Threshold Pharmaceuticals
THRESHOLD PHARMACEUTICALS INC (Form: 10-Q, Received: 05/16/2017 06:10:47)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2017

or

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

For the transition period from               to             

Commission File Number: 001-32979

 

Threshold Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3409596

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3705 Haven Ave., Suite 120, Menlo Park, CA 94025

(Address of principal executive offices, including zip code)

(650) 474-8200

(Registrant’s telephone number, including area code)

 

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       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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 7(a)(2)(B) of the Securities Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

On April 28, 2017, there were 71,591,518 shares of common stock, par value $0.001 per share, of Threshold Pharmaceuticals, Inc. outstanding.

 

 

 


 

Threshold Pharmaceuticals, Inc.

TABLE OF CONTENTS

 

 

  

 

Page

PART I.

  

FINANCIAL INFORMATION

 

 

Item 1.

  

Unaudited Condensed Consolidated Financial Statements

 

3

 

  

Unaudited Condensed Consolidated Balance Sheets

 

3

 

  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

 

4

 

  

Unaudited Condensed Consolidated Statements of Cash Flows

 

5

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

20

Item 4.

  

Controls and Procedures

 

20

PART II.

  

OTHER INFORMATION

 

 

Item 1

  

Legal Proceedings

 

22

Item 1A.

  

Risk Factors

 

22

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 3.

  

Defaults Upon Senior Securities

 

55

Item 4.

  

Mine Safety Disclosures

 

55

Item 5.

  

Other Information

 

55

Item 6.

  

Exhibits

 

56

SIGNATURES

 

57

 

EXHIBIT INDEX

 

58

 

 

 

 

2


 

P ART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Threshold Pharmaceuticals, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

March 31,

2017

 

 

December 31,

2016 (Note 1)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

11,438

 

 

$

10,551

 

Marketable securities, current

 

6,163

 

 

 

13,000

 

Notes receivable

 

2,000

 

 

 

 

Prepaid expenses and other current assets

 

352

 

 

 

623

 

Total current assets

 

19,953

 

 

 

24,174

 

Property and equipment, net

 

 

 

 

109

 

Total assets

$

19,953

 

 

$

24,283

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

328

 

 

$

822

 

Collaboration payable

 

 

 

 

129

 

Accrued clinical and development expenses

 

178

 

 

 

777

 

Accrued liabilities

 

1,704

 

 

 

888

 

Total current liabilities

 

2,210

 

 

 

2,616

 

Warrant liability

 

2,407

 

 

 

1,743

 

Deferred rent

 

9

 

 

 

36

 

Total liabilities

 

4,626

 

 

 

4,395

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

Common stock, $0.001 par value, shares authorized: 150,000,000 shares; issued and outstanding:

   71,591,518 shares at March 31, 2017 and 71,560,294 shares at December 31, 2016

 

72

 

 

 

72

 

Additional paid-in capital

 

373,864

 

 

 

373,352

 

Accumulated other comprehensive loss

 

(1

)

 

 

(2

)

Accumulated deficit

 

(358,608

)

 

 

(353,534

)

Total stockholders’ equity

 

15,327

 

 

 

19,888

 

Total liabilities and stockholders’ equity

$

19,953

 

 

$

24,283

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


 

Threshold Pharmaceuticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Revenue

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

1,590

 

 

 

6,005

 

General and administrative

 

2,853

 

 

 

2,249

 

Total operating expenses

 

4,443

 

 

 

8,254

 

Loss from operations

 

(4,443

)

 

 

(8,254

)

Interest income (expense), net

 

33

 

 

 

32

 

Other income (expense), net

 

(664

)

 

 

370

 

Net loss

 

(5,074

)

 

 

(7,852

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

1

 

 

 

22

 

Comprehensive loss

$

(5,073

)

 

$

(7,830

)

Net loss per share:

 

 

 

 

 

 

 

Basic

$

(0.07

)

 

$

(0.11

)

Diluted

$

(0.07

)

 

$

(0.11

)

Weighted average number of shares used in net loss per share

   calculations:

 

 

 

 

 

 

 

Basic

 

71,575

 

 

 

71,488

 

Diluted

 

71,575

 

 

 

71,488

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

4


 

Threshold Pharmaceuticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(5,074

)

 

$

(7,852

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

26

 

 

 

185

 

(Gain) loss on sale of property and equipment

 

(21

)

 

 

9

 

Stock-based compensation expense

 

505

 

 

 

843

 

Change in common stock warrant fair value

 

664

 

 

 

(370

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Collaboration receivable/payable

 

(129

)

 

 

1,114

 

Prepaid expenses and other assets

 

271

 

 

 

719

 

Accounts payable

 

(494

)

 

 

838

 

Accrued clinical and development expenses

 

(599

)

 

 

(3,509

)

Accrued liabilities

 

816

 

 

 

(2,582

)

Deferred rent

 

(27

)

 

 

(22

)

Net cash used in operating activities

 

(4,062

)

 

 

(10,627

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Issuance of promissory notes to Molecular Templates, Inc.

