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CTMX > SEC Filings for CTMX > Form 10-Q on 6-May-2016All Recent SEC Filings

Show all filings for CYTOMX THERAPEUTICS, INC.

Form 10-Q for CYTOMX THERAPEUTICS, INC.


6-May-2016

Quarterly Report


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

You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission ("SEC") on March 7, 2016.

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"), ImmunoGen, Inc. ("ImmunoGen") and AbbVie Ireland Unlimited Company ("AbbVie") 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 three months ended March 31, 2016 was $16.0 million. As of March 31, 2016, we had an accumulated deficit of $133.5 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 United States Food and Drug Administration ("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, ImmunoGen and AbbVie, 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 SEC, 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 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.


Results of Operations

For the Three Months Ended March 31, 2016 and 2015.

Revenues

Three Months Ended
March 31,
2016 2015 Change
(in thousands)

Total revenues $ 2,223 $ 1,742 $ 481

Revenue increased $0.5 million during the three months ended March 31, 2016 compared to the corresponding period in 2015. The increase in revenue was primarily due to $0.3 million increase in recognized revenue related to the BMS milestone payment in connection with its selection of the third target, and a $0.2 million increase in service revenue related to our collaborations with BMS and Pfizer.

Operating Costs and Expenses

Research and Development Expenses

Three Months Ended
March 31,
2016 2015 Change
(in thousands)

Research and development expenses $ 13,365 $ 4,664 $ 8,701

Research and development expense increased $8.7 million during the three months ended March 31, 2016 compared to the corresponding period in 2015. The increase was attributable to an increase of $6.2 million in laboratory and professional services related to advancement of our product pipeline, an increase of $1.3 million in stock based compensation primarily due to higher stock valuation, an increase of $0.8 million in personnel-related expenses due to an increase in headcount, and an increase of $0.4 million in royalty payments by the Company to a third party triggered by BMS's milestone payment in connection with its selection of the third target.

General and Administrative Expenses

Three Months Ended
March 31,
2016 2015 Change
(in thousands)

General and administrative expenses $ 5,040 $ 1,946 $ 3,094

General and administrative expense increased $3.1 million during the three months ended March 31, 2016 compared to the corresponding period in 2015. The increase was attributable to an increase in consulting and professional services expense of $1.2 million due to costs associated with operating as a public company, an increase of $1.1 million in stock based compensation primarily due to higher stock valuation, and an additional $0.7 million of personnel-related expenses due to an increase in headcount.

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



                                                   Three Months Ended
                                                        March 31,
                                                   2016           2015       Change
                                                     (in thousands)
     Interest income                             $     490      $    138     $   352
     Interest expense                                 (353 )        (230 )      (123 )
     Other income (expense), net                        19        (1,251 )     1,270
     Total Interest and other income (expense)   $     156      $ (1,343 )   $ 1,499


Interest Income

Interest income increased $0.4 million during the three months ended March 31, 2016 compared to the corresponding period in 2015. 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 May 2015 and June 2015, and initial public offering of common stock ("IPO") in October 2015.

Interest Expense

Interest expense increased $0.1 million during the three months ended March 31, 2016 compared to the corresponding period in 2015. The increase was primarily attributable to a $0.2 million increase in amortization of premiums on our short-term investments, partly offset by a decrease of $0.1 million interest expense due to repayment and termination of debt facility in September 2015.

Other Income (Expense), Net

Other income (expense), net decreased $1.3 million during the three months ended March 31, 2016, compared to the corresponding period in 2015. The increase was primarily attributable to a loss of $1.3 million related to an increase in the fair value of our convertible preferred stock warrant liability.

Liquidity and Capital Expenditures

Sources of Liquidity

As of March 31, 2016, we had cash, cash equivalents and short-term investments of $180.6 million and an accumulated deficit of $133.5 million, compared to cash and cash equivalents of $186.7 million and an accumulated deficit of $117.5 million as of December 31, 2015. We have financed our operations primarily through sales of our common stock in conjunction with the IPO, sales of our 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 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, 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 Quarterly Report on Form 10-Q. 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.


