UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q 

 

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

oTRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from               to               .

 

Commission File Number 001-35798

 

 

Humanigen, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

     
Delaware   77-0557236
(State or other jurisdiction of   (IRS Employer
incorporation)   Identification No.)

 

533 Airport Boulevard, Suite 400 Burlingame, CA 94010

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 243-3100

 

 

 

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  o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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  o   Accelerated filer o
     
Non-accelerated filer  x

  Smaller reporting company  x
    Emerging growth company  x

 

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  o  No  x

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes   No ☐

  

As of November 6, 2018, there were 109,872,526 shares of common stock of the issuer outstanding.

  

 

 

 

 

TABLE OF CONTENTS

HUMANIGEN, INC.

FORM 10-Q

 

       
      Page
       
PART I. FINANCIAL INFORMATION 3
       
  Item 1. Financial Statements (unaudited) 3
       
    Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 3
       
    Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 4
       
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 5
       
    Notes to Condensed Consolidated Financial Statements 6
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
       
  Item 4. Controls and Procedures 26
       
PART II. OTHER INFORMATION 28
       

 

Item 1. Legal Proceedings 28
       

 

Item 6. Exhibits 29
       
SIGNATURES   31

 

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

Humanigen, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)

 

   September 30,  December 31,
   2018  2017
Assets          
Current assets:          
Cash and cash equivalents  $2,038   $737 
Prepaid expenses and other current assets   504    813 
Total current assets   2,542    1,550 
           
Property and equipment, net       19 
Restricted cash   71    101 
Total assets  $2,613   $1,670 
           
Liabilities and stockholders’ deficit          
Current liabilities:          
Accounts payable  $2,895   $3,330 
Accrued expenses   3,224    3,307 
Advance notes   726     
Term loans payable       18,018 
Notes payable to vendors   1,409    - 
Total current liabilities   8,254    24,655 
Convertible notes   1,052    - 
Notes payable to vendors       1,351 
Total liabilities   9,306    26,006 
           
Stockholders’ deficit:          
  Common stock, $0.001 par value: 225,000,000 and 85,000,000 shares          

authorized at September 30, 2018 and December 31, 2017, respectively;

109,872,526 and 14,946,712 shares issued and outstanding at September 30,

2018 and December 31, 2017, respectively

   110    15 
  Additional paid-in capital   265,725    238,246 
  Accumulated deficit   (272,528)   (262,597)
Total stockholders’ deficit   (6,693)   (24,336)
Total liabilities and stockholders’ deficit  $2,613   $1,670 

 

See accompanying notes.

 

3 

Table of Contents

 

Humanigen, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

   2018  2017  2018  2017
Operating expenses:                    
Research and development  $535   $3,807   $1,808   $10,328 
General and administrative   1,804    1,993    7,793    5,987 
Total operating expenses   2,339    5,800    9,601    16,315 
                     
Loss from operations   (2,339)   (5,800)   (9,601)   (16,315)
                     
Other income (expense):                    
Interest expense   (116)   (1,269)   (542)   (2,245)
Other income (expense), net   319    (14)   318    (38)
Reorganization items, net   (40)   (102)   (106)   (289)
Net loss   (2,176)   (7,185)   (9,931)   (18,887)
Other comprehensive income   -  -   -    -
Comprehensive loss  $(2,176)  $(7,185)  $(9,931)  $(18,887)
                     
Basic and diluted net loss per common share  $(0.02)  $(0.48)  $(0.11)  $(1.26)
                     
Weighted average common shares outstanding used to                    
   calculate basic and diluted net loss per common share   109,766,974    14,981,346    89,655,878    14,978,728 

 

 See accompanying notes.

 

4 

Table of Contents

 

 Humanigen, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

  

Nine Months Ended

September 30,

   2018  2017
Operating activities:          
Net loss  $(9,931)  $(18,887)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   19    38 
Noncash interest expense   512    2,226 
Stock based compensation expense   4,170    1,773 
Change in fair value of warrants issued in connection with acquisition of licenses   -   (97)
Issuance of common stock in lieu of cash compensation   85      
Issuance of common stock in exchange for services   67    12 
Gain on forgiveness of accrued legal fees   (275)   - 
Changes in operating assets and liabilities:          
Prepaid expenses and other assets   308    303 
Accounts payable   (159)   327 
Accrued expenses   219    2,253 
Liabilities subject to compromise   -    (259)
Net cash used in operating activities   (4,985)   (12,311)
           
Investing activities:          
Changes in restricted cash   30    - 
Net cash provided by investing activities   30    - 
           
Financing activities:          
Net proceeds from issuance of common stock   2,781    - 
Net proceeds from term loan   50    10,500 
Net proceeds from issuance of convertible debt   2,500    - 
Net proceeds from issuance of advance notes   925    - 
Net cash provided by financing activities   6,256    10,500 
           
Net increase (decrease) in cash and cash equivalents   1,301    (1,811)
Cash and cash equivalents, beginning of period   737    2,906 
Cash and cash equivalents, end of period  $2,038   $1,095 
           
Supplemental cash flow disclosure:          
Cash paid for interest  $6   $6 
Supplemental disclosure of non-cash investing and financing activities:          
Conversion of notes payable and related accrued interest and fees to common stock  $18,432   $- 
Change in fair value of warrants issued in connection with acquisition of licenses  $-   $(97)
Beneficial conversion feature of Advance notes  $271   $- 
Beneficial conversion feature of Convertible notes  $1,465   $- 
Issuance of stock options in lieu of cash compensation  $303   $- 
Issuance of common stock in lieu of cash compensation  $85   $- 
Issuance of common stock in exchange for services  $67   $12 

 

See accompanying notes.

 

5 

Table of Contents

  

Humanigen, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

 

Description of the Business

 

Humanigen, Inc. (the “Company”) was incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001 under the name KaloBios Pharmaceuticals, Inc. Effective August 7, 2017, the Company changed its legal name to Humanigen, Inc.

 

As disclosed in the Company’s 2017 Form 10-K, since August 29, 2017 the Company has shifted its primary focus toward developing its proprietary monoclonal antibody portfolio, which comprises lenzilumab, ifabotuzumab and HGEN005, for use in addressing significant, serious and potentially life-threatening unmet needs in oncology and immunology. These product candidates are at various stages of development and will require substantial time, expenses, clinical development, testing, and regulatory approval prior to commercialization, if they are approved at all. Furthermore, none of these product candidates has advanced into a pivotal registration study. While the Company plans to do so with its lead projects, it may be years before any such studies are initiated, if at all.

 

Lenzilumab is a recombinant monoclonal antibody, or mAb, that neutralizes soluble granulocyte-macrophage colony-stimulating factor, or GM-CSF, a critical cytokine in the inflammatory cascade associated with serious and potentially life-threatening CAR-T-related side effects and in the growth of certain hematologic malignancies, solid tumors and other serious conditions. The Company expects to study lenzilumab’s potential to reduce the serious and potentially life-threatening side effects associated with CAR-T therapy and potentially improve efficacy. Pre-clinical work has demonstrated lenzilumab’s effectiveness in preventing or ameliorating neurotoxicity and cytokine release syndrome (“CRS”) associated with CAR-T therapy. Pre-clinical animal data also shows that there may be an increase in CAR-T cell expansion when CAR-T is combined with lenzilumab, which potentially could translate into improved CAR-T efficacy. This is likely to be an area of further study. In addition, the Company has completed enrollment of patients in a Phase 1 clinical trial for chronic myelomonocytic leukemia (“CMML”), to identify the maximum tolerated dose, (“MTD”), or recommended Phase 2 dose (“RPTD”) of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity. Fifteen patients in the 200, 400 and 600 mg dose cohorts of the CMML trial have been enrolled, and the Company is evaluating subjects in the highest dose cohort of 600 mg and potentially continuing to accrue up to eighteen patients. The Company also plans to review preliminary safety data and may use data from this study to determine the feasibility of commencing a Phase 1 study in juvenile myelomonocytic leukemia (“JMML”) patients, or to explore a Phase 2 CMML study. JMML is a rare pediatric cancer, is associated with poor outcomes and a very high unmet medical need, for which there are no United States Food and Drug Administration (“FDA”) -approved therapies.