 

(2,000

)

 

 

 

Purchases of marketable securities

 

(299

)

 

 

(7,495

)

Proceeds from sale of property and equipment

 

100

 

 

 

 

Proceeds from maturities of marketable securities

 

7,141

 

 

 

19,731

 

Net cash provided by investing activities

 

4,942

 

 

 

12,236

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

7

 

 

 

13

 

Net cash provided by financing activities

 

7

 

 

 

13

 

Net increase in cash and cash equivalents

 

887

 

 

 

1,622

 

Cash and cash equivalents, beginning of period

 

10,551

 

 

 

9,589

 

Cash and cash equivalents, end of period

$

11,438

 

 

$

11,211

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

5


 

Threshold Pharmaceuticals, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Threshold Pharmaceuticals, Inc. (the “Company”) is a biotechnology company using its expertise in the tumor microenvironment to discover and develop therapeutic agents that selectively target tumor cells for the treatment of patients living with cancer. The Company has no commercial products, and the Company announced at the end of 2015 that its lead product candidate, evofosfamide, a novel, hypoxia-activated prodrug of a bis-alkylating agent, did not meet its primary endpoint of demonstrating a statistically significant improvement in two pivotal Phase 3 clinical trials.  In 2016, the Company engaged a financial and strategic advisor to explore a range of alternatives to enhance stockholder value, including but not limited to business combination and/or partnership opportunities, as well as a distribution of a significant amount of cash to stockholders, and dissolution of the Company.  In March 2017, the Company entered into a definitive agreement for a merger with Molecular Therapeutics, Inc. See Note 3 regarding this transaction.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for pursuant to the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair presentation of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2017.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, and reflect the elimination of intercompany accounts and transactions.

In March 2016, the FASB issued an accounting standard update, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. The Company adopted the standard effective January 1, 2017 and the adoption did not have a material effect on its condensed consolidated financial statement for quarter ending March 31, 2017.

 

 

6


 

NOTE 2 — NET LOSS PER SHARE

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive common shares, including outstanding options and warrants.

Potential dilutive common shares also include the dilutive effect of the common stock underlying in-the-money stock options and warrants that were calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option or warrant is assumed to be used to repurchase shares in the current period. In addition, the average amount of compensation cost for in-the-money options, if any, for future service that the Company has not yet recognized when the option is exercised, is also assumed to repurchase shares in the current period. A reconciliation of the numerator and denominator used in the calculation is as follows (in thousands, except per share amounts):

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

Net loss

$

(5,074

)

 

$

(7,852

)

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

71,575

 

 

 

71,488

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

Basic

$

(0.07

)

 

$

(0.11

)

Diluted

$

(0.07

)

 

$

(0.11

)

 

 

The following outstanding warrants, options and purchase rights under the Company’s 2004 Employee Stock Purchase Plan (“2004 Purchase Plan”) were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Shares issuable upon exercise of warrants

 

8,300

 

 

 

8,300

 

Shares issuable upon exercise of stock options

 

10,827

 

 

 

11,561

 

Shares issuable related to the 2004 Purchase Plan

 

20

 

 

 

39

 

 

 

NOTE 3 — Merger Agreement with Molecular Templates

In March 2017, the Company entered into a definitive Merger Agreement (“Merger Agreement”), with Molecular Templates, Inc. (“Molecular Templates”), a private company incorporated and registered in the United States and the shareholders of Molecular Templates, pursuant to which the shareholders of Molecular Templates will become the majority owners of the Company.  The number of shares of common stock of the Company to be issued in respect of each Molecular Templates share will be based upon the relative stipulated values of each of the Company and Molecular Templates as determined pursuant to the Merger Agreement. The stipulated value of the Company is subject to downward adjustment based upon the Company’s net cash balance at the closing of the transaction. Assuming that no such adjustment is applicable, immediately following the closing of the transaction, Molecular Templates equity holders are expected to own approximately 65.6% of the outstanding common stock of the Company on a fully-diluted basis.  Consummation of the transaction is subject to certain closing conditions, including, among other things, approval by the stockholders of the Company of the transactions contemplated by the Merger Agreement and related matters. The Merger Agreement contains certain termination rights for both the Company and Molecular Templates, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Molecular Templates a termination fee of $0.8 million.  Any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance shareholder value.

7


 

In connection with execution of the Merger Agreement, the Company made a bridge loan to Molecular Templates pursuant to a not e purchase agreement and promissory notes (the “Notes”) up to an aggregate principal amount of $4.0 million with an initial closing held on March 24, 2017 for a principal amount of $2.0 million.  If the Merger Agreement is terminated prior to the maturity date , which is the one year anniversary from the signing of the note purchase agreement, of the Notes, the outstanding principal of the Notes plus all accrued and unpaid interest shall become due and payable upon the earlier of (i) the consummation of a qu alified financing by Molecular Templates of at least $10.0 million, (ii) the occurrence of a Molecular Templates liquidity event, or (iii) the four-month anniversary of the termination of the Merger Agreement, and such amounts shall be credited against any termination fees owed by the Company to Molecular Templates pursuant to the Merger Agreement.

In addition on March 16, 2017, the Company and Molecular Templates received from Longitude Venture Partners III, L.P. (“Longitude”) an Equity Commitment Letter (the “Commitment Letter”), pursuant to which, immediately following the Closing of the Merger, Longitude will purchase $20 million of equity securities in the Company.  Longitude’s investment is subject to certain conditions, including the Closing of the Merger and the Company having secured commitments from additional investors for the purchase of an additional $20 million of such securities (the “Financing”).  The Financing will be accomplished in a private placement exempt from registration under Section 4(a)(2) and Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and the rules promulgated thereunder. The securities to be sold in the Financing have not been registered under the Securities Act, or any state securities laws, and may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. The closing of the Merger is not contingent upon the completion of this Financing.

 

 

NOTE 4 — STOCKHOLDERS’ EQUITY

Common Stock Warrant Valuation

The Company accounts for its common stock warrants under guidance now codified in ASC 815 that clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify for classification as a liability or equity. ASC 815 requires the Company’s outstanding warrants to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as other income (expense) in the Company’s consolidated statements of operations.

