuant to our
collaboration and licensing agreements. In , we closed on the
initial sale of 32,628 shares of our newly-created Series A Convertible
Preferred Stock, or the Series A Convertible, to GMS Tenshi Holdings Pte.
Limited, or GMS Tenshi, for $3.3 million of cash, and entered into an investor
rights agreement in connection therewith. In , following receipt of
necessary stockholder approval, we issued an additional 217,372 shares of our
Series A Convertible and warrants to acquire 16,750,000 shares of our common
stock to GMS Tenshi for $21.7 million of cash. Concurrent with such second
closing, we also exchanged an aggregate $1.5 million of outstanding senior
secured notes into 1,500,000 shares of our newly-created Series B Convertible
Preferred Stock, or the Series B Convertible.



Additionally, as part of the GMS Tenshi transaction, in , we entered into a joint development and licensing agreement for ONS-3010 and ONS-1045 in all emerging market territories not previously licensed to other development partners.



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We have incurred recurring losses and negative cash flows from operations since
inception and have an accumulated deficit at  of $188.1
million, $13.5 million of senior secured notes due in  and
$4.6 million of indebtedness that is due on demand. We will need to raise
substantial additional capital to fund our planned future operations, commence
Phase 3 clinical trials, receive approval for and commercialize ONS-3010 and
ONS-1045 and continue to develop our other pipeline candidates. We plan to
finance our future operations with a combination of proceeds from providing
contract development and manufacturing services on a fee for service basis, the
issuance of equity securities, the issuance of additional debt, potential
collaborations and revenues from potential future product sales, if any. There
are no assurances that we will be successful in obtaining an adequate level of
financing for the development and commercialization of ONS-3010, ONS-1045 or any
other current or future biosimilar product candidates. If we are unable to
secure adequate additional funding, our business, operating results, financial
condition and cash flows may be materially and adversely affected. These matters
raise substantial doubt about our ability to continue as a going concern. Our
interim unaudited consolidated financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.



Our current cash resources of  $13.8 million as of  are
expected to fund our operations through . To provide additional
working capital, we continue to engage in active discussions with global and
regional pharmaceutical companies for licensing and/or co-development rights to
our late- and early-stage pipeline product candidates. If we are not successful
in raising additional capital or entering into one or more licensing and/or
co-development rights agreements, we will be required to scale back our plans
and place certain activities on hold.



We do not have any products approved for sale and we have only generated revenue
from our collaboration agreements. We have incurred operating losses and
negative operating cash flows since inception and there is no assurance that we
will ever achieve profitable operations, and if achieved, that profitable
operations will be sustained. Our net loss for the three months ended  was $1.9 million. We also had a net loss of $19.1 million for the three
months ended . In addition, development activities, clinical
and preclinical testing and commercialization of our product candidates will
require significant additional financing.



Collaboration and License Agreements




From time to time, we enter into collaboration and license agreements for the
research and development, manufacture and/or commercialization of our biosimilar
products and/or biosimilar product candidates. These agreements generally
provide for non-refundable upfront license fees, development and commercial
performance milestone payments, cost sharing, royalty payments and/or profit
sharing.



Selexis SA


In , we entered into a research license agreement with Selexis SA,
or Selexis, pursuant to which we acquired a non-exclusive license to conduct
research internally or in collaboration with third parties to develop
recombinant proteins from mammalian cells created lines using the Selexis
expression technology, or the Selexis Technology. The original research license
had a three-year term, but on , was extended for an additional
three-year term through , and then extended for one more year
through . We may sublicense our rights with Selexis' prior
written consent but are prohibited from making commercial use of the Selexis
Technology or the resultant recombinant proteins comprising our biosimilars in
humans, or from filing an investigational new drug, absent a commercial license
agreement with Selexis covering the particular biosimilar product candidate
developed under the research license. In connection with the entry into the
research license, we paid Selexis an initial fee and agreed to make additional
annual maintenance payments of the same amount for each of the three years that
the research license agreement term was extended.