 

Ifabotuzumab is an anti-Eph Type-A receptor 3, or EphA3, mAb that has the potential to offer a novel approach to treating solid tumors and hematologic malignancies, serious pulmonary conditions such as idiopathic pulmonary fibrosis (IPF) and as part of an antibody drug conjugate (ADC) or a CAR construct potentially targeting glioblastoma multiforme (GBM). EphA3 is aberrantly expressed on the surface of tumor cells and stroma cells in certain cancers. The Company completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial for ifabotuzumab in multiple hematologic malignancies for which the preliminary results were published in the journal Leukemia Research in 2016. An investigator-sponsored Phase 0/1 radio-labeled imaging trial of ifabotuzumab in GBM, a particularly aggressive and deadly form of brain cancer, has begun at the Olivia-Newton John Cancer Institute in Melbourne, Australia, which is also developing an ADC comprising ifabotuzumab.  The trial has enrolled five patients to date, with more expected. The Company is also in discussions with a leading center in the U.S. to develop a series of CAR constructs based on ifabotuzumab and may take these constructs, if developed, into pre-clinical testing for a range of cancer types. The Company is continuing to explore partnering opportunities to enable further development of ifabotuzumab.

 

HGEN005 is a pre-clinical stage anti-human epidermal growth factor-like module containing mucin-like hormone receptor 1, or EMR1, mAb. EMR1 is a therapeutic target for eosinophilic disorders. Eosinophils are a type of white blood cell. If too many are produced in the body, chronic inflammation and tissue and organ damage may result. Analysis of blood and bone marrow shows that surface expression of EMR1 is restricted to mature eosinophils and correlated with eosinophilia. Tissue eosinophils also express EMR1. In pre-clinical work, the Company has demonstrated that eosinophil killing is enhanced in the presence of HGEN005 and immune effector cells. A major limitation of current eosinophil targeted therapies is incomplete depletion of tissue eosinophils and/or lack of cell selectivity, which may mean that HGEN005 could offer promise in a range of eosinophil-driven diseases, such as eosinophilic asthma, eosinophilic esophagitis and eosinophilic granulomatosis with polyangiitis. The Company is in discussion with a leading center in the U.S. to develop a series of CAR constructs based on HGEN005 and may take or partner these constructs, if developed, into pre-clinical testing for eosinophilic leukemia, an orphan condition with significant unmet need.

 

6 

Table of Contents

 

The Company’s monoclonal antibody portfolio was developed with its proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use.

 

Liquidity and Going Concern

 

The Company has incurred significant losses since its inception in March 2000 and had an accumulated deficit of $272.5 million as of September 30, 2018. At September 30, 2018, the Company had a working capital deficit of $5.7 million.  On February 27, 2018, the Company issued 91,815,517 shares of common stock in exchange for the extinguishment of all term loans, related fees and accrued interest and received $1.5 million in cash proceeds.  See Note 8 for a more detailed discussion of these restructuring transactions. On March 12, 2018 the Company issued 2,445,557 shares of common stock for proceeds of $1.1 million to accredited investors. On June 4, 2018, the Company issued 400,000 shares of common stock for proceeds of $0.2 million to an accredited investor. In June, July and August of 2018, the Company received aggregate proceeds of $0.9 million from advances made to the Company (the “Advance Notes”) by four different lenders including Dr. Cameron Durrant, the Company’s Chairman and Chief Executive Officer; Cheval Holdings, Ltd., an affiliate of Black Horse Capital, L.P., the Company’s controlling stockholder; and Ronald Barliant, a director of the Company. Commencing September 19, 2018, the Company delivered a series of convertible promissory notes (the “Notes”) evidencing an aggregate of $2.5 million of loans made to the Company by six different lenders, including an affiliate of Black Horse Capital, L.P., the Company’s controlling stockholder. See Note 6 for further description of the Advance Notes and the Notes. To date, none of the Company’s product candidates has been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. The Company will require additional financing in order to meet its anticipated cash flow needs during the next twelve months. As a result, the Company will continue to require additional capital through equity offerings, debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds are not available on acceptable terms when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Condensed Consolidated Financial Statements for the nine months ended September 30, 2018 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its total liabilities of $9.3 million at September 30, 2018 and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Basis of Presentation

 

The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements and include all adjustments necessary for the presentation of the Company’s condensed consolidated financial position, results of operations and cash flows for the periods presented. The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The December 31, 2017 Condensed Consolidated Balance Sheet was derived from the audited financial statements but does not include all disclosures required by U.S. GAAP. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2018, or for any other future annual or interim period. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s 2017 Form 10-K.

 

7 

Table of Contents

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining the valuation of the fair value-based measurement of stock-based compensation, accruals and warrant valuations. The Company evaluates its estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the Condensed Consolidated Financial Statements.

 

2. Chapter 11 Filing

 

On December 29, 2015, the Company filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (Case No. 15-12628 (LSS) (the “Bankruptcy Case”).

 

Plan of Reorganization

 

On May 9, 2016, the Company filed with the Bankruptcy Court a Plan of Reorganization and related amended disclosure statement (the “Plan”) pursuant to Chapter 11 of the Bankruptcy Code. On June 16, 2016, the Bankruptcy Court entered an order confirming the Plan.

 

The Plan became effective on June 30, 2016 (the “Effective Date”) and the Company emerged from its Chapter 11 bankruptcy proceedings.

 

Bankruptcy Claims Administration

 

The reconciliation of certain proofs of claim filed against the Company in the Bankruptcy Case, including certain General Unsecured Claims, Convenience Class Claims and Other Subordinated Claims, is complete.  As a result of its examination of the claims, the Company asked the Bankruptcy Court to disallow, reduce, reclassify, subordinate or otherwise adjudicate certain claims the Company believes are subject to objection or otherwise improper.  On July 11, 2018, the Company filed an objection to the remaining claims. By objection, the Company sought to disallow in their entirety the remaining claims totaling approximately $0.5 million. On September 17, 2018 the Bankruptcy Court issued a Final Decree and Order to close the Bankruptcy Case and terminate the remaining claims and noticing services.

 

Financial Reporting in Reorganization

 

The Company applied Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. It requires that the financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be subject to a plan of reorganization must be reported at the amounts expected to be allowed in the Company’s Chapter 11 case, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors.

 

For the nine months ended September 30, 2017, the Company wrote off approximately $0.2 million in claims that had been reduced or for which a settlement had been reached at a lower amount than had been previously accrued. Remaining amounts will be paid based on terms of the Plan.

 

For the three and nine months ended September 30, 2018 and 2017, Reorganization items, net consisted of the following charges:

 

8 

Table of Contents

 

   Three months ended September 30,  Nine months ended September 30,
   2018  2017  2018  2017
Legal fees  $32   $97   $85   $263 
Professional fees   8    5    21    26 
Total reorganization items, net  $40   $102   $106   $289 
                     

  

Cash payments for reorganization items totaled $0.1 million and $0.2 million for the three and nine months ended September 30, 2018, respectively. Cash payments for reorganization items totaled $0.2 million and $0.8 million for the three and nine months ended September 30, 2017, respectively.

 

3. Summary of Significant Accounting Policies

 

There have been no material changes in the Company’s significant accounting policies since those previously disclosed in the 2017 Annual Report.

 

4. Potentially Dilutive Securities

 

The Company’s potentially dilutive securities, which include stock options, restricted stock units and warrants, have been excluded from the computation of diluted net loss per common share as the effect of including those securities would be to reduce the net loss per common share and be antidilutive. Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in each period presented.

 

The following outstanding potentially dilutive securities have been excluded from the computations of diluted net loss per common share:

 

   As of September 30,
   2018  2017
Options to purchase common stock   15,551,023    2,578,948 
Warrants to purchase common stock   331,193    356,193 
    15,882,216    2,935,141 

 

5. Fair Value of Financial Instruments

 

Cash, accounts payable and accrued liabilities are carried at cost, which approximates fair value given their short-term nature. Marketable securities and cash equivalents are carried at fair value. The Company has money market funds of $71 and $101 at September 30, 2018 and December 31, 2017, respectively, that are reported as restricted cash on the balance sheet. The amortized cost of these funds equals their fair value as there were no unrealized gains or losses at September 30, 2018 or December 31, 2017.

