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CTMX > SEC Filings for CTMX > Form 10-K on 7-Mar-2016All Recent SEC Filings

Show all filings for CYTOMX THERAPEUTICS, INC.

Form 10-K for CYTOMX THERAPEUTICS, INC.


7-Mar-2016

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached financial statements and notes thereto. This Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of this Annual Report on Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.

Overview

We are an oncology-focused biopharmaceutical company pioneering a novel class of antibody therapeutics based on our Probody technology platform. We are using our platform to create proprietary cancer immunotherapies against clinically-validated targets as well as to develop first-in-class cancer therapeutics against novel targets. We believe that our Probody platform will allow us to improve the combined efficacy and safety profile, or therapeutic window, of monoclonal antibody modalities including cancer immunotherapies, antibody drug conjugates ("ADCs") and T-cell-recruiting bispecific antibodies. Our Probody therapeutics are designed to take advantage of unique conditions in the tumor microenvironment to enhance the tumor-targeting features of an antibody and reduce drug activity in healthy tissues. We are currently developing Probody therapeutics that address clinically- validated cancer targets in immuno-oncology, such as PD-L1, as well as novel targets, such as CD-166, that are difficult to drug and lead to concerns about damage to healthy tissues, or toxicities. In addition to our proprietary programs, we are collaborating with strategic partners including Bristol-Myers Squibb Company ("BMS"), Pfizer Inc. ("Pfizer") and ImmunoGen, Inc. ("ImmunoGen") to develop selected Probody therapeutics. Our broad technology platform and lead product candidates are supported by a decade of thorough scientific research and strong intellectual property, and we are advancing these candidates toward clinical trials. Our vision is to transform lives with safer, more effective therapies. To realize this vision we are executing on our mission of changing the treatment of cancer by urgently advancing our Probody pipeline.

We do not currently have any product candidates in clinical trials or approved for sale, and we continue to incur significant research and development and general administrative expenses related to our operations. We are not profitable and have incurred losses in each year since our founding in 2008. Our net loss for the year ended December 31, 2015 was $35.4 million. As of December 31, 2015, we had an accumulated deficit of $117.5 million. We expect to continue to incur significant losses for the foreseeable future.

We have three pipeline strategies that we are pursuing with our Probody platform: (i) developing a novel class of immuno- oncology therapies directed against clinically-validated targets, (ii) developing first-in-class therapeutics directed against difficult-to- drug targets and (iii) collaborating with leading pharmaceutical companies to discover and develop Probody therapeutics against selected targets.

Regulatory agencies, including the FDA, regulate many aspects of a product candidate's life cycle, including research and development and preclinical and clinical testing. We have product candidates that are still in research and preclinical development, which means that they have not yet been tested on humans. We will need to commit significant time and resources to develop these and additional product candidates. Many product candidates in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. We are unable to provide the nature, timing, and estimated costs of the efforts necessary to complete the development of our product candidates because, among other reasons, we cannot predict with any certainty the pace of enrollment of our clinical trials, which is a function of many factors, including the availability and proximity of patients with the relevant condition.

We currently have no manufacturing capabilities and do not intend to establish any such capabilities. We have no commercial manufacturing facilities for our product candidates. As such, we are dependent on third parties to supply our product candidates according to our specifications, in sufficient quantities, on time, in compliance with appropriate regulatory standards and at competitive prices.


Components of Results of Operations

Revenue

Our revenue to date has been primarily derived from non-refundable license payments and reimbursements for research and development expenses under our research, collaboration, and license agreements. We recognize revenue from upfront payments ratably over the term of our estimated period of performance under the agreement. In addition to receiving upfront payments, we may also be entitled to milestone and other contingent payments upon achieving predefined objectives. Revenue from milestones, if they are nonrefundable and deemed substantive, is recognized upon successful accomplishment of the milestones. To the extent that non substantive milestones are achieved and we have remaining performance obligations, milestones are deferred and recognized as revenue over the estimated remaining period of performance. Reimbursements from Pfizer and BMS for research and development costs incurred under our research, collaboration and license agreements with them are classified as revenue.

For the foreseeable future, we do not expect to generate any revenue from the sale of products unless and until such time as our product candidates have advanced through clinical development and obtained regulatory approval. We expect that any revenue we do generate in the foreseeable future will fluctuate from year to year as a result of the timing and amount of milestones and other payments from our collaborations with BMS, Pfizer and ImmunoGen, and any future collaboration partners, and as a result of the fluctuations in the research and development expenses we incur in the performance of assigned activities under these agreements.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred to conduct research, such as the discovery and development of our product candidates as well as the development of product candidates pursuant to our research, collaboration and license agreements. Research and development expenses include personnel costs, including stock-based compensation expense, contractor services, laboratory materials and supplies, depreciation and maintenance of research equipment, and an allocation of related facilities costs. We expense research and development costs as they are incurred.