Selexis also granted us a non-transferrable option to obtain a perpetual,
non-exclusive, worldwide commercial license under the Selexis Technology to
manufacture, or have manufactured, a recombinant protein produced by a cell line
developed using the Selexis Technology for clinical testing and commercial sale.
We exercised this option in  and entered into three commercial license
agreements with Selexis for our ONS-3010, ONS-1045 and ONS-1050 biosimilar
candidates. We paid an upfront licensing fee to Selexis for each commercial
license and also agreed to pay a fixed milestone payment for each licensed
product. In addition, we are required to pay a single-digit royalty on a final
product-by-final product and country-by-country basis, based on worldwide net
sales of such final products by us or any of our affiliates or sub-licensees
during the royalty term. At any time during the term, we have the right to
terminate our royalty payment obligation by providing written notice to Selexis
and paying Selexis a royalty termination fee.



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IPCA Laboratories Limited -Humira (ONS-3010), Avastin (ONS-1045) and Herceptin (ONS-1050)




In , we entered into a strategic license agreement with IPCA
Laboratories Limited, or IPCA, under which we granted IPCA and its affiliates a
license for the research, development, manufacture, use or sale of ONS-3010 and,
by amendment in , ONS-1045. The license is exclusive with respect to
India, Sri Lanka and Myanmar, and non-exclusive with respect to Nepal and
Bhutan. Under the terms of the  agreement, we received an upfront
payment from IPCA, and are eligible to earn additional regulatory milestone
payments for each of ONS-3010 and ONS-1045. In addition, we are eligible to
receive royalties at a low teens percentage rate of annual net sales of products
by IPCA and its affiliates in the agreed territory.



In , we entered into an agreement with IPCA to assist IPCA in
establishing its research, development and manufacturing capabilities for mAbs
and biologics, including, in part, through collaborative development,
manufacture and commercialization of ONS-1050 (our Herceptin biosimilar), in the
agreed territory. The agreed territory for ONS-1050 includes the Republics of
India, Sri Lanka, Myanmar, Nepal and Bhutan, while the agreed territory for any
product candidates developed independent of our involvement is global without
geographical restriction. We also agreed to assist IPCA with its research and
development program. Under the terms of the  agreement, we are
eligible to receive development payments and commercialization fees. In
addition, we are eligible to receive royalties from IPCA at a mid-single digit
rate on annual net sales of ONS-1050 commercialized by IPCA and its affiliates
in the agreed territory.


As of , we have received an aggregate of $5.0 million of payments from IPCA under our various agreements.

Liomont - Humira (ONS-3010) and Avastin (ONS-1045)




In , we entered into a strategic license agreement with Laboratories
Liomont, S.A. de C.V., or Liomont, under which we granted Liomont and its
affiliates an exclusive, sublicenseable license in Mexico for the research,
development, manufacture, use or sale of the ONS-3010 and ONS-1045 biosimilar
product candidates in Mexico. Under the terms of the agreement, we received an
upfront payment from Liomont, and we are eligible to earn milestone payments for
each of ONS-3010 and ONS-1045. In addition, we are eligible to receive tiered
royalties at upper single-digit to low teens percentage rates of annual net
sales of products by Liomont and its affiliates in Mexico. As of , we have received an aggregate of $3.0 million of upfront and milestone
payments from Liomont.


Huahai - Humira (ONS-3010) and Avastin (ONS-1045)




In , we entered into a series of agreements with Zhejiang Huahai
Pharmaceutical Co., Ltd., or Huahai, to form an alliance for the purpose of
developing and obtaining regulatory approval for, and commercial launch and
marketing of licensed products in an agreed territory, as described below. The
agreements include a strategic alliance agreement, which sets out the governance
framework for the relationship, along with a joint participation agreement
regarding joint development and commercialization of ONS-3010, and a
co-development and license agreement for each of ONS-3010 and ONS-1045. As of
, we have received an aggregate of $16.0 million of upfront and
milestone payments from Huahai.