At both March 31, 2017 and December 31, 2016 the Company had warrants outstanding to purchase 8.3 million shares of common stock, having an exercise price of $3.62 per share, which warrants were issued by the Company in the February 2015 offering. The fair value of these warrants on March 31, 2017 and December 31, 2016 was determined using a Black-Scholes model with the following key level 3 inputs:

 

 

March 31,

2017

 

 

December 31, 2016

 

Risk-free interest rate

 

1.50

%

 

 

1.93

%

Expected life (in years)

 

2.89

 

 

 

3.13

 

Dividend yield

 

 

 

 

 

Volatility

 

141

%

 

 

135

%

Stock price

$

0.57

 

 

$

0.44

 

 

 

During three months ended March 31, 2017, the change in fair value of $0.7 million of noncash expense related to the February 2015 warrants was recorded as other income (expense) in the Company’s consolidated statement of operations.

The following table sets forth the Company’s financial liabilities, related to warrants issued in the February 2015 offering, subject to fair value measurements as of March 31, 2017 and December 31, 2016:

 

 

Fair Value as of March 31, 2017

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

February 2015 warrants

$

2,407

 

 

$

 

 

$

 

 

$

2,407

 

 

 

 

Fair Value as of December 31, 2016

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

February 2015 warrants

$

1,743

 

 

$

 

 

$

 

 

$

1,743

 

8


 

 

The following table is a reconciliation of the warrant liability measured at fair value using level 3 inputs (in thousands):

 

 

Warrant

Liability

 

Balance at December 31, 2016

$

1,743

 

Change in fair value of common stock warrants during three months ended March 31, 2017

 

664

 

Balance at March 31, 2017

$

2,407

 

 

NOTE 5 — STOCK BASED COMPENSATION

The Company recognizes stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation.” Stock-based compensation expense, which consists of the compensation cost for employee stock options and the 2004 Purchase Plan, and the value of options issued to non-employees for services rendered, was allocated to research and development and general and administrative expenses in the unaudited consolidated statements of operations for the three months ended March 31, 2017 and 2016 as follows (in thousands):

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Amortization of stock-based compensation:

 

 

 

 

 

 

 

Research and development

$

151

 

 

$

318

 

General and administrative

 

354

 

 

 

525

 

 

$

505

 

 

$

843

 

 

 

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is being amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The fair value of employee stock options and employee purchase rights under the 2004 Purchase Plan was estimated using the following weighted-average assumptions for the three months ended March 31, 2017 and 2016:

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Employee Stock Options:

 

 

 

 

 

 

 

Risk-free interest rate

 

 

 

 

1.64

%

Expected term (in years)

 

 

 

 

6.02

 

Dividend yield

 

 

 

 

 

Volatility

 

 

 

 

108

%

Weighted-average fair value of stock options granted

$

 

 

$

0.45

 

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

Employee Stock Purchase Plan (ESPP):

 

 

 

 

 

 

 

Risk-free interest rate

 

0.56

%

 

 

0.56

%

Expected term (in years)

 

1.24

 

 

 

1.24

 

Dividend yield

 

 

 

 

 

Volatility

 

161

%

 

 

161

%

Weighted-average fair value of ESPP purchase rights

$

0.22

 

 

$

0.22

 

 

To determine the expected term of the Company’s employee stock options granted, the Company utilized the simplified approach as defined by SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). To determine the risk-free interest rate, the Company utilized an average interest rate based on U.S. Treasury instruments with a term consistent with the expected term of the Company’s stock based awards. To determine the expected stock price volatility for the Company’s stock based awards, the Company utilized the historical volatility of the Company’s common stock. The fair value of all the Company’s stock based awards assumes no dividends as the Company does not anticipate paying cash dividends on its common stock.

9


 

Employee Stock-based Compensa tion Expense

As required by ASC 718, the Company recognized $0.5 million of stock-based compensation expense related to stock options and purchase rights, under the Company’s equity incentive plans and 2004 Purchase Plan, for the three months ended March 31, 2017 and $0.8 million of stock-based compensation for the three months ended March 31, 2016. As of March 31, 2017, the total unrecognized compensation cost related to unvested stock-based awards granted to employees under the Company’s equity incentive plans was approximately $2.9 million before forfeitures. This cost will be recorded as compensation expense on a straight-line basis over the remaining weighted average requisite service period of approximately 2.3 years.

Equity Incentive Plans

Equity Incentive Plans At March 31, 2017, 1,659,008 shares were authorized and available for issuance under the 2014 Equity Incentive Plan.

The following table summarizes stock option activity under the Company’s equity incentive plans:

 

Options

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2016

 

 

10,941,745

 

 

$

3.00

 

 

 

 

 

 

 

Granted

 

 

 

 

$

 

 

 

 

 

 

 

Exercised

 

 

 

 

$

 

 

 

 

 

 

 

Forfeitures

 

 

(114,264

)

 

$

1.49

 

 

 

 

 

 

 

Outstanding at March 31, 2017

 

 

10,827,481

 

 

$

3.01

 

 

 

5.20

 

 

$

115,102

 

Vested and expected to vest March 31, 2017

 

 

10,773,313

 

 

$

3.02

 

 

 

5.17

 

 

$

113,582

 

Exercisable at March 31, 2017

 

 

8,355,859

 

 

$

3.44

 

 

 

4.19

 

 

$

48,103

 

 

No stock options were exercised during the three months ended March 31, 2017 and 2016. The Company issues new shares of common stock upon exercise of options. As there was no exercises, there was no related tax benefit realized by the Company.