 

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

9 

Table of Contents

 

The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets that are measured at fair value and the classification by level of input within the fair value hierarchy:

 

   Fair Value Measurements as of
   September 30, 2018
(in thousands)  Level 1  Level 2  Level 3  Total
Investments:            
Money market funds  $71   $—     $—     $71 
Total assets measured at fair value  $71   $—     $—     $71 

 

   Fair Value Measurements as of
   December 31, 2017
(in thousands)  Level 1  Level 2  Level 3  Total
Investments:            
Money market funds  $101   $—     $—     $101 
Total assets measured at fair value  $101   $—     $—     $101 

6. Debt

 

Notes Payable to Vendors

 

On June 30, 2016, the Company issued promissory notes in an aggregate principal amount of approximately $1.2 million to certain claimants in accordance with the Plan. The notes are unsecured, bear interest at 10% per annum and are due and payable in full, including principal and accrued interest on June 30, 2019. As of September 30, 2018 and 2017, the Company has accrued $0.3 million and $0.1 million in interest related to these promissory notes, respectively.

 

Term Loans

 

Term Loans consisted of the following at December 31, 2017:

 

As of December 31, 2017               
  

Original

Principal

Amount

 

Accrued

Interest

 

Loan

Balance

  Fees 

Balance

Due

December 2016 Loan  $3,315   $324   $3,639   $153   $3,792 
March 2017 Loan   5,978    452    6,430    275    6,705 
July 2017 Loan   5,435    249    5,684    250    5,934 
Bridge Loan   1,500    6    1,506    -    1,506 
Claims Advances Loan   80    1    81    -    81 
Totals  $16,308   $1,032   $17,340   $678   $18,018 

 

  

On December 21, 2016, the Company entered into a Credit and Security Agreement, as amended on March 21, 2017 and on July 8, 2017 (as amended, the “Term Loan Credit Agreement”), with Black Horse Capital Master Fund (“BHCMF”) as administrative agent and lender, and lenders Black Horse Capital (“BHC”), Cheval Holdings, Ltd. (“Cheval” and collectively with BHCMF and BHC, the “Black Horse Entities”) and Nomis Bay LTD (“Nomis Bay”) (collectively the “Lenders”). The Term Loan Credit Agreement provided for the December 2016 Loan, the March 2017 Loan and the July 2017 Loan (the “Term Loans”).

 

In accordance with the terms of the Term Loan Credit Agreement, the Company used the proceeds of the Term Loans for general working capital, the payment of certain fees and expenses owed to BHCMF and the Lenders and other costs incurred in the ordinary course of business. Dr. Dale Chappell, one of the Company’s former directors, is an affiliate of each of BHCMF, BHC and Cheval.

 

10 

Table of Contents

 

The Term Loans bore interest at 9% and were subject to certain customary representations, warranties and covenants, as set forth in the Term Loan Credit Agreement.

 

On December 1, 2017 the Term Loans matured and began bearing interest at the default rate of 14%. The Company’s obligations under the Term Loan Credit Agreement were secured by a first priority interest in all of the Company’s real and personal property, subject only to certain carve outs and permitted liens, as set forth in the agreement.

 

On December 21, 2017, the Company entered into a Forbearance and Loan Modification Agreement, where among other things, it obtained a $1.5 million bridge loan (the "Bridge Loan") from Cheval and a credit facility with Nomis Bay (the “Claims Advances Loan”). Both loans bear interest at 14% and are treated as secured loans under the Term Loan Credit Agreement.

 

On February 27, 2018 the Term Loans, the Bridge Loan and the Claims Advances Loan along with all related fees and accrued interest, were extinguished in connection with the Restructuring Transactions described in Note 8.

 

Advance Notes

 

In June, July and August, 2018 the Company received an aggregate of $0.9 million of proceeds from advances made to the Company (the “Advance Notes”) by four different lenders including Dr. Cameron Durrant, the Company’s Chairman and Chief Executive Officer; Cheval Holdings, Ltd., an affiliate of Black Horse Capital, L.P., the Company’s controlling stockholder; and Ronald Barliant, a director of the Company (collectively the “Lenders”). The Advance Notes will accrue interest at a rate of 7% per year, compounded annually.

 

The intention of the parties is that the amounts due under the Advance Notes will be converted automatically into the same type and class of securities as may be sold by the Company in a future financing transaction with an aggregate sales price of at least $5 million (a “Qualifying Financing”).

 

The Advance Notes generally are not convertible at the option of the lender into the Company’s common stock until June 21, 2019 (the “Expiration Date”); however, if prior to completing a Qualifying Financing, the Company experiences a change of control or makes a public announcement that it has entered into a collaboration arrangement with a strategic partner relating to clinical studies of lenzilumab in connection with certain CAR-T therapies in a transaction that would not otherwise constitute a Qualifying Financing, the lenders may elect to convert the amounts due under the Advance Notes into the Company’s common stock at a conversion price of $0.45 per share. Additionally, if neither a Qualifying Financing nor a change of control has occurred by the Expiration Date, then at any time from and after the Expiration Date the Lenders may, at their option, convert the Advance Notes, plus any accrued and unpaid interest, into a number of shares of the Company’s common stock at the lesser of (i) the volume weighted average sales price per share over the 20 most recent trading days prior to the conversion or (ii) $0.45 per share.

 

Convertible Notes

 

Commencing September 19, 2018, the Company delivered a series of convertible promissory notes (the “Notes”) evidencing an aggregate of $2.5 million of loans made to the Company by six different lenders, including an affiliate of Black Horse Capital, L.P., the Company’s controlling stockholder. The Notes bear interest at a rate of 7% per annum and will mature on the earliest of (i) twenty-four months from the date the Notes are signed, (ii) the occurrence of any customary event of default, or (iii) the certain liquidation events including any dissolution or winding up of the Company or merger or sale by the Company of all or substantially all of its assets (in any case, a “Liquidation Event”). The Company plans to use the proceeds from the Notes for working capital.

 

The Notes are convertible into equity securities in the Company in three different scenarios:

 

If the Company sells its equity securities on or before the date of repayment of the Notes in any financing transaction that results in gross proceeds to the Company of at least $10 million (a “Qualified Financing”), the Notes will be converted into either (i) such equity securities as the noteholder would acquire if the principal and accrued but unpaid interest thereon (the “Conversion Amount”) were invested directly in the financing on the same terms and conditions as given to the financing investors in the Qualified Financing, or (ii) common stock at a conversion price equal to $0.45 per share (subject to ratable adjustment for any stock split, stock dividend, stock combination or other recapitalization occurring subsequent to the date of the Notes).

 

11 

Table of Contents

 

If the Company sells its equity securities on or before the date of repayment of the Notes in any financing transaction that results in gross proceeds to the Company of less than $10 million (a “Non-Qualified Financing”), the noteholders may convert their remaining Notes into either (i) such equity securities as the noteholder would acquire if the Conversion Amount were invested directly in the financing on the same terms and conditions as given to the financing investors in the Non-Qualified Financing, or (ii) common stock at a conversion price equal to $0.45 per share (subject to ratable adjustment for any stock split, stock dividend, stock combination or other recapitalization occurring subsequent to the date of the Notes).

 

The Notes may convert in the event the Company enters into or publicly announces its intention to consummate a Liquidation Event. Immediately prior to the completion of any such Liquidation Event, in lieu of receiving payment in cash, noteholders may convert the Conversion Amount into common stock at a conversion price equal to $0.45 per share (subject to ratable adjustment for any stock split, stock dividend, stock combination or other recapitalization occurring subsequent to the date of the Notes).

 

The Advance Notes and Notes have an optional voluntary conversion feature in which the holder could convert the notes in the Company’s common stock at maturity at a conversion rate of $0.45 per share. The intrinsic value of this beneficial conversion feature was $1.7 million upon the issuance of the Advance Notes and Notes and was recorded as additional paid-in capital and as a debt discount which is accreted to interest expense over the term of the Advance Notes and Notes. Interest expense includes debt discount amortization of $0.1 million for the three- and nine-month periods ended September 30, 2018.