As contemplated by the strategic alliance agreement, we entered into a joint
participation agreement with Huahai where we agreed to co-fund the development
and share the value ownership interest of ONS-3010 in the United States, Canada,
European Union, Japan, Australia and New Zealand. Under the agreement as
amended, we are responsible for completing a defined "Phase-3 Ready Package" at
our expense, for which the portion of the funds received from Huahai to date
under this joint participation agreement was used.



In the event Huahai funds its proportionate share of development costs incurred
after completion of the "Phase-3 Ready Package," Huahai would be entitled to
retain its 51% value ownership, with us entitled to retain our 49% value
ownership, of ONS-3010 in the agreed territories. Similarly, revenues from
commercialization of ONS-3010 in the agreed countries (including major markets
such as the United States and the European Union, or EU, among others), would
also be shared based on such proportional ownership interests. In the event that
Huahai does not fund its proportionate share of such development costs, the
joint participation agreement provides for a proportionate adjustment to our
respective value ownership interests based on our respective investments in such
development costs, which would increase our value ownership interest in
ONS-3010. Under the joint participation agreement, we could also be required to
form a joint venture to further develop and commercialize ONS-3010 with Huahai
in the agreed countries, if so requested by Huahai.



In conjunction with the strategic alliance agreement, we also entered into a
co-development and license agreement with Huahai, under which we granted Huahai
and its affiliates an exclusive license, in the territory for the research,
development, manufacture, use or sale of ONS-3010 or ONS-1045 in China,
including, the People's Republic of China, Hong Kong, Macau and Taiwan. We will
each bear our respective costs under the development plans. Huahai agreed to
carry out all clinical, manufacturing and regulatory requirements necessary for
approval of the products in the agreed territory. Under the terms of the
agreement, we received an upfront payment from Huahai for ONS-3010, and have
received regulatory milestone payments for each of ONS-3010 and ONS-1045.



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GMS Tenshi - Humira (ONS-3010) and Avastin (ONS-1045)




On , in connection with the entry into the GMS Tenshi purchase
agreement for the Series A Convertible and warrants, we also entered into a
joint development and license agreement providing for the license of rights to
ONS-3010 and ONS-1045 in emerging markets, excluding China, India and Mexico,
which superseded and replaced a previous strategic licensing agreement dated
. As of , we have received an aggregate
of $5.0 million of payments from GMS Tenshi under our joint development and
license agreement.



Components of our Results of Operations



Collaboration Revenue



To date, we have derived revenue only from activities pursuant to our
collaboration and licensing agreements. We have not generated any revenue from
commercial product sales. Until we begin generating revenue from our contract
development and manufacturing services, we expect all of our revenue, if any,
will be generated from our collaboration and licensing agreements. If any of our
biosimilar product candidates currently under development are approved for
commercial sale, we may generate revenue from product sales, or alternatively,
we may choose to select a collaborator to commercialize our product candidates.



The following table sets forth a summary of revenue recognized from our
collaboration and licensing agreements for the three months ended  and 2016, all of which was from the recognition of deferred revenues under
such agreements:



                               Three months ended December 31,
                                 2017                   2016

IPCA Collaboration         $         65,268       $         65,268
Liomont Collaboration                59,160                 59,160
Huahai Collaboration                178,712                178,712
GMS Tenshi Collaboration            468,750                      -
                           $        771,890       $        303,140




Each of our collaboration and licensing agreements is considered to be a
multiple-element arrangement for accounting purposes. We determined that there
are two deliverables; specifically, the license to our biosimilar product
candidate and the related research and development services that we are
obligated to provide. We concluded that these deliverables should be accounted
for as a single unit of accounting. We determined that the upfront license
payments received should be deferred and recognized as revenue on a
straight-line basis through the estimated period of completion of our
obligations under the agreement. During the three months ended , we revised our estimate of the period of completion from  to
.