2004 Employee Stock Purchase Plan On January 1, 2017, an additional 100,000 shares was authorized for issuance under the 2004 Purchase Plan pursuant to the annual automatic increase to the authorized shares under the 2004 Purchase Plan. For the three months ended March 31, 2017, plan participants had purchased 31,624 shares at an average purchase price of $0.25 for total cash proceeds of $7,000.  At March 31, 2017, 203,165 shares were authorized and available for issuance under the 2004 Purchase Plan.

 

NOTE 6 —MARKETABLE SECURITIES AND FAIR VALUE

The Company accounts for its marketable securities in accordance with ASC 820 “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2 —Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices 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.

10


 

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For Level 2 securities that have market prices from multiples sources, a “consensus price” or a weighted average price for each of these securities can be derived from a distribution-curve-based algorithm which includes market prices obtained from a variety of industrial standard data providers (e.g. Bloomberg), sec urity master files from large financial institutions, and other third-party sources. Level 2 securities with short maturities and infrequent secondary market trades are typically priced using mathematical calculations adjusted for observable inputs when av ailable.

The following table sets forth the Company’s financial assets (cash equivalents and marketable securities) at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:

 

 

Fair Value as of March 31, 2017

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

3,102

 

 

$

3,102

 

 

$

 

 

$

 

Corporate debt securities

 

1,565

 

 

 

 

 

 

1,565

 

 

 

 

Government securities

 

3,199

 

 

 

 

 

 

3,199

 

 

 

 

Commercial paper

 

9,245

 

 

 

 

 

 

9,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

17,111

 

 

$

3,102

 

 

$

14,009

 

 

$

 

 

 

 

Fair Value as of December 31, 2016

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

2,746

 

 

$

2,746

 

 

$

 

 

$

 

Corporate debt securities

 

4,206

 

 

 

 

 

 

4,206

 

 

 

 

Government securities

 

5,299

 

 

 

 

 

 

5,299

 

 

 

 

Commercial paper

 

10,966

 

 

 

 

 

 

10,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

23,217

 

 

$

2,746

 

 

$

20,471

 

 

$

 

 

The Company invests in highly-liquid, investment-grade securities. The following is a summary of the Company’s available-for-sale securities at March 31, 2017 and December 31, 2016:

 

As of March 31, 2017 (in thousands):

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Money market funds

$

3,102

 

 

$

 

 

$

 

 

$

3,102

 

Corporate debt securities

 

1,565

 

 

 

 

 

 

 

 

 

1,565

 

U.S. Government securities

 

3,200

 

 

 

 

 

 

(1

)

 

 

3,199

 

Commercial paper

 

9,245

 

 

 

 

 

 

 

 

 

9,245

 

 

 

17,112

 

 

 

 

 

 

(1

)

 

 

17,111

 

Less cash equivalents

 

10,948

 

 

 

 

 

 

 

 

 

10,948

 

Total marketable securities

$

6,164

 

 

$

 

 

$

(1

)

 

$

6,163

 

 

 

As of December 31, 2016 (in thousands):

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Money market funds

$

2,746

 

 

$

 

 

$

 

 

$

2,746

 

Corporate debt securities

 

4,208

 

 

 

 

 

 

(2

)

 

 

4,206

 

U.S. Government securities

 

5,299

 

 

 

1

 

 

 

(1

)

 

 

5,299

 

Commercial paper

 

10,966

 

 

 

 

 

 

 

 

 

10,966

 

 

 

23,219

 

 

 

1

 

 

 

(3

)

 

 

23,217

 

Less cash equivalents

 

10,217

 

 

 

 

 

 

 

 

 

10,217

 

Total marketable securities

$

13,002

 

 

$

1

 

 

$

(3

)

 

$

13,000

 

 

There were no realized gains or losses in three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the weighted average maturity for the Company’s available for sale securities was 0.5 months, with the longest maturity being July 2017.

11


 

The Company does not intend to sell the investments that are in an unrealized loss position, and it is unlikely that the C ompany will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. The following table provides the breakdown of the marketable securities with unrealized losses at March 31, 2017 (in thousands):

 

 

In loss position for less

than twelve months

 

As of March 31, 2017 (in thousands):

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government securities

$

3,199

 

 

$

(1

)

The Company determined the fair value of the liability associated with its February 2015 warrants to purchase in aggregate 8.3 million shares of outstanding common stock using a Black-Scholes Model. See detailed discussion in Note 4 Stockholders’ Equity.

 

 

NOTE 7 — COMMITMENTS AND CONTINGENCIES

The Company leases certain of its facilities under noncancelable leases, which qualify for operating lease accounting treatment under ASC 840, “Leases,” and, as such, these facilities are not included on its unaudited condensed consolidated balance sheets. The future rental payments required by the Company for all of its facilities under noncancelable operating leases are as follows (in thousands):

 

Years Ending December 31,

 

 

 

2017

 

25

 

Thereafter

 

 

Total

$

25

 

 

Indemnification

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, contractors and parties performing its clinical trials. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party as a result of the Company’s activities. The duration of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. The Company maintains commercial general liability insurance and products liability insurance to offset certain of its potential liabilities under these indemnification provisions. Accordingly, the Company has not recognized any liabilities relating to these agreements as of March 31, 2017.