 

The Company evaluated the embedded features within the Advance Notes and Notes to determine if the embedded features are required to be bifurcated and recognized as derivative instruments. The Company determined that the Advance Notes and the Notes contain contingent beneficial conversion features (“CBCF”) that allow or require the holder to convert the Advance Notes and Notes to Company common stock at a conversion rate of $0.45 per share, but did not contain embedded features requiring bifurcation and recognition as derivative instruments. Upon the occurrence of a CBCF that results in conversion of the Advance Notes or Notes to Company common stock, the remaining unamortized discount will be charged to interest expense.

 

7. Commitments and Contingencies

 

Contractual Obligations and Commitments

 

As of September 30, 2018, other than the Restructuring Transactions described in Note 8, there were no material changes to the Company’s contractual obligations from those set forth in the 2017 Annual Report.

 

Guarantees and Indemnifications

 

The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented.

 

12 

Table of Contents

 

8. Stockholders’ Equity

 

This summarizes the activity in Stockholders’ Equity discussed below:

 

           Additional     Total
     Common Stock  Paid-In  Accumulated  Stockholders’
     Shares  Amount  Capital  Deficit  Deficit
Balances at December 31, 2017     14,946,712   $15   $238,246   $(262,597)  $(24,336)
Conversion of notes payable and related accrued interest                           
and fees to common stock     76,007,754    76    18,356    -    18,432 
Issuance of common stock     18,653,320    19    2,762    -    2,781 
Beneficial conversion feature of Advance notes     -    -    271    -    271 
Beneficial conversion feature of Convertible notes     -    -    1,465    -    1,465 
Issuance of stock options in lieu of cash compensation     -    -    303    -    303 
Stock-based compensation expense     -    -    4,170    -    4,170 
Issuance of common stock in lieu of cash compensation     151,407    -    85    -    85 
Issuance of common stock in exchange for services     113,333    -    67    -    67 
Comprehensive loss     -    -    -    (9,931)   (9,931)
Balances at September 30, 2018     109,872,526   $110   $265,725   $(272,528)  $(6,693)

  

 

Restructuring Transactions

 

On December 21, 2017, the Company entered into a Securities Purchase and Loan Satisfaction Agreement (the “Purchase Agreement”) and a Forbearance and Loan Modification Agreement (the “Forbearance Agreement” and, together with the Purchase Agreement, the “Agreements”), each with the Lenders. The Agreements provided for a series of transactions (the “Restructuring Transactions”) pursuant to which, at the closing of the Restructuring Transactions (the “Transaction Closing”), which occurred on February 27, 2018, the Company would: (i) in exchange for the satisfaction and extinguishment of the entire balance of the Term Loans, (a) issue to the Lenders an aggregate of 59,786,848 shares of Common Stock (the “New Lender Shares”), and (b) transfer and assign to Madison Joint Venture LLC (“Madison”), an affiliate of Nomis Bay, all of the assets of the Company related to benznidazole (the “Benz Assets”), the Company’s former drug candidate; and (ii) issue to Cheval an aggregate of 32,028,669 shares of Common Stock (the “New Black Horse Shares” and, collectively with the New Lender Shares, the “New Common Shares”) for total consideration of $3.0 million.

 

Issuance of the New Lender Shares

 

Under the Purchase Agreement, at the Transaction Closing, the Company issued to the Lenders the New Lender Shares, of which 29,893,424 shares of Common Stock were issued to the Black Horse Entities and 29,893,424 shares of Common Stock were issued to Nomis Bay. The issuance of the New Lender Shares to the Lenders and the assignment of the Benz Assets to Madison resulted in the satisfaction and extinguishment of the Company’s outstanding obligations under the Credit Agreement and the cancellation of the Term Loans, including the Bridge Loan and the Claims Advances Loan, described below and all security interests of the Lenders in the Company’s assets were released. The conversion of the Term Loans, Bridge Loan and Claims Advances Loan was accounted for as a decrease to Long-term debt and an increase to Common stock and Additional paid-in capital in the amount of the liabilities outstanding at the time of conversion.

 

Transfer of the Benz Assets; Claims Advances

 

Under the Purchase Agreement, at the Transaction Closing, the Company transferred and assigned the Benz Assets to Madison. The Company also agreed to retain, but provide Madison the benefits of, any Benz Assets which are not permitted to be assigned absent receipt of third-party consents. On August 23, 2018 Madison elected to keep the Benz Assets (a “Positive Election”).

 

13 

Table of Contents

 

In connection with the transfer of the Benz Assets to Madison, Nomis Bay paid certain amounts incurred by the Company and Madison after December 21, 2017 and prior to the Transaction Closing in investigating certain causes of action and claims related to or in connection with the Benz Assets (the “Claims Advances Loan”), including the right to pursue causes of action and claims related to potential misappropriation of the Company’s trade secrets by a competitor in connection with such competitor’s submissions to FDA (the “Claims”). In addition, as a result of a Positive Election: (i) Nomis Bay assumed certain legal fees and expenses owed by the Company to its litigation counsel totaling $0.3 million, and (ii) the Company will be entitled to receive a ratable portion, based on the Company’s then-current ownership percentage in Madison of any amounts realized from the successful prosecution of the Claims or otherwise from the Benz Assets, after Nomis Bay is reimbursed for certain expenses in connection with funding the Claims Advances Loan and after giving effect to any payments that Madison may be required to make to any third parties. The assumption of the $0.3 million of legal fees is recorded as Other income on the Statement of Operations for the three and nine months ended September 20, 2018.

 

Nomis Bay has full control, in its sole discretion, over the management of Madison, any development of or realization on the Benz Assets and the prosecution of the Claims. Since the Benz Assets had no carrying value on the Company’s Condensed Consolidated Balance Sheet, the initial investment in Madison was recorded at $0.

 

Issuance of the New Black Horse Shares; Bridge Loan

 

Under the Purchase Agreement, at the Transaction Closing, the Company issued to Cheval the New Black Horse Shares for total consideration of $3.0 million, including extinguishment of the Bridge Loan. The Company used the proceeds from the issuance of the New Black Horse Shares for working capital and other costs incurred in the ordinary course of business. At the Transaction Closing, the entire amount of the Bridge Loan was credited to Cheval’s $3.0 million payment obligation and was converted into New Black Horse Shares and all security interests of Cheval in the non-benznidazole assets was released.

 

Equity Financings

 

On March 12, 2018, the Company issued 2,445,557 shares of its common stock for total proceeds of $1.1 million to accredited investors.

 

On June 4, 2018, the Company issued 400,000 shares of its common stock for total proceeds of $0.2 million to an accredited investor.

 

Amendments to Articles of Incorporation

 

Effective February 26, 2018, the Company amended its Amended and Restated Certificate of Incorporation, as amended (the “Charter”), to amend Article IV of the Charter to (i) increase the number of authorized shares of Common Stock from 85,000,000 to 225,000,000, and (ii) authorize the issuance of 25,000,000 shares of preferred stock of the Company, par value $0.001 (the “Preferred Stock”), with such powers, rights, terms and conditions as may be designated by the Company’s board of directors upon the issuance of shares of Preferred Stock at one or more times in the future (the “Charter Amendment”). The Charter Amendment was approved and adopted by the written consent of a majority of the stockholders of the Company in accordance with the applicable provisions of the Delaware General Corporation Law, the Charter, and the Company’s Second Amended and Restated Bylaws.

 

Termination of Equity Financing Facility

 

On August 24, 2017, the Company entered into a Common Stock Purchase Agreement, dated as of August 23, 2017 (the “ELOC Purchase Agreement”), with Aperture Healthcare Ventures Ltd. (“Aperture”) pursuant to which the Company could, subject to certain conditions and limitations set forth in the ELOC Purchase Agreement, require Aperture to purchase up to $15 million worth of newly issued shares (the “Put Shares”) of the Company’s common stock, over the 36-month term.

 

The Company terminated the ELOC Purchase Agreement on March 12, 2018. No Put Shares were issued pursuant to the ELOC Purchase Agreement prior to such termination.