We expect our research and development expenses to increase substantially in absolute dollars in the future as we advance our product candidates into and through clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical program, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates.

General and Administrative Expenses

General and administrative expenses include personnel costs, expenses for outside professional services and other allocated expenses. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent expense related to our office and research and development facility. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase our administrative headcount significantly to operate as public company and as we advance our product candidates through clinical development, which will also increase our general and administrative expenses.

Interest Income

Interest income primarily consists of interest income from our cash equivalents and short-term investments.

Interest Expense

Interest expense primarily consists of interest costs related to our outstanding borrowings under our loan agreements and amortization of premiums on our short-term investments.


Other Income (Expense), Net

Other income (expense), net consists primarily of changes to the estimated fair value of the convertible preferred stock warrant liability and the convertible preferred stock liability.

Comparison of Years Ended December 31, 2015 and 2014

Revenue

Year Ended December 31,
2015 2014 Change
(in thousands)

Revenue: $ 7,712 $ 5,077 $ 2,635

Revenue increased $2.6 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase in revenue was primarily due to revenue recognized in 2015 related to the BMS agreement effective as of July 2014.

Operating Costs and Expenses

Research and Development Expenses

Year Ended December 31,
2015 2014 Change
(in thousands)

Research and development $ 28,357 $ 28,302 $ 55

Research and development expense remained relatively flat during the year ended December 31, 2015 compared to the corresponding period in 2014. The decrease of $12.8 million attributable to the ImmunoGen collaboration agreement was largely offset by an increase of $7.6 million in lab services and supplies related to advancement of our product pipeline, an increase of $4.1 million in personnel-related expenses due to an increase in headcount, and an increase of $0.7 million in allocated facility costs partly due to a lease we entered into in September 2014.

General and Administrative Expenses

Year Ended December 31,
2015 2014 Change
(in thousands)

General and administrative $ 12,558 $ 6,540 $ 6,018

General and administrative expense increased $6.0 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was attributable to an additional $4.3 million of personnel-related expenses due to an increase in headcount and an additional $1.6 million in consulting and professional services expenses due primarily to preparations for our initial public offering.

Interest Income, Interest Expense and Other Income (Expense), net



                                                Year Ended December 31,
                                                 2015               2014         Change
                                                           (in thousands)
 Interest income                             $       1,315       $        7     $  1,308
 Interest expense                                   (1,732 )           (487 )     (1,245 )
 Other income (expense), net                        (1,744 )            (55 )     (1,689 )
 Total interest and other income (expense)   $      (2,161 )     $     (535 )   $ (1,626 )

Interest Income

Interest income increased $1.3 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was attributable to interest income earned on cash equivalents and short-term investments as a result of the proceeds received from our preferred stock financings in December 2014, May 2015 and June 2015 and from our initial public offering in October 2015.


Interest Expense

Interest expense increased $1.2 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was primarily attributable to amortization of premiums on our short-term investments.

Other Income (Expense), Net

Other income (expense) increased $1.7 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was primarily attributable to a loss of $1.1 million related to the remeasurement of the convertible preferred stock liability and an increase in the fair value of the convertible preferred stock warrant liability of $0.6 million.

Comparison of Years Ended December 31, 2014 and 2013

Revenue

Year Ended December 31,
2014 2013 Change
(in thousands)

Revenue: $ 5,077 $ 888 $ 4,189

Revenue increased $4.2 million during the year ended December 31, 2014 compared to the corresponding period in 2013. The increase in revenue was primarily attributable to an increase of $1.4 million of revenue recognized related to the Pfizer agreement entered into in May 2013 and $2.8 million of revenue recognized in 2014 related to the BMS agreement effective as of July 2014.

Operating Costs and Expenses

Research and Development Expenses

Year Ended December 31,
2014 2013 Change
(in thousands)

Research and development $ 28,302 $ 10,890 $ 17,412

Research and development expense increased $17.4 million during the year ended December 31, 2014 compared to the corresponding period in 2013. The increase was primarily attributable to $12.8 million expensed in 2014 related to the ImmunoGen collaboration agreement, a $1.7 million increase in personnel-related expenses due to headcount, increased consulting costs, and increased recruiting expenses primarily related to recruiting key personnel, an increase of $2.7 million in lab services and supplies arising from the research and collaboration agreements entered into in 2014 with BMS, and an increase of $0.4 million in rent and occupancy costs due to new leases entered into in August 2013 and September 2014.