 

 

12


 

I TEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the “Risk Factors” section of this Quarterly Report on Form 10-Q. Other than statements of historical fact, statements made in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act, and Section 27A of the Act . When used in this report or elsewhere by management from time to time, the words “believe,” “will,” “may,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations. Forward-looking statements made in this report include, for example, statements about:

 

the implementation of our business strategies, including our ability to pursue development pathways and regulatory strategies for evofosfamide (formerly TH-302);

 

our ability to advance the development of our product candidates;

 

our plans to pursue discussions with regulatory authorities, and the anticipated timing, scope and outcome of related regulatory actions or guidance;

 

our ability to establish and maintain potential new partnering or collaboration arrangements for the development and commercialization of evofosfamide and tarloxotinib bromide or tarloxotinib (formerly referred to as TH-4000, PR610 or Hypoxin™);

 

our financial condition, including our ability to obtain the funding necessary to advance the development of our product candidates;

 

the anticipated progress of our product candidate development programs, including whether our ongoing and potential future clinical trials will achieve clinically relevant results;

 

our ability to generate data and conduct analyses to support the regulatory approval of our product candidates;

 

our ability to establish and maintain intellectual property rights for our product candidates;

 

whether any product candidates that we are able to commercialize are safer or more effective than other marketed products, treatments or therapies;

 

our ability to discover and develop additional product candidates suitable for clinical testing;

 

our ability to identify, in-license or otherwise acquire additional product candidates and development programs;

 

our anticipated research and development activities and projected expenditures;

 

our ability to complete preclinical and clinical testing successfully for new product candidates, such as tarloxotinib, that we may develop or license;

 

our ability to have manufactured active pharmaceutical ingredient, or API, and drug product that meet required release and stability specifications;

 

our ability to have manufactured sufficient supplies of drug product for clinical testing and commercialization;

 

our ability to obtain licenses to any necessary third-party intellectual property;

 

our ability to retain and hire necessary employees and appropriately staff our development programs;

 

the sufficiency of our cash resources; and

 

our projected financial performance.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of the potential risks and uncertainties that may impact their accuracy, see the “Risk Factors” section in Part II, Item 1A of this quarterly report on Form 10-Q. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements reflect our view only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons that actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

13


 

Overview

We are a clinical-stage biopharmaceutical company that has historically used our expertise in the tumor microenvironment to discover and develop therapeutic and diagnostic agents that selectively target tumor cells for the treatment of patients living with cancer. Most recently, the Company has devoted substantially all of its research, development, clinical efforts and financial resources to its two therapeutic product candidates based on hypoxia-activated prodrug technology in the clinic: evofosfamide and tarloxotinib ; and its imaging agent product candidate:  [18F]-HX4.   In December 2015, we announced topline results from two pivotal Phase 3 clinical trials of evofosfamide: TH-CR-406 conducted by Threshold in patients with soft tissue sarcoma and MAESTRO conducted by Merck KGaA, Darmstadt, Germany (“Merck KGaA”), in patients with advanced pancreatic cancer; and that neither trial met its primary endpoint of demonstrating a statistically significant improvement in overall survival.  Of particular note based on the data from the September 1, 2015 cut-off date for the MAESTRO trial, a meaningful improvement in overall survival was reported for a subgroup of 123 Asian patients (enrolled at Japanese and South Korean sites) in which the risk of death was reduced by 48 percent for patients on the treatment arm compared to patients on the control arm. The hazard ratio (“HR”) for this subgroup was 0.52 (95% confidence interval (or “CI”: 0.32 – 0.85).  In particular and based upon Merck KGaA’s MAESTRO data, the 116 patients from Japan from the treatment arm had a median overall survival of 13.6 months versus 9.1 months for those patients on the control arm with significant improvements in progression free survival, objective response rates, and reductions in the pancreatic cancer biomarker, CA19-9. No new safety findings were identified in the MAESTRO study and the safety profile was consistent with that previously reported in other studies of evofosfamide plus gemcitabine. Based on the results of our analyses, we discussed potential registration pathways with Japan’s Pharmaceuticals and Medical Devices Agency (“PMDA” ).  In March 2017, we received minutes from the Company’s formal meeting with the PMDA indicating that the Company’s analysis of the data from the randomized Phase III study, EMR200592-001 (N=693), conducted under a Special Protocol Agreement with the FDA, and the data from the supporting randomized Phase II study, TH-CR-404 (N=214),would not provide adequate efficacy data to support the submission of a New Drug Application (“JNDA”) for evofosfamide for the treatment of patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy.  We are currently in discussions with the PMDA to clarify the scope of a new Phase 3 clinical trial for which the PMDA would consider necessary to accept a JNDA for evofosfamide in Japan based on the previous results observed in the Japanese sub-population.  Our current evofosfamide development strategy is limited to the Company-sponsored Phase I clinical trial of evofosfamide in combination with immune checkpoint antibodies in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center, initiated March 1, 2017 and investigator-sponsored clinical trials of evofosfamide in combination with antiangiogenic therapies in a variety of tumor types as described in more detail below under “Our Product Candidates in Part 1 Item 1. Business Section.”

Our second product candidate, tarloxotinib, was a prodrug designed to selectively release a covalent (irreversible) EGFR tyrosine kinase inhibitor under hypoxic conditions. In September, 2016, the Company announced that its Phase 2 proof-of-concept trial evaluating tarloxotinib bromide for the treatment of patients with mutant EGFR-positive, T790M-negative advanced non-small cell lung cancer(NSCLC) progressing on an EGFR tyrosine kinase inhibitor (TH-CR-601) did not achieve its primary interim response rate endpoint. While the Company’s other Phase 2 proof-of-concept trial evaluating tarloxotinib bromide for the treatment of patients with recurrent or metastatic squamous cell carcinomas of the skin met its primary interim response rate endpoint, the other two arms of the study, evaluating tarloxotinib bromide for the treatment of patients with recurrent or metastatic squamous cell carcinomas of the head and neck did not achieve their primary interim response rate endpoint, and the overall results from the two trials didn't meet the activity thresholds required to justify further development investment by the Company. Accordingly, no further clinical development of tarloxotinib or HX4 is planned. We plan to present preliminary results from both trials at an upcoming medical meeting.