Research and Development Expenses

Research and development expense consists of expenses incurred in connection with the discovery and development of our biosimilar product candidates. We expense research and development costs as incurred. These expenses include:

· expenses incurred under agreements with contract research organizations, or

CROs, as well as investigative sites and consultants that conduct our

preclinical studies and clinical trials;

· manufacturing scale-up expenses and the cost of acquiring and manufacturing

preclinical and clinical trial materials and commercial materials, including

manufacturing validation batches;

· outsourced professional scientific development services;

· employee-related expenses, which include salaries, benefits and stock-based

compensation;

· payments made under a third-party assignment agreement, under which we acquired

intellectual property;

· expenses relating to regulatory activities, including filing fees paid to

regulatory agencies;

· laboratory materials and supplies used to support our research activities; and

· allocated expenses, utilities and other facility-related costs.




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The successful development of our biosimilar product candidates is highly
uncertain. At this time, we cannot reasonably estimate or know the nature,
timing and costs of the efforts that will be necessary to complete the remainder
of the development of, or when, if ever, material net cash inflows may commence
from any of our other biosimilar product candidates. This uncertainty is due to
the numerous risks and uncertainties associated with the duration and cost of
clinical trials, which vary significantly over the life of a project as a result
of many factors, including:


· the number of clinical sites included in the trials;

· the length of time required to enroll suitable patients;

· the number of patients that ultimately participate in the trials;

· the number of doses patients receive;

· the duration of patient follow-up;

· the results of our clinical trials;

· the establishment of commercial manufacturing capabilities;

· the receipt of marketing approvals; and

· the commercialization of product candidates.





Our expenditures are subject to additional uncertainties, including the terms
and timing of regulatory approvals. We may never succeed in achieving regulatory
approval for any of our biosimilar product candidates. We may obtain unexpected
results from our clinical trials. We may elect to discontinue, delay or modify
clinical trials of some biosimilar product candidates or focus on others. A
change in the outcome of any of these variables with respect to the development
of a biosimilar product candidate could mean a significant change in the costs
and timing associated with the development of that biosimilar product candidate.
For example, if the U.S. Food and Drug Administration, or FDA, or other
regulatory authorities were to require us to conduct clinical trials beyond
those that we currently anticipate, or if we experience significant delays in
enrollment in any of our clinical trials, we could be required to expend
significant additional financial resources and time on the completion of
clinical development. Biosimilar product commercialization will take
several years and millions of dollars in development costs.



Research and development activities are central to our business model.
Biosimilar 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
significantly over the next several years as we increase personnel costs,
including stock-based compensation, conduct clinical trials and prepare
regulatory filings for our biosimilar product candidates.



General and Administrative Expenses




General and administrative expenses consist principally of salaries and related
costs for personnel in executive, administrative, finance and legal functions,
including stock-based compensation, travel expenses and recruiting expenses.
Other general and administrative expenses include facility related costs, patent
filing and prosecution costs and professional fees for business development,
legal, auditing and tax services and insurance costs.



We anticipate that our general and administrative expenses will increase as a
result of increased payroll, expanded infrastructure and an increase in
accounting, consulting, legal and tax-related services associated with
maintaining compliance with stock exchange listing and SEC requirements,
investor relations costs, and director and officer insurance premiums associated
with being a public company. We also anticipate that our general and
administrative expenses will increase in support of our clinical trials as we
expand and progress our development programs. Additionally, if and when we
believe a regulatory approval of a biosimilar product candidate appears likely,
we anticipate an increase in payroll and expense as a result of our preparation
for commercial operations, particularly as it relates to the sales and marketing
of our biosimilar product.



Interest Expense


Interest expense consists of cash paid and non-cash interest expense related to our senior secured notes, former bank loans, notes with current and former stockholders, equipment loans and capital lease and other finance obligations.