 

2012 Equity Incentive Plan

 

Under the Company’s 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Awards generally vest and become exercisable over three to four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.

 

14 

Table of Contents

 

On March 9, 2018, the Board of Directors of the Company approved an amendment to the Company’s 2012 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares of the Company’s common stock authorized for issuance under the Equity Plan by 16,050,000 shares, and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the Equity Plan during a calendar year to 7,500,000.

 

A summary of stock option activity for the nine months ended September 30, 2018 under all of the Company’s options plans is as follows:

 

   Options 

Weighted

Average

Exercise

Price

Outstanding at December 31, 2017   2,448,383   $3.67 
Granted   13,575,038    0.66 
Cancelled (forfeited)   (431,269)   3.14 
Cancelled (expired)   (41,129)   37.82 
Outstanding at September 30, 2018   15,551,023   $0.97 

 

 

The weighted average fair value of options granted during the nine months ended September 30, 2018 was $0.51 per share.

 

The Company valued the options granted using the Black-Scholes options pricing model and the following weighted-average assumption terms for the nine months ended September 30, 2018:

  

  

Nine months ended

September 30, 2018

 
Exercise price   $0.45 - $0.67  
Market value   $0.45 - $0.67  
Risk-free rate  2.74% - 2.80% 
Expected term  5-6 years 
Expected volatility  92.6% - 96.9% 
Dividend yield  - 

 

15 

Table of Contents

 

Stock-Based Compensation

 

The Company recorded stock-based compensation expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

   2018  2017  2018  2017
General and administrative  $715   $278   $3,969   $1,477 
Research and development   -    67    201    296 
Total stock-based compensation  $715   $345   $4,170   $1,773 

  

At September 30, 2018, the Company had $3.5 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 1.6 years.

 

9. Savant Arrangements

 

On February 29, 2016, the Company entered into a binding letter of intent (the “LOI”) with Savant Neglected Diseases, LLC (“Savant”). The LOI provided that the Company would acquire certain worldwide rights relating to benznidazole (the “Compound”) from Savant.

 

On the Effective Date, as authorized by the Plan and the Confirmation Order, the Company and Savant entered into an Agreement for the Manufacture, Development and Commercialization of Benznidazole for Human Use (the “MDC Agreement”), pursuant to which the Company acquired certain worldwide rights relating to the Compound. The MDC Agreement consummates the transactions contemplated by the LOI.

 

In addition, on the Effective Date the Company and Savant also entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company granted Savant a continuing senior security interest in the assets and rights acquired by the Company pursuant to the MDC Agreement and certain future assets developed from those acquired assets.

 

On the Effective Date, the Company issued to Savant a five year warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, subject to adjustment. The Warrant is exercisable for 25% of the shares immediately and exercisable for the remaining shares upon reaching certain regulatory related milestones. As of September 30, 2018 the number of shares for which the Warrant is currently exercisable totals 100,000 shares at an exercise price of $2.25 per share.

 

The Company reevaluated the performance conditions and expected vesting of the Warrant as of September 30, 2017 and recorded a reduction in expense of approximately $0.06 and $0.1 million during the three and nine months ended September 30, 2017, respectively, due to a decline in the fair value, which reduction is included in Research and development expense in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss. As a result of the FDA granting accelerated and conditional approval of a benznidazole therapy manufactured by a competitor for the treatment of Chagas disease and awarding such competitor a neglected tropical disease PRV in August 2017, the Company re-evaluated the final two vesting milestones and concluded that the probability of achievement of these milestones had decreased to 0%.

 

Before a compound receives regulatory approval, the Company records upfront and milestone payments made to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.

 

On May 26, 2017, the Company submitted its benznidazole IND to FDA which became effective on June 26, 2017. The Company recorded expense of $1.0 million during the year ended December 31, 2017 as Research and development expense related to the milestone achievement associated with the IND being declared effective.

 

On July 10, 2017 FDA notified the Company that it granted Orphan Drug Designation to benznidazole for the treatment of Chagas disease. The Company recorded expense of $1.0 million during the year ended December 31, 2017 as Research and development expense related to the milestone achievement associated with Orphan Drug Designation.

 

16 

Table of Contents

 

In July 2017, the Company commenced litigation against Savant alleging that Savant breached the MDC Agreement and seeking a declaratory judgement. Savant has asserted counterclaims for breaches of contract under the MDC Agreement and the Security Agreement. The dispute primarily concerns the Company’s right under the MDC Agreement to offset certain costs incurred by the Company in excess of the agreed upon budget against payments due Savant. See Note 10, below, for more information regarding the Savant litigation. The aggregate cost overages as of June 30, 2017 that the Company asserts are Savant’s responsibility total approximately $3.4 million, net of a $0.5 million deductible. The Company asserts that it is entitled to offset $2.0 million in milestone payments due Savant against the cost overages, such that as of June 30, 2017, Savant owed the Company approximately $1.4 million. As of September 30, 2018, the cost overages totaled $4.1 million such that Savant owed the Company approximately $2.1 million in cost overages. Such cost overages have been charged to Research and development expense as incurred. Recovery of such cost overages, if any, will be recorded as a reduction of Research and development expense in the period received.

 

The $2.0 million in milestone payments due Savant are included in Accrued expenses in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017

 

10. Litigation

 

Bankruptcy Proceeding

 

The Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code on December 29, 2015. See Note 2 for additional information related to the bankruptcy.

 

Savant Litigation

 

On July 10, 2017, the Company filed a complaint against Savant Neglected Diseases, LLC (“Savant”) in the Superior Court for the State of Delaware, New Castle County (the “Delaware Court”). KaloBios Pharmaceuticals, Inc. v. Savant Neglected Diseases, LLC, No. N17C-07-068 PRW-CCLD. The Company asserted breach of contract and declaratory judgment claims against Savant arising under the MDC Agreement. See Note 9 - “Savant Arrangements” for more information about the MDC Agreement. The Company alleges that Savant has breached its MDC Agreement obligations to pay cost overages that exceed a budgetary threshold as well as other related MDC Agreement representations and obligations. In the litigation, the Company has alleged that as of June 30, 2017, Savant was responsible for aggregate cost overages of approximately $3.4 million, net of a $0.5 million deductible under the MDC. The Company asserts that it is entitled to offset $2.0 million in milestone payments due Savant against the cost overages, such that as of June 30, 2017 Savant owed the Company approximately $1.4 million.

 

On July 12, 2017, Savant removed the case to the Bankruptcy Court, claiming that the action is related to or arises under the Bankruptcy Case from which we emerged in July 2016. On July 27, 2017, Savant filed an Answer and Counterclaims. Savant’s filing alleges breaches of contracts under the MDC Agreement and the Security Agreement, claiming that the Company breached its obligations to pay the milestone payments and other related representations and obligations.

 

On August 1, 2017, the Company moved to remand the case back to the Delaware Court (the “Motion to Remand”).

 

On August 2, 2017, Savant sent a foreclosure notice to the Company, demanding that it provide the Collateral as defined in the Security Agreement for inspection and possession on August 9, 2017, with a public sale to be held on September 1, 2017. The Company moved for a Temporary Restraining Order (the “TRO”) and Preliminary Injunction in the Bankruptcy Court on August 4, 2017. Savant responded on August 7, 2017. On August 7, 2017, the Bankruptcy Court granted the Company’s motion for a TRO, entering an order prohibiting Savant from collecting on or selling the Collateral, entering our premises, issuing any default notices to us, or attempting to exercise any other remedies under the MDC Agreement or the Security Agreement. The parties have stipulated to continue the provisions of the TRO in full force and effect until further order of the appropriate court.

 

On January 22, 2018, Savant wrote to the Bankruptcy Court requesting dissolution of the TRO. On January 29, 2018, the Bankruptcy Court granted the Motion to Remand and denied Savant’s request to dissolve the TRO, ordering that any request to dissolve the TRO be made to the Delaware Court.

 

17 

Table of Contents

 

On February 13, 2018 Savant made a letter request to the Delaware Superior Court to dissolve the TRO. Also on February 13, 2018, Humanigen filed its Answer and Affirmative defenses to Savant’s Counterclaims. On February 15, 2018 Humanigen filed a letter opposition to Savant’s request to dissolve the TRO and requesting a status conference. A hearing on Savant’s request to dissolve the TRO was held before the Delaware Superior Court on March 19, 2018. The Delaware Superior Court denied Savant’s request to dissolve the TRO and the TRO remains in effect.