General and Administrative Expenses

Year Ended December 31,
2014 2013 Change
(in thousands)

General and administrative $ 6,540 $ 4,954 $ 1,586

General and administrative expense increased $1.6 million during the year ended December 31, 2014 compared to the corresponding period in 2013. The increase was attributable to a $0.8 million increase in personnel-related expenses as a result of increased headcount and an increase in recruiting costs primarily related to recruiting of key personnel, $0.6 million increase in legal costs due to the new research and collaboration agreements entered into and a $0.4 million increase in consulting costs. The increase was partially offset by a decrease of $0.2 million in allocated facility costs.


Interest Income, Interest Expense and Other Income (Expense), net



                                                 Year Ended December 31,
                                                 2014              2013         Change
                                                           (in thousands)
  Interest income                             $         7       $         6     $     1
  Interest expense                                   (487 )            (254 )      (233 )
  Other income (expense), net                         (55 )              71        (126 )
  Total interest and other income (expense)          (535 )            (177 )   $  (358 )

Interest Income

Interest income was relatively flat between the two periods.

Interest Expense

Interest expense increased $0.2 million during the year ended December 31, 2014 compared to the corresponding period in 2013. The increase was primarily attributable to amortization of premiums on our short-term investments.

Other Income (Expense), Net

Other income (expense), net changed by ($0.1) million to an expense of $55,000 during the year ended December 31, 2014 compared to the corresponding period in 2013. The change was primarily due to the fair value remeasurement of the convertible preferred stock warrant liability.

Summary Statement of Cash Flows

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



                                                         Year Ended December 31,
                                                    2015           2014           2013
                                                              (in thousands)
 Net cash (used in) provided by operating
 activities                                      $  (27,415 )   $   31,802     $   (8,008 )
 Net cash used in investing activities             (130,562 )       (1,663 )         (732 )
 Net cash provided by financing activities          153,403         25,554          2,697
 Net increase (decrease) in cash and cash
 equivalents                                     $   (4,574 )   $   55,693     $   (6,043 )

Cash Flows from Operating Activities

During the year ended December 31, 2015, cash used in operating activities was $27.4 million, which consisted of a net loss of $35.4 million, adjusted by non-cash charges of $8.2 million and a net decrease of $0.2 million in our net operating assets. The non-cash charges primarily consist of $4.0 million in stock-based compensation, $1.2 million in depreciation and amortization, $1.2 million in amortization premiums on our short-term investments, $1.1 million in revaluation of the convertible preferred stock liability and $0.6 million in remeasurement of the convertible preferred stock warrant liability. The change in our net operating assets and liabilities was primarily due to a decrease of $6.1 million in deferred revenue due to the recognition of upfront fees received, partially offset by an increase of $3.2 million in accrued liabilities and $2.9 million in accounts payable.

During the year ended December 31, 2014, cash provided by operating activities was $31.8 million, which consisted of a net loss of $30.3 million adjusted by non-cash charges of $1.4 million, adjusted by a net change of $60.8 million in our net operating assets. The non-cash charges primarily consist of $0.8 million from depreciation and amortization and $0.6 million from stock-based compensation. The change in our net operating assets and liabilities was primarily due to an increase of $61.5 million in deferred revenue resulting from the upfront payments of $50.0 million received from BMS and of $1.5 million received from Pfizer and $13.3 million related to the ImmunoGen collaboration agreement, partially offset by recognition of upfront fees of $3.3 million, and a $1.5 million increase in accounts payable and accrued liabilities due to our increased research and development activities as a result of our agreements with BMS and ImmunoGen. The increase is partially offset by an increase of $1.6 million in accounts receivable primarily due to the $1.5 million upfront payment due from Pfizer and a $0.6 million increase in prepaid expenses and other assets due to deferred costs related to the ImmunoGen collaboration agreement.


During the year ended December 31, 2013, cash used in operating activities was $8.0 million, which consisted of a net loss of $15.1 million, adjusted by non-cash charges of $1.2 million and a net decrease of $6.0 million in our net operating assets. The non-cash charges primarily consist of depreciation and amortization of $0.7 million, stock-based compensation of $0.3 million, a charge of $0.2 million related to common stock issued in connection with a license agreement partially offset by a $0.1 million gain from the revaluation of the convertible preferred stock liability. The change in our net operating assets and liabilities was primarily due to an increase of $5.5 million in deferred revenue due to the receipt of an upfront fee from Pfizer and a $0.9 million increase in accounts payable and accrued liabilities due to an increase in our research and development activities as a result of our agreement with Pfizer, primarily offset by an increase of $0.3 million in accounts receivable and prepaid expenses and other current assets resulted from our increased business activities.