 Cash Flows



The following table summarizes our cash flows for the periods indicated in
thousands:



                                                             Three Months Ended
                                                                  March 31,
                                                             2016          2015
    Net cash provided by (used in):
    Operating activities                                   $  (5,540 )   $  (5,369 )
    Investing activities                                      13,579       (52,043 )
    Financing activities                                          36           835
    Net (decrease) increase in cash and cash equivalents   $   8,075     $ (56,577 )

Cash Flows from Operating Activities

During the three months ended March 31, 2016, cash used in operating activities was $5.5 million, which consisted of a net loss of $16.0 million, adjusted by non-cash charges of $3.2 million and a net increase of $7.3 million in our net operating assets. The non-cash charges primarily consist of $2.5 million in stock-based compensation, $0.4 million in depreciation and amortization and $0.4 million in amortization premiums on our short-term investments. The change in our net operating assets and liabilities was primarily due to an increase of $8.2 million in deferred revenue due to a $10 million milestone payment from BMS in connection with its selection of the third target, which was partially offset by the recognition of upfront fees received, a decrease of $0.3 million in accounts receivable, an increase of $0.2 million in accounts payable, a decrease of $1.1 million in prepaid expenses and other current assets and a decrease of $0.4 million in accrued liabilities.

During the three months ended March 31, 2015, cash used in operating activities was $5.4 million, which consisted of a net loss of $6.2 million, adjusted by non-cash charges of $1.8 million and a net decrease of $1.0 million in our net operating assets. The non-cash charges primarily consist of depreciation and amortization of $0.3 million, stock-based compensation of $0.2 million, amortization of premiums of our short-term investments of $0.1 million, and a loss on remeasurement of our convertible preferred stock liability. The change in our net operating assets and liabilities was primarily due to a $0.7 million decrease in accounts payable and accrued liabilities mainly due to the payment of the 2014 annual bonus in 2015 as well as legal costs for patent filings, a decrease of $1.5 million in deferred revenue due to the recognition of upfront fees received and an increase of $0.4 million in prepaid expenses and other assets mainly due to accrued interest receivable from our short-term investments and prepayment of rent for our facility, partially offset by a decrease of $1.7 million in accounts receivable primarily due to the receipt of the $1.5 million upfront payment from Pfizer agreement in the first quarter of 2015.

Cash Flows from Investing Activities

Cash provided in investing activities during the three months ended March 31, 2016 was $13.6 million, which consisted of $47.7 million in proceeds from the maturity of marketable securities. This was partially offset by $33.8 million in purchases of short-term investments and $0.3 million of capital expenditures to purchase property and equipment.

Cash used in investing activities during the three months ended March 31, 2015 was $52.0 million, which consisted of $0.3 million of capital expenditures to purchase property and equipment and $51.8 million of purchases of short-term investments.

Cash Flows from Financing Activities

During the three months ended March 31, 2016, cash provided by financing activities primarily consisted of proceeds from the exercise of stock options.

During the three months ended March 31, 2015, cash provided by financing activities was $0.8 million consisting of $1.2 million in net proceeds from the issuance of preferred stock, partially offset by repayments on our borrowings of $0.4 million.


Contractual Obligations

The following table summarizes our contractual obligations as of March 31, 2016
(in thousands):



                                                          Payments Due by Period(4)
                                    2016 (1)       2017        2018        2019        2020 +       Total
Operating leases(2)                $    1,053     $ 3,387     $ 4,374     $ 4,506     $ 34,144     $ 47,464
Royalty obligations (3)                     -         150           -           -            -          150
Total contractual obligations      $    1,053     $ 3,537     $ 4,374     $ 4,506     $ 34,144     $ 47,614

(1) Remainder of the year

(2) 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.

(3) We have royalty obligations under the terms of certain exclusive licensed patent rights. See Note 9 of our financial statements.

(4) This table excludes unrecognized tax benefits of $666,000 as of December 31, 2015 because these uncertain tax positions, if recognized, would be an adjustment to our deferred tax assets.

Off-Balance Sheet Arrangements

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

JOBS Act Accounting Election

We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We do intend to rely on other exemptions provided by the JOBS Act, including, without limitation, providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the IPO, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

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