 

On April 11, 2018, Humanigen advised the Delaware Superior Court that it would meet and confer with Savant regarding a proposed case management order and date for trial. On April 26, 2018 the Delaware Superior Court so-ordered a proposed case management order submitted by the Company and Savant. The schedule in the case management order was modified by stipulation on August 24, 2018.

 

There have been no further proceedings in this matter to date.

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. This Quarterly Report on Form 10-Q contains statements that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our expectations regarding the scope, progress, expansion, and costs of researching, developing and commercializing our product candidates; our opportunity to benefit from various regulatory incentives; expectations for our financial results, revenue, operating expenses and other financial measures in future periods; and the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements. Actual events or results may differ materially due to known and unknown risks, uncertainties and other factors such as:

 

·our lack of revenues, history of operating losses, bankruptcy, limited cash reserves and ability to obtain additional capital to develop and commercialize our product candidates, including the additional capital which will be necessary to complete the clinical trials that we have initiated or plan to initiate, and continue as a going concern;

·the effect on our stock price and the significant dilution to the share ownership of our existing stockholders that resulted from conversion of the term loans into equity of the company or that may result in the future upon additional issuances of our equity securities;

·our ability to execute our new strategy and business plan focused on developing our proprietary monoclonal antibody portfolio;

·our ability to preserve our stock quotation on the OTCQB Venture Market or, in the future, to list our common stock on a national securities exchange, whether through a new listing or by completing a reverse merger or other strategic transaction;
·the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders;
·the success, cost, timing and potential indications of our product development activities and clinical trials;
·the potential timing and outcomes of pre-clinical and clinical studies of lenzilumab, ifabotuzumab, HGEN005 or any other product candidates and the uncertainties inherent in pre-clinical and clinical testing;

·the timing of the initiation, enrollment and completion of planned clinical trials;

·our ability to timely source adequate supply of our development products from third-party manufacturers on which we depend;

·the potential, if any, for future development of any of our present or future products;

·our ability to successfully progress, partner or complete further development of our programs;

·our plans to research, develop and commercialize our product candidates;

·our ability to identify and develop additional products;

·our ability to attain market exclusivity or to protect our intellectual property;

 

18 

Table of Contents

 

·our ability to reach agreement with a partner to effect a successful commercialization of any of our product candidates;

·our ability to attract and retain collaborators with development, regulatory and commercialization expertise;

·the outcome of pending or future litigation;

·the ability of the Black Horse Entities (as defined below) to exert control over all matters of the Company, including their ability to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction;

·competition;

·our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions,

·limitations, and/or warnings in the label of an approved product candidate; and

·changes in the regulatory landscape that may prevent us from pursuing or realizing any of the expected benefits from the various regulatory incentives, or the imposition of regulations that affect our products.

 

These are only some of the factors that may affect the forward-looking statements contained in this Form 10-Q. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2017 Form 10-K. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. However, we operate in a competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time to time. It is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Form 10-Q. You should be aware that the forward-looking statements contained in this Form 10-Q are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this Form 10-Q are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

Overview

 

We were incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001 under the name KaloBios Pharmaceuticals, Inc. We completed our initial public offering in January 2013. Effective August 7, 2017, we changed our legal name to Humanigen, Inc.

 

As disclosed in our 2017 Form 10-K, since August 29, 2017, we have shifted our primary focus toward developing our proprietary monoclonal antibody portfolio, which comprises lenzilumab, ifabotuzumab and HGEN005, for use in addressing significant unmet needs in oncology and immunology. These product candidates are at various stages of development and will require substantial time, expenses, clinical development, testing, and regulatory approval from the FDA prior to commercialization, if they are approved at all. Furthermore, none of these product candidates has advanced into pivotal registration studies. While we plan to do so with our lead projects, it may be years before any such studies are initiated, if at all.

 

Lenzilumab is a recombinant mAb that neutralizes soluble GM-CSF, a critical cytokine in the inflammatory cascade associated with serious and potentially life-threatening CAR-T-related side effects and in the growth of certain hematologic malignancies, solid tumors and other serious conditions. We are studying lenzilumab’s potential in reducing the serious and potentially life-threatening side effects associated with CAR-T therapy and potentially improving efficacy. Pre-clinical work has demonstrated lenzilumab’s effectiveness in preventing or ameliorating neurotoxicity and CRS associated with CAR-T therapy. Pre-clinical animal data also suggests there may be an increase in CAR-T cell expansion when combined with lenzilumab, which potentially could translate into improved CAR-T efficacy and this is likely to be an area of further study. In addition, we have completed enrollment of patients in a Phase 1 clinical trial for CMML to identify the MTD, or RPTD of lenzilumab and to assess lenzilumab’s safety, pharmacokinetics, and clinical activity. Fifteen patients in the 200, 400 and 600 mg dose cohorts of the CMML trial have been enrolled, and we are evaluating subjects in the highest dose cohort of 600 mg and potentially continuing to accrue up to eighteen patients. We also plan to review preliminary safety data and may use the data from this study to determine the feasibility of commencing a Phase 1 study in JMML patients, or to explore progressing a Phase 2 CMML study. JMML is a rare pediatric cancer, is associated with a very high unmet medical need and there are no FDA-approved therapies.

 

19 

Table of Contents

 

Ifabotuzumab is an EphA3 mAb that has the potential to offer a novel approach to treating solid tumors and hematologic malignancies, serious pulmonary conditions such as idiopathic pulmonary fibrosis (IPF) and as part of an antibody drug conjugate (ADC) or a CAR construct potentially targeting glioblastoma multiforme (GBM). EphA3 is aberrantly expressed on the surface of tumor cells and stroma cells in certain cancers. We completed the Phase 1 dose escalation portion of a Phase 1/2 clinical trial for ifabotuzumab in multiple hematologic malignancies for which the preliminary results were published in the journal Leukemia Research in 2016. An investigator-sponsored Phase 0/1 radio-labeled imaging trial of ifabotuzumab in GBM, a particularly aggressive and deadly form of brain cancer, has begun at the Olivia-Newton John Cancer Institute in Melbourne, Australia, which is also developing an ADC comprising ifabotuzumab.   The trial has enrolled five patients to date, with more expected. We are also in discussions with a leading center in the U.S. to develop a series of CAR constructs based on ifabotuzumab and may take these constructs, if developed, into pre-clinical testing for a range of cancer types. We will also continue to explore partnering opportunities to enable further development of ifabotuzumab.

 

HGEN005 is a pre-clinical stage anti-EMR1 mAb. EMR1 is a therapeutic target for eosinophilic disorders. Eosinophils are a type of white blood cell. If too many are produced in the body, chronic inflammation and tissue and organ damage may result. Analysis of blood and bone marrow shows that surface expression of EMR1 is restricted to mature eosinophils and correlated with eosinophilia. Tissue eosinophils also express EMR1. In pre-clinical work, we demonstrated that eosinophil killing is enhanced in the presence of HGEN005 and immune effector cells. A major limitation of current eosinophil targeted therapies is incomplete depletion of tissue eosinophils and/or lack of cell selectivity, which may mean that HGEN005 could offer promise in a range of eosinophil-driven diseases, such as eosinophilic asthma, eosinophilic esophagitis and eosinophilic granulomatosis with polyangiitis. We are in discussion with a leading center in the U.S. to develop a series of CAR constructs based on HGEN005 and may take or partner these constructs, if developed, into pre-clinical testing for eosinophilic leukemia, an orphan condition with significant unmet need.

 

Our monoclonal antibody portfolio was developed with our proprietary, patent-protected Humaneered® technology, which consists of methods for converting antibodies (typically murine) into engineered, high-affinity antibodies designed for human therapeutic use.