Loss on Extinguishment of Debt




Loss on extinguishment of debt is attributable to the exchange of $1.5 million
of principal borrowings under our senior secured notes for shares of Series B
Convertible. The loss represents the excess fair value of the Series B
Convertible that was issued over the carrying value of the senior secured notes
and accrued interest.



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Change in Fair Value of Warrant Liability

Warrants to purchase our common stock that have been issued in conjunction with
our senior secured notes are classified as liabilities and recorded at fair
value. The warrants are subject to re-measurement at each balance sheet date and
we recognize any change in fair value in our statements of operations as other
(income) expense.



Income Taxes



In , we received approval from the New Jersey Economic Development
Authority's Technology Business Tax Certificate Transfer Program to sell a
portion of our unused New Jersey net operating losses, or NOLs, and research and
development, or R&D, tax credits. As a result, we received $3.15 million of cash
from the sale of these NOLs and credits in . Since inception, we
have not recorded any U.S. federal or state income tax benefits (excluding the
sale of New Jersey state NOLs and research credits) for the net losses we have
incurred in each year or on our earned R&D tax credits, due to our uncertainty
of realizing a benefit from those items. As of , we had
federal and state NOL carryforwards of $131.5 million and $69.6 million,
respectively that will begin to expire in 2030 and 2036, respectively. As of
, we had federal foreign tax credit carryforwards of
$2.9 million available to reduce future tax liabilities, which begin to expire
starting in 2023. As of , we also had federal research and
development tax credit carryforwards of $0.8 million, which begin to expire
in
2031.



In general, under Section 382 of the Internal Revenue Code of 1986, as amended,
or the Code, a corporation that undergoes an "ownership change" is subject to
limitations on its ability to utilize its NOLs to offset future taxable income.
We have not completed a study to assess whether an ownership change has occurred
in the past. Our existing NOLs may be subject to limitations arising from
previous ownership changes, and if we undergo an ownership change in connection
with or after our IPO, our ability to utilize NOLs could be further limited by
Section 382 of the Code. Future changes in our stock ownership, some of which
are outside of our control, could result in an ownership change under
Section 382 of the Code. Our NOLs are also subject to international regulations,
which could restrict our ability to utilize our NOLs. Furthermore, our ability
to utilize NOLs of companies that we may acquire in the future may be subject to
limitations. There is also a risk that due to regulatory changes, such as
suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs
could expire or otherwise be unavailable to offset future income tax
liabilities.



Results of Operations


Comparison of Three Months Ended and 2016



                                                 Three months ended December 31,
                                                     2017                 2016             Change

Collaboration revenues                         $        771,890       $    

303,140 $ 468,750


Operating expenses:
Research and development                                402,402          13,227,714       (12,825,312 )
General and administrative                            3,549,252           

4,870,668 (1,321,416 )

                                                      3,951,654          

18,098,382 (14,146,728 )


Loss from operations                                 (3,179,764 )       

(17,795,242 ) 14,615,478

Interest expense                                        717,883             489,145           228,738
Loss on extinguishment of debt                        1,252,353                   -        (1,252,353 )
Change in fair value of warrant liability               (78,783 )          
810,083          (888,866 )
Loss before income taxes                             (5,071,217 )       (19,094,470 )      14,023,253
Income tax (benefit) expense                         (3,150,716 )             4,000        (3,154,716 )
Net loss                                       $     (1,920,501 )     $ (19,098,470 )   $  17,177,969




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Collaboration Revenues



Collaboration revenues increased $0.5 million, to $0.8 million, for the three
months ended , as compared to the three months ended . The change is due to the amortization of the upfront payments received
in August and  under our collaboration arrangement with GMS
Tenshi.