Cash Flows from Investing Activities

Cash used in investing activities during the year ended December 31, 2015 was $130.6 million, which consisted of $250.9 million of purchases of short-term investments, $1.6 million of capital expenditures to purchase property and equipment and $0.8 million in increase in restricted cash relating to a standby letter of credit issued in connection with the lease we entered into in December 2015, partially offset by $122.8 million in proceeds from the maturity of marketable securities.

Cash used in investing activities during the year ended December 31, 2014 was $1.7 million, which consisted of capital expenditures to purchase property and equipment.

Cash used in investing activities during the year ended December 31, 2013 was $0.7 million, which consisted of capital expenditures to purchase property and equipment.

Cash Flows from Financing Activities

During the year ended December 31, 2015, cash provided by financing activities was $153.4 million consisting primarily of $81.8 million in net proceeds from the consummation of our initial public offering in October 2015, $74.4 million in net proceeds from the issuance of redeemable convertible preferred stock, partially offset by repayment on our borrowing of $3.1 million.

During the year ended December 31, 2014, cash provided by financing activities was $25.6 million primarily consisting of net proceeds of $26.8 million from the issuance of preferred stock, offset by $1.3 million in payments on our borrowings.

During the year ended December 31, 2013, cash provided by financing activities was $2.7 million consisting of proceeds of $3.4 million from the issuance of long-term debt and proceeds of $0.1 million from the exercise of stock options, offset by $0.7 million in payments on our borrowings.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2015, we had cash, cash equivalents and short-term investments of $186.7 million and an accumulated deficit of $117.5 million, compared to cash and cash equivalents of $64.4 million and an accumulated deficit of $78.1 million as of December 31, 2014. We have financed our operations primarily through sales of our common stock in conjunction with the IPO, convertible preferred securities and payments received under our collaboration agreements. In May and June 2015, respectively, an investor exercised its option to purchase 659,209 shares of Series C redeemable convertible preferred stock for net proceeds of $3.5 million and we issued 7,490,540 shares of Series D redeemable convertible preferred stock for net proceeds of $69.7 million.

On October 14, 2015, we consummated our IPO and sold 7,666,667 shares of our common stock at a price of $12.00 per share, which included the exercise of the underwriters' option to purchase 1,000,000 additional shares of common stock. We received net proceeds of approximately $81.8 million, after deducting underwriting discounts, commissions and estimated offering expenses. Immediately prior to the consummated IPO, all outstanding shares of the convertible preferred stock and redeemable convertible preferred stock converted into common stock on a one-for-one basis.


We believe our current cash and cash equivalents and short-term investments will be sufficient to fund our planned expenditures and meet our obligations through the end of 2018. However, if the anticipated operating results are not achieved in future periods, the planned expenditures may need to be reduced in order to extend the time period over which the then-available resources would be able to fund the operations. The amounts and timing of our actual expenditures depend on numerous factors, including the progress of our preclinical development efforts, the results of any clinical trials and other studies, our operating costs and expenditures and other factors describe under the caption "Risk Factors" in this Annual Report on Form 10-K. The cost and timing of developing our CX-2009 and CX-072 product candidates are highly uncertain, are subject to substantial risks and many changes. As such, we may alter our expenditures as a result of contingencies such as the failure of one of these product candidates in clinical development, the identification of a more promising product candidate in our research efforts or unexpected operating costs and expenditures. We will need to raise additional funds in the future. There can be no assurance, however, that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable to us.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31,
2015 (in thousands):



                                                      Payments Due by Period(3)
                                 2016        2017        2018        2019        2020 +       Total
Operating leases(1)             $ 1,369     $ 4,251     $ 5,268     $ 4,582     $ 34,144     $ 49,614
Royalty obligations(2)              150         150           -           -            -          300
Total contractual obligations   $ 1,519     $ 4,401     $ 5,268     $ 4,582     $ 34,144     $ 49,914

(1) We lease our current facility under a long-term operating lease, which expires in 2019. In March 2016, we entered into an agreement with our current landlord to terminate the lease effective November 30, 2016. We entered into in a new lease in December 2015 under a long-term operating lease, which expires in 2026.

. . .

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