Following the announcement of the evofosfamide clinical trial results, our board of directors commenced a process of evaluating strategic alternatives to maximize stockholder value. To assist with this process, our board of directors engaged a financial advisory firm to help explore our available strategic alternatives, including possible mergers and business combinations, a sale of part or all of our assets, collaboration and licensing arrangements and/or equity and debt financings. 

In March 2017, the Company entered into a Merger Agreement with Molecular Templates, Inc. (“Molecular Templates”), pursuant to which a wholly-owned subsidiary of ours will merge with and into Molecular Templates, with Molecular Templates surviving as a wholly-owned subsidiary of us. We believe that the merger will result in a pharmaceutical company focused on the development and global distribution of safer products less prone tor resistance useful in the treatment of cancer and other disorders.  The number of shares of common stock of the Company to be issued in respect of each Molecular Templates share will be based upon the relative stipulated values of each of the Company and Molecular Templates as determined pursuant to the Merger Agreement. The stipulated value of the Company is subject to downward adjustment based upon the Company’s net cash balance at the closing of the transaction. Assuming that no such adjustment is applicable, immediately following the closing of the transaction, Molecular Templates equity holders are expected to own approximately 65.6% of the outstanding common stock of the Company on a fully-diluted basis.  Consummation of the transaction is subject to certain closing conditions, including, among other things, approval by the stockholders of the Company of the transactions contemplated by the Merger Agreement and related matters. The Merger Agreement contains certain termination rights for both the Company and Molecular Templates, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Molecular Templates a termination fee of $750,000 and reimburse certain fees and

14


 

expenses incurred by Molecular Templates.  Although we have entered into the Merger Agreement and intend to consummate the merger, there is no assuranc e that we will be able to successfully consummate the merger on a timely basis, or at all.

If the Merger is not completed, the Company will reconsider strategic alternatives and could pursue one of the following courses of action:

 

Pursue another strategic transaction . The Company may resume the process of evaluating a potential strategic transaction.

 

Develop evofosfamide in parallel with partnering TH-3424 and/or HX4and broadening our pipeline by in-licensing or acquiring new product candidates. We are currently in ongoing discussions with the PMDA to clarify the scope of a new clinical trial for which the PMDA would consider necessary to accept a JNDA for evofosfamide in Japan based on the previous results observed in the Japanese sub-population in the Phase 3 MAESTRO clinical trial.  In addition, we are in the process of completing our analyses of the available biomarker data from the Phase 3 MAESTRO trial in patients with pancreatic cancer with the goal of identifying additional subgroups of patients that may benefit from treatment with evofosfamide and gemcitabine. In parallel, we intend to complete the Phase 1 clinical trial of evofosfamide in combination with immune checkpoint antibodies in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center and several ISTs as described in more detail below under “Product Candidates.”  TH-3424 is our small-molecule drug candidate, discovered at Threshold, being evaluated for the potential treatment of hepatocellular (liver) cancer, castrate resistant prostate cancer, T-cell acute lymphoblastic leukemias, and other cancers expressing high levels of aldo-keto reductase family 1 member C3, or AKR1C3. Tumors overexpressing AKR1C3 can be resistant to radiation therapy and chemotherapy. TH-3424 is a prodrug in preclinical development that selectively releases a potent DNA cross-linking agent in the presence of AKR1C3.  Preliminary nonclinical toxicology studies including biochemical, in vitro cell-based and in vivo animal-based characterization of its pharmacological properties were presented at the 2016 Annual Meeting of the American Association for Cancer Research (AACR) in April 2016.  The preliminary nonclinical studies suggested an adequate therapeutic index.  We believe that the preliminary nonclinical study results warrant continued development of TH-3424 in Investigational New Drug (IND)-enabling toxicology studies in collaboration with Ascenta Pharmaceuticals, Ltd. which we expect will be completed by the fourth quarter of 2017. Our ability to advance the clinical development of evofosfamide is dependent upon our ability to obtain additional funding, including entering into new collaborative or partnering arrangements for evofosfamide, TH-3424 and/or HX4. In this regard, we are currently seeking pharmaceutical and diagnostic partners for TH-3424 and HX4 with a commercial presence in oncology. Subject to our ability to obtain additional funding, we also intend to evaluate opportunities with academic institutions or pharma- and biopharmaceutical companies to potentially in-license or acquire new product candidates.

 

Dissolve and liquidate the Company's assets . If, for any reason, the Merger does not close, the board of directors currently intends to attempt to complete another strategic transaction like the Merger. If the Board cannot complete another strategic transaction in a reasonable period of time or decides to no longer continue to pursue the development of evofosfamide or to partner TH-3424 and HX4, then the Board intends to sell or otherwise dispose of the Company’s various assets. If the board of directors determines to sell or otherwise dispose of the Company's various assets, any remaining cash proceeds would be distributed to its stockholders. In that event, the Company would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there would be no assurances as to the amount or timing of available cash remaining to distribute to stockholders after paying its obligations and setting aside funds for reserve.