Research and Development Expenses

The following table summarizes our research and development expenses by functional area for the three months ended and 2016:



                                                Three months ended                  2016

Preclinical and clinical development $ 927,071 $ 8,944,891 Settlement of clinical development contract (3,228,613 )

-

Compensation and related benefits                    1,426,402           

2,469,609

Stock-based compensation                               318,241            

386,109

Other research and development                         959,301           

1,427,105

Total research and development expenses $ 402,402 $ 13,227,714

The following table summarizes our research and development expenses by compound for the three months ended and 2016:



                                                   Three months ended December 31,
                                                       2017                 2016

ONS-3010                                         $        497,837       $   5,590,557
ONS-1045                                                  280,903           2,755,026
Early-stage compounds                                     148,331             599,308
Settlement of clinical development contract            (3,228,613 )        

-

Personnel related and stock-based compensation 1,744,643 2,855,718 Other research and development

                            959,301           

1,427,105

Total research and development expenses $ 402,402 $ 13,227,714





Research and development expenses for the three months ended 
decreased by $12.8 million compared to the three months ended .
The reduction in research and development expenses is directly related to our
decision to postpone the initiation of our planned Phase 3 clinical trials for
ONS-3010 and ONS-1045 until we secure additional development partners. This
resulted in a $8.0 million decrease in preclinical and clinical development
costs and a $1.1 million decrease in compensation related costs. Further, we
also terminated an agreement related to such clinical development and were able
to favorably settle amounts previously owed under the contract resulting in a
reduction to our accrued research and development expenses of $3.2 million. Our
ongoing cost reduction efforts generated an additional $0.5 million decrease in
other research and development costs.



General and Administrative Expenses

The following table summarizes our general and administrative expenses by type for the three months ended and 2016:



                                                Three months ended December 31,
                                                  2017                   2016

Professional fees                           $        728,021       $      1,177,179
Compensation and related benefits                    596,246               

722,134

Stock-based compensation                           1,571,579              

2,077,943

Facilities, fees and other related costs             653,406               

893,412

Total general and administration expenses $ 3,549,252 $ 4,870,668




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General and administrative expenses for the three months ended 
decreased by $1.3 million compared to the three months ended .
The reduction was primarily driven by our ongoing cost reduction efforts.



Interest Expense



Interest expense increased by $0.2 million for the three months ended  as compared to the three months ended , primarily due
to the amortization of debt discount and interest expense on the senior secured
notes.


Liquidity and Capital Resources




We have not generated any revenue from biosimilar product sales. Since
inception, we have incurred net losses and negative cash flows from our
operations. Through , we have funded substantially all of our
operations through the sale and issuance of $180.3 million net proceeds of our
equity securities, debt securities and borrowings under debt facilities. We have
also received an aggregate of $29.0 million pursuant to our collaboration and
licensing agreements. In , we closed on the initial sale of 32,628
shares of Series A Convertible to GMS Tenshi for $3.3 million of cash, and
entered into an investor rights agreement and joint development and licensing
agreement. In , following receipt of stockholder approval, we issued
an additional 217,372 shares of our Series A Convertible and warrants to acquire
an aggregate of 16,750,000 shares of our common stock to GMS Tenshi for
$21.7 million of cash. We also converted $1.5 million aggregate principal amount
of our senior secured notes into 1,500,000 shares of our Series B Convertible.
In , we received approval from the New Jersey Economic Development
Authority's Technology Business Tax Certificate Transfer Program to sell a
portion of our unused New Jersey net operating losses, or NOLs, and research and
development tax credits. As a result, we received $3.15 million of cash from the
sale of these NOLs and credits in . We will require additional
capital to fund our operations past . Alternatively, we will be
required to scale back our plans and place certain activities on hold.