 

We have incurred significant losses and had an accumulated deficit of $272.5 million as of September 30, 2018. We expect to continue to incur net losses for the foreseeable future as we develop our drug candidates, expand pre-clinical and clinical trials for our drug candidates currently in development, expand our development activities and seek regulatory approvals. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

 

Despite completing the Restructuring Transactions, the common stock financings, the Advance Note financings (as discussed below) and the Convertible note financings (as discussed below), we will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for our product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. We anticipate that we will seek additional financing from a number of sources, including, but not limited to, the sale of equity or debt securities, strategic collaborations, and licensing of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all. If in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result in, among other things, a sale, merger, consolidation or business combination.

 

If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.

 

The consolidated financial statements for the three and nine months ended September 30, 2018 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

20 

Table of Contents

 

Critical Accounting Policies and Use of Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, valuation of financing derivative, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the Condensed Consolidated Financial Statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

 

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended September 30, 2018, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2017 Form 10-K, filed with the SEC on March 27, 2018.

 

Results of Operations

 

General

 

We have not generated net income from operations for any periods presented. At September 30, 2018, we had an accumulated deficit of $272.5 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates may never be successfully developed or commercialized and we may therefore never realize revenue from any product sales, particularly because most of our product candidates are at an early stage of development. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

 

Research and Development Expenses

 

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We track external research and development costs incurred by project for each of our clinical programs. Our external research and development costs consist primarily of:

 

·expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;
·the cost of acquiring and manufacturing clinical trial and other materials; and
·other costs associated with development activities, including additional studies.

 

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project.

 

21 

Table of Contents

 

The following table shows our total research and development expenses for the three and nine months ended September 30, 2018 and 2017:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

(in thousands)  2018  2017  2018  2017
External Costs                    
   Lenzilumab  $422   $528   $1,359   $1,713 
   Ifabotuzumab   25    25    75    120 
   Benznidazole   -    3,138    -    6,956 
Internal costs   88    116    374    1,539 
Total research and development  $535   $3,807   $1,808   $10,328 

 

General and Administrative Expenses

 

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development.

 

Comparison of Three Months Ended September 30, 2018 and 2017

 

   Three Months Ended September 30,  Increase/(Decrease)
(in thousands)  2018  2017  $'s  %
Operating expenses:                    
Research and development  $535   $3,807   $(3,272)   (86)
General and administrative   1,804    1,993    (189)   (9)
Loss from operations   (2,339)   (5,800)   (3,461)   (60)
Interest expense   (116)   (1,269)   (1,153)   (91)
Other income (expense), net   319    (14)   (333)   (2,379)
Reorganization items, net   (40)   (102)   (62)   (61)
Net loss  $(2,176)  $(7,185)  $(5,009)   (70)

 

Research and development expenses decreased by $3.3 million, from $3.8 million for the three months ended September 30, 2017 to $0.5 million for the three months ended September 30, 2018. The decrease is primarily due to the discontinuation of the development of benznidazole in August 2017, lower internal costs, and lower spending on the development of lenzilumab, primarily in connection with the CMML trial.

 

General and administrative expenses decreased $0.2 million from $2.0 million for the three months ended September 30, 2017 to $1.8 million for the three months ended September 30, 2018. The decrease is primarily due to lower legal and consulting costs partially offset by higher wage and stock-based compensation costs.

 

Interest expense decreased $1.2 million from $1.3 million recognized for the three months ended September 30, 2017 to $0.1 million for the three months ended September 30, 2018. The decrease in interest expense was related to the conversion of the Term Loans in February 2018 related to the Restructuring Transactions.

 

Other income for the three months ended September 30, 2018 primarily consisted of legal fees assumed by Madison Joint Venture LLC related to their positive election related to the Benz Assets (see Note 8).

 

Reorganization items, net, decreased $0.06 million for the three months ended September 30, 2018 versus the three months ended September 30, 2017. The decrease is primarily related to the decrease in legal and professional fees in the current three-month period.

 

22 

Table of Contents

 

Comparison of Nine Months Ended September 30, 2018 and 2017 

 

   Nine Months Ended September 30,  Increase/(Decrease)
(in thousands)  2018  2017  $'s  %
Operating expenses:                    
Research and development  $1,808   $10,328   $(8,520)   (82)
General and administrative   7,793    5,987    1,806    30 
Loss from operations   (9,601)   (16,315)   (6,714)   (41)
Interest expense   (542)   (2,245)   (1,703)   (76)
Other income (expense), net   318    (38)   (356)   (937)
Reorganization items, net   (106)   (289)   (183)   (63)
Net loss  $(9,931)  $(18,887)  $(8,956)   (47)

 

Research and development expenses decreased by $8.5 million, from $10.3 million for the nine months ended September 30, 2017 to $1.8 million for the nine months ended September 30, 2018. The decrease is primarily due to the discontinuation of the development of benznidazole in August 2017 and lower internal costs.

 

General and administrative expenses increased $1.8 million from $6.0 million for the nine months ended September 30, 2017 to $7.8 million for the nine months ended September 30, 2018. The increase is primarily due to a $2.5 million increase in stock-based compensation expense related to the issuance of options to management, consultants and board members subsequent to the completion of the Restructuring Transactions and $0.6 million in wage and related costs, partially offset by decreases in consultant and legal fees of $1.5 million.

 

Interest expense decreased $1.7 million from $2.2 million recognized for the nine months ended September 30, 2017 to $0.5 million for the nine months ended September 30, 2018. The decrease in interest expense was related to lower average Term Loans balances for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 as a result of the conversion of the Term Loans in February 2018 related to the Restructuring Transactions.

 

Other income for the nine months ended September 30, 2018 primarily consisted of legal fees assumed by Madison Joint Venture LLC related to their positive election related to the Benz Assets (see Note 8).

 

Reorganization items, net, decreased $0.2 million for the nine months ended September 30, 2018 versus the nine months ended September 30, 2017. The decrease is primarily related to the decrease in legal and professional fees in the current nine-month period.

 

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, and borrowings against lines of credit. At September 30, 2018, we had cash and cash equivalents of $2.0 million. As of November 6, 2018, we had cash and cash equivalents of $1.5 million.

 

23 

Table of Contents

 

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

 

   Nine Months Ended September 30,
(in thousands)  2018  2017
Net cash (used in) provided by:          
   Operating activities  $(4,985)  $(12,311)
   Investing activities   30    - 
   Financing activities   6,256    10,500 
Net increase (decrease) in cash and cash equivalents  $1,301   $(1,811)

 

Net cash used in operating activities was $5.0 million and $12.3 million for the nine months ended September 30, 2018 and 2017, respectively. Cash used in operating activities of $5.0 million for the nine months ended September 30, 2018 primarily related to our net loss of $10.0 million, adjusted for non-cash items, such as $4.2 million in stock-based compensation, $0.5 million in noncash interest expense, and net increases in working capital items of $0.1 million.

 

Cash used in operating activities of $12.3 million for the nine months ended September 30, 2017 primarily related to our net loss of $18.9 million, adjusted for non-cash items, such as $1.8 million in stock based compensation, $2.2 million in noncash interest expense and net increases in working capital items, primarily $2.3 million of Accrued expenses.

 

Net cash provided by financing activities was $6.3 million for the nine months ended September 30, 2018. This amount consists primarily of $1.5 million received from Cheval related to the Restructuring Transactions (see “Restructuring Transactions” below), $1.1 million from the issuance of 2,445,557 shares of our common stock to accredited investors on March 12, 2018, $0.2 million received from the issuance of 400,000 shares of our common stock to an accredited investor on June 4, 2018, $0.9 million received from the issuance of the Advance Notes in June, July and August 2018 and $2.5 million received for the issuance of the Notes in September 2018. Net cash provided by financing activities was $10.5 million for the nine months ended September 30, 2017 related to the Term Loans.

 

Restructuring Transactions

 

On December 1, 2017, our obligations matured under the Term Loan Credit Agreement with the Term Loan Lenders. On December 21, 2017, we entered into the Restructuring Agreements, each with the Term Loan Lenders, in connection with a series of transactions providing for, among other things, the satisfaction and extinguishment of our outstanding obligations under the Term Loan Credit Agreement and the infusion of $3.0 million of new capital. As of February 27, 2018, the date the Restructuring Transactions were completed, the aggregate amount of our obligations under the Term Loan Credit Agreement, including the Bridge Loan, the Claims Advances Loan (each as discussed below) and all accrued interest and fees, approximated $18.4 million.