We were incorporated in October 2001. We have devoted substantially all of our resources to research and development of our product candidates, principally evofosfamide and tarloxotinib . We have not generated any revenue from the commercial sales of our product candidates, and since inception we have funded our operations through the private placement and public offering of equity securities and through payments received under our former collaboration with Merck KGaA. As of March 31, 2017 and December 31, 2016, we had cash, cash equivalents and marketable securities of $17.6 million and $23.6 million, respectively. The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note. We currently have no ongoing collaborations for the development and commercialization of evofosfamide, and no source of revenue . However, we continue t o seek out new strategic partners for the continued development of TH-3424, as well as new in-licensing opportunities for us and funding for those opportunities.  If these efforts are not successful, we may be unable to continue as a going concern.  

15


 

Subject to our ability to obtain additional funding and to otherwise advance the development of evofosfamide , we expect to devote substantial resources to research and development in future periods as we potentially start additional clinical trials on our own or with a potential future strategic partner or collaborator. While we expect to incur additional research and development expenses in the absence of additional funding as a result of the planned Phase 1 clinical trial of evofosfamide in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center and our ongoing preclinical development of TH-3424, research and development expenses are expected to decrease in 201 7 compared to 201 6 primarily as a result of Merck KGaA ’s and our decision to cease further joint development of evofosfamide, our decision to cease further enrollment in all Threshold-sponsored clinical trials of evofosfamide and our decision to cease further development of tarloxotinib and, to a lesser exten t, the impact of workforce reduction s implemented in December 2015 and in September 2016. However, apart from the planned Phase 1 clinical trial of evofosfamide, we cannot currently predict whether and to what extent we may continue or increase product can didate development activities in future periods, if at all, and what our future cash needs may be for any such activities.  

We believe that our cash, cash equivalents and marketable securities will be sufficient to fund our projected operating requirement s for the next twelve months based upon current operating plans and spending assumptions as a standalone company. However, we will need to raise substantial additional capital to meaningfully advance the clinical development of evofosfamide, whether throug h new collaborative, partnering or other strategic arrangements or otherwise, and to in-license or otherwise acquire and develop additional product candidates or programs.  In particular, our ability to meaningfully advance the clinical development of evof osfamide is dependent upon our ability to enter into new partnering, collaborative or other strategic arrangements for evofosfamide and TH-3424, or to otherwise obtain sufficient additional funding for such development, particularly since we are no longer eligible to receive any further milestone payments or other funding from Merck KGaA for evofosfamide, including the 70% of worldwide development costs for evofosfamide that were previously borne by Merck KGaA.   If we are unable to secure additional funding on a timely basis or on terms favorable to us, we may be required to cease or reduce certain development projects, to conduct additional workforce reductions, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. Insufficient funds may require us to delay, scale back, or eliminate some or all of our activities, and if we are unable to obtain additional funding, there is uncertainty regarding our continued existence.

Results of Operations

Research and Development . Research and development expenses were $1.6 million for the three months ended March 31, 2017 compared to $6.0 million for the three months ended March 31, 2016, net of the reimbursement for Merck KGaA’s 70% share of total development expenses for evofosfamide. The $4.4 million decrease in expenses was due primarily to a $0.9 million decrease in employee related expenses (including a $0.2 million decrease in noncash stock-based stock compensation expense), a $3.3 million decrease in clinical development expenses net of the reimbursement for Merck KGaA’s 70% share of total development expenses for evofosfamide, and a decrease of $0.2 million in consulting expenses. The decrease in employee related expenses was primarily due to the reductions in workforce of 43 employees in clinical development and discovery research in December 2015 and September 2016. As a result of the termination of our former collaboration with Merck KGaA , we are no longer entitled to any reimbursement for evofosfamide development expenses apart from Merck KGaA’s 70% reimbursement obligation for costs to wind down the discontinued trials and return the evofosfamide rights back to us through December 31, 2016.

During the three months ended March 31, 2017 and 2016, we were engaged in three primary research and development programs: the development of evofosfamide, which was the subject of two pivotal Phase 3 clinical trials and were wound down by the end of quarter ended March 31, 2017, and multiple Phase 2 and Phase 1 clinical trials; the clinical development of tarloxotinib, which was the subject of two Phase 2 proof of concept trials, which also were in the process of winding down; and our discovery research program aimed at identifying new drug candidates. Research and development expenses consist primarily of costs of conducting clinical trials, salaries and related costs for personnel including noncash stock-based compensation, costs of clinical materials, costs for research projects and preclinical studies, costs related to regulatory filings, and facility costs. Contracting and consulting expenses are a significant component of our research and development expenses as we rely on consultants and contractors in many of these areas. The following table summarizes our research and development expenses (net of reimbursement for Merck KGaA’s 70% share of total development expenses in the case of evofosfamide for 2016) attributable to each of our programs for each period presented:

 

Research and Development Expenses by Project (in thousands):

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Evofosfamide

 

$

776

 

 

$

4,278

 

Tarloxotinib

 

 

561

 

 

 

1,332

 

Discovery Research

 

 

253

 

 

 

395

 

Total Research and Development Expenses

 

$

1,590

 

 

$

6,005

 

16


 

Research and development expenses associated with our internally discovered compound evofosfamide were $ 0.8 million for the three months ended March 31, 2017 and $ 4.3 million for the three months ended March 31, 2016 , in each case net of the reimbursement or payment for Merck KGaA’s 70% share of total eligible collaboration expenses for evofosfamide . The de crease of $ 3.5 million for the three months ended March 31, 2017 compared to the same period in 2016 , was due to Merck KGaA’s and our joint decision to cease further development in evofosfamide in December 2015 and the related discontinuation of enrollment and closure of all company sponsored evofosfamide trials in 2016 . We are currently only pursuing development of ev ofosfamide in a Phase 1 trial in combination with immune checkpoint antibodies in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center .