As of , we had an accumulated deficit of $188.1 million and a
cash balance of $13.8 million. In addition, we have $13.5 million of senior
secured notes due in  and $4.6 million of indebtedness that is due
on demand. These matters raise substantial doubt about our ability to continue
as a going concern. Our unaudited interim consolidated financial statements do
not include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty. We anticipate incurring
additional losses until such time, if ever, that we can generate significant
sales of our product candidates currently in development or from receiving fees
for contract development and manufacturing services that we plan to provide for
other biopharmaceutical companies. We will need substantial additional financing
to fund our operations and to commercially develop our product candidates.
Management is currently evaluating various strategic opportunities to obtain the
required funding for future operations. These strategies may include, but are
not limited to: providing contract development and manufacturing services on a
fee for service basis, private placements of equity and/or debt, payments from
potential strategic research and development, licensing and/or marketing
arrangements with pharmaceutical companies, and public offerings of equity
and/or debt securities. Additionally, we continue to engage in active
discussions with global and regional pharmaceutical companies for licensing
and/or co-development rights to our late- and early-stage pipeline candidates.
There can be no assurance that these future funding efforts will be successful.



Our future operations are highly dependent on a combination of factors, including (i) the timely and successful completion of additional financing discussed above, (ii) our ability to complete revenue-generating partnerships with pharmaceutical companies, (iii) the success of our research and development, (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies, and, ultimately, (v) regulatory approval and market acceptance of our proposed future products.



Cash Flows



The following table summarizes our cash flows for each of the periods presented:



                                              Three months ended                  2016

Net cash used in operating activities $ (8,671,077 ) $ (5,841,668 ) Net cash used in investing activities

             (1,075,143 )          (148,362 )
Net cash provided by financing activities         20,398,480           5,716,678
Net increase (decrease) in cash             $     10,652,260       $    (273,352 )




  19


  Table of Contents



Operating Activities.



During the three months ended , we used $8.7 million of cash in
operating activities resulting from our net loss of $1.9 million and the change
in our operating assets and liabilities of $11.0 million. This use of cash was
partially offset by $4.3 million of noncash items such as non-cash interest
expense, stock-based compensation, change in fair value of warrant liability,
loss on extinguishment of debt and depreciation and amortization expense. The
change in our operating assets and liabilities was primarily due to payments of
our outstanding accounts payable and accrued expenses from  as
well as the prepayment of certain research and development expenses and the
amortization of our deferred revenues from collaborations.



During the three months ended , we used $5.8 million of cash in
operating activities, primarily resulting from our net loss of $19.1 million,
partially offset by the net cash provided from changes in our operating assets
and liabilities of $9.2 million and $4.1 million of noncash items such as
non-cash interest expense, stock-based compensation, change in fair value of
warrant liability and depreciation and amortization expense. The change in our
operating assets and liabilities was primarily due to increases in accounts
payable related to the timing of vendor payments for research and development
and in deferred revenues due to ratable recognition of upfront payments received
under our collaboration arrangements. These outflows were offset by decreases in
our prepaid expenses and other current assets, and increases in accrued
expenses, and other liabilities that relate to the timing of vendor payments and
the recognition of research and development expenses.



Investing Activities.



During the three months ended  and 2016, we used cash of $1.1
million and $0.1 million, respectively, in investing activities for the purchase
of property and equipment.



Financing Activities.



During the three months ended , net cash provided by financing
activities was $20.4 million, primarily attributable to $20.6 million in net
proceeds from our second closing of our Series A Convertible in October 2017.We
also had $0.2 million in debt payments.



During the three months ended , net cash provided by financing
activities was $5.7 million, primarily attributable to $8.35 million in
aggregate proceeds from our senior secured notes and warrants in ,
these inflows were offset by $2.8 million in debt payments, primarily $2.4
million to repay senior bank loans.



Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of .

Contractual Obligations and Commitments



Not applicable.


Critical Accounting Policies and Significant Judgments and Estimates

The Critical Accounting Policies and Significant Judgments and Estimates included in our Form 10-K for the fiscal year ended , filed with the SEC on , as amended to date, have not materially changed.




JOBS Act Accounting Election



The JOBS Act, permits an "emerging growth company" such as us to take advantage
of an extended transition period to comply with new or revised accounting
standards applicable to public companies until those standards would otherwise
apply to private companies. We have irrevocably elected to "opt out" of this
provision and, as a result, we will comply with new or revised accounting
standards when they are required to be adopted by public companies that are not
emerging growth companies.

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