 

On February 27, 2018 (the “Restructuring Effective Date”), the Restructuring Transactions were completed in accordance with the Restructuring Agreements. As a result, on the Restructuring Effective Date, we: (i) in exchange for the satisfaction and extinguishment of the entire $18.4 million balance of the Term Loans, including the Bridge Loan, the Claims Advances Loan and all accrued interest and fees, (a) issued to the Term Loan Lenders an aggregate of 59,786,848 shares of our common stock (the “New Lender Shares”), and (b) transferred and assigned to Madison, an entity owned 70% by Nomis Bay and 30% by us, the Benz Assets, our former drug candidate, capable of being so assigned; and (ii) issued to Cheval an aggregate of 32,028,669 shares of our common stock (the “New Black Horse Shares” and, collectively with the New Lender Shares, the “New Common Shares”) for total consideration of $3.0 million (collectively, the “Restructuring Transactions”), $1.5 million of which we received on December 22, 2017 in the form of a bridge loan (the “Bridge Loan”).

 

On the Restructuring Effective Date, the aggregate amount of the Term Loans that were deemed to be satisfied and extinguished (i) previously owed to the Black Horse Entities, including the Bridge Loan and all accrued interest and fees, totaled $9.9 million, and (ii) previously owed to Nomis Bay, including the Claims Advances Loan totaling $0.1 million and all accrued interest and fees, totaled $8.5 million. In addition, on the Restructuring Effective Date, (i) each of the Term Loan Credit Agreement, all promissory notes issued thereunder and the Intellectual Property Security Agreement, dated as of December 21, 2016, by and between us and the Term Loan Lenders, were terminated and are of no further force or effect, and (ii) all security interests of the Black Horse Entities and Nomis Bay in our assets were released. In addition, as a result of Madison’s Positive Election regarding the Benz Assets, Madison became obligated to pay $0.3 million in legal fees and expenses owed by us to our litigation counsel, which they paid in August 2018.

 

24 

Table of Contents

 

Upon completion of the Restructuring Transactions, the Black Horse Entities collectively held 66,870,851 shares of our common stock, or approximately 62.6% of our outstanding common stock. Accordingly, the completion of the Restructuring Transactions on the Restructuring Effective Date resulted in a change in control of our company, as the Black Horse Entities and their affiliates owning more than a majority of our outstanding common stock. Dr. Dale Chappell, a member of our board of directors from June 30, 2016 until November 10, 2017, controls the Black Horse Entities and accordingly, will be able to exert control over matters of our company and will be able to determine all matters of our company requiring stockholder approval.

 

Despite completing the Restructuring Transactions, the March 12, 2018 and the June 4, 2018 common stock issuances, the June, July and August 2018 Advance Notes and the September 2018 Notes, we will require substantial additional capital to continue as a going concern and to support our business efforts, including obtaining regulatory approvals for our product candidates, clinical trials and other studies, and, if approved, the commercialization of our product candidates. The amount of capital we will require and the timing of our need for additional capital will depend on many factors, including:

 

·the type, number, timing, progress, costs, and results of the product candidate development programs that we are pursuing or may choose to pursue in the future;

·the scope, progress, expansion, costs, and results of our pre-clinical and clinical trials;

·the timing of and costs involved in obtaining regulatory approvals;

·the success, progress, timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders;

·our ability to preserve our stock quotation on the OTCQB Venture Market or, in the future, to list our common stock on a national securities exchange, whether through a new listing or by completing a strategic transaction;

·our ability to establish and maintain development partnering arrangements and any associated funding;

·the emergence of competing products or technologies and other adverse market developments;

·the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

·the resources we devote to marketing, and, if approved, commercializing our product candidates;

·the scope, progress, expansion and costs of manufacturing our product candidates; and

·the costs associated with being a public company.

 

We are pursuing efforts to raise additional capital from a number of sources, including, but not limited to, the sale of equity or debt securities and strategic collaborations. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, would materially harm our business, financial condition and results of operations. Any financing we may obtain may be dilutive to existing stockholders. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms, if at all. If in the best interests of our stockholders, we may also find it appropriate to enter into a strategic transaction that could result in, among other things, a sale, merger, consolidation or business combination.

 

If management is unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital will not be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our common stock currently trades on the OTCQB Venture Market under the ticker symbol “HGEN”. Although our common stock is listed for quotation on the OTCQB Venture Market, trading is limited and an active market for our common stock may never develop in the future, which could harm our ability to raise capital to continue to fund operations.

 

25 

Table of Contents

 

Termination of Equity Financing Facility

 

On March 12, 2018, we notified Aperture of our decision to terminate the ELOC Purchase Agreement, pursuant to which Aperture had agreed to provide us with an equity line of credit. We did not sell any shares pursuant to the equity line of credit prior to its termination.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

 

Item 4.Controls and Procedures.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

“Disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Disclosure controls and procedures include, without limitation, those designed to ensure that this information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of September 30, 2018 to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of September 30, 2018. In making this assessment, our Chief Executive Officer and Chief Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework. Based on that assessment and using the COSO criteria, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2018, our internal control over financial reporting was not effective because of the material weaknesses described below.

 

A material weakness is defined as “a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

 

The ineffectiveness of our internal control over financial reporting at September 30, 2018, was due to an insufficient degree of segregation of duties among our accounting and financial reporting personnel.

 

During 2018, we intend to work to remediate the material weaknesses identified above, which could include the addition of accounting and financial reporting personnel and/or the engagement of accounting and personnel consultants on a limited-time basis until we add a sufficient number of personnel. However, our current financial position could make it difficult for us to add the necessary resources.

 

26 

Table of Contents

 

Inherent Limitations of Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

27 

Table of Contents

 

PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

 

Please see Note 10 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of legal proceedings and developments during the quarter ended September 30, 2018.

 

28 

Table of Contents

 

Item 6.Exhibits.

  

Exhibit No.   Exhibit Description  
2.1   Findings of Fact, Conclusions of Law, and Order Confirming Second Amended Chapter 11 Plan of Reorganization of the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on June 22, 2016).  
3.1   Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on July 6, 2016).  
3.2   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.4 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on August 7, 2017).  
3.3   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on February 28, 2018).  
3.4   Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-035798) filed on August 7, 2017).  
4.1   Specimen of Stock Certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-184299) filed on January 15, 2013).  
4.2   Warrant to Purchase Stock, by and between the Registrant and MidCap Financial SBIC, LP, dated as of June 19, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on June 24, 2013).  
4.3   Registration Rights Agreement, dated December 3, 2015, between the Registrant and each of the several purchasers signatory thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 9, 2015).  
4.4   Common Stock Purchase Warrant, by and between the Registrant and Armistice Capital Fund, dated as December 4, 2015 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-35798) filed on December 9, 2015).  
4.5†   Common Stock Purchase Warrant, dated June 30, 2016, by and between the Registrant and Savant Neglected Diseases, LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-035798) filed on September 23, 2016, as amended by Amendment No. 1 filed on December 30, 2016).  
4.6   Registration Rights Agreement, dated December February 27, 2018 between the Registrant and Black Horse Capital Master Fund, Black Horse Capital, Cheval Holdings, Ltd., and Nomis Bay LTD.  
10.1   Form of Convertible Note  
10.2*   Amended Employment Agreement dated August 22, 2018, between the Company and Jon. G. Jester.  
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended.  
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended.  
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350.  
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350.  
       
101.INS   XBRL Instance Document  
101.SCH   XBRL Taxonomy Extension Schema Document  
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document  
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document  
101.LAB   XBRL Taxonomy Extension Label Linkbase Document  
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document  

 

29 

Table of Contents

 

 

 

 

 

Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

 

*   Denotes management or director compensation plan or arrangement.
     
**   The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Humanigen, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

30 

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       
    HUMANIGEN, INC.
       
Date: November 6, 2018   By:   /s/ Cameron Durrant
      Cameron Durrant
      Chief Executive Officer
      (Principal Executive Officer)
       
       
Date: November 6, 2018   By:   /s/ Greg Jester
      Greg Jester
      Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

31