Research and developments expenses associated with tarloxotinib were $0.6 million for the three months ended March 31, 2017 compared to $1.3 million for the three months ended March 31, 2016. The decrease of $0.7 million was due primarily to the completion of enrollment of two Phase 2 proof-of-concept clinical trials of tarl oxotinib during the quarter ended September 30, 2016.  In addition, during the quarter ended September 30, 2016, we determined to cease any further development of tarloxotinib based on the interim results from the two Phase 2 proof-of-concept trials of tarloxotinib.  With our decision to cease any further development of tarloxotinib, we expect activities to be limited to winding down the trials in the first half of 2017. Discovery research and development expenses were $0.2 million for the three months ended March 31, 2017 compared to $0.3 million for the three months ended March 31, 2016, respectively. W ith the reduction in workforce enacted in December of 2015 pursuant to which we eliminated our in-house discovery research activities, activities in 2017 are limited to preclinical development of TH-3424 with third party collaborators.

The largest component of our total operating expenses has historically been our ongoing investment in our research and development activities, primarily with respect to the development of evofosfamide. The process of conducting the clinical research necessary to obtain FDA and foreign regulatory approvals is costly, uncertain and time consuming. We consider the active management of our research and development programs to be critical to our long-term success. The actual probability of success for evofosfamide and potential future clinical product candidates may be impacted by a variety of factors, including, among others, the quality of the product candidate, early clinical da ta, investment in the program and the availability of adequate funding, competition, manufacturing capability and commercial viability. Furthermore, our strategy depends upon our ability to enter into potential new partnering, collaborative or other strategic arrangements with third parties to assist in the development of evofosfamide and TH-3424 , or to otherwise obtain sufficient additional funding to permit such development.  In the event we enter into partnering or collaborative arrangements for evofosfamide or TH-3424, the preclinical development or clinical trial process for a product candidate and the estimated completion date may largely be under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our current and potential future product candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. In addition, the length of time required for clinical development of a particular product candidate and our development costs for that product candidate may be impacted by the scope and timing of enrollment in clinical trials for the product candidate, unanticipated additional clinical trials that may be required, future decisions to develop a product candidate for subsequent indications, and whether in the future we decide to pursue development of the product candidate with a collaborator or independently. For example, evofosfamide may have the potential to be approved for multiple indications, and we do not yet know how many of those indications we and a potential future collaborator will pursue. In this regard, the decision to pursue regulatory approval for subsequent indications will depend on several variables outside of our control, including the strength of the data generated in our prior and ongoing clinical studies and the willingness of potential collaborators to jointly fund such additional work. Furthermore, the scope and number of clinical studies required to obtain regulatory approval for each pursued indication is subject to the input of the applicable regulatory authorities, and we have not yet sought such input for all potential indications that we may elect to pursue, and even after having given such input applicable regulatory authorities may subsequently require additional clinical studies prior to granting regulatory approval based on new data generated by us or other companies, or for other reasons outside of our control.

We did not track research and development expenses by project prior to 2003, and therefore we cannot provide cumulative project expenses to date. The risks and uncertainties associated with our research and development projects are discussed more fully in the “Risk Factors” section in Part II, Item 1A of this quarterly report on Form 10-Q. As a result of the risks and uncertainties discussed in the “Risk Factors” section and above, we are unable to determine with any degree of certainty the duration and completion costs of our research and development projects, anticipated completion dates or when and to what extent we will receive cash inflows from the commercialization and sale of a product candidate, including evofosfamide. To date, we have not commercialized any of our product candidates and in fact may never do so.

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General and Administrative . General an d administrative expenses were $ 2.9 million for the three months ended March 31, 2017 compared to $ 2. 2 million for three months ended March 31, 2016 . The $0. 7 million increase was due to a $0. 9 million in crease in consulting expenses partially offset by a $0. 2 million decrease in employee related expenses. Consulting expenses increased as result of an increase in legal and other consulting expenses related to the merger agreeme nt with Molecular Templates, Inc. We currently expect our general and administrative expenses to remain flat in 201 7 compared to 201 6 due to merger- related expenses in first half of 2017, partially offset by a decrease in employee related expenses , includi ng facilities costs, due to the red uction in workforce in December 2015 and September 2016 and decrease in general and administrative expenses to support our decreased development activities related to evofosfamide and TH-3424 .

Interest Income (Expense), Net. Interest income (expense), net for the three months ended March 31, 2017 was $33,000 compared to $32,000 of interest income for same period in 2016.

Other Income (Expense). Other income (expense) for the three months ended March 31, 2017 was non-cash expense of $0.7 million compared to non-cash income of $0.4 million for the three months ended March 31, 2016. The non-cash expense during the three months ended March 31, 2017 was due to a net increase in the fair value of the outstanding warrants as result of an increase in the underlying price of the common stock during the period. The non-cash income during the three months ended March 31, 2016 was due to a net decrease in the fair value of the outstanding warrants as result of a decrease in the underlying price of the common stock during the period.

Liquidity and Capital Resources

We have not generated and do not expect to generate revenue from sales of product candidates in the near term. Since our inception we have funded our operations primarily through private placements and public offerings of equity securities and through payments received under our former collaboration with Merck KGaA. We have received $110 million in upfront and milestone payments from our former collaboration with Merck KGaA. We had cash, cash equivalents and marketable securities of $17.6 million and $23.6 million at March 31, 2017 and December 31, 2016, respectively, available to fund operations. The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note.

Net cash used in operating activities for the three months ended March 31, 2017 was $4.1 million compared to net cash used in operating activities of $10.6 million for the three months ended March 31, 2016. The decrease of $6.5 million in cash used in operations was due to a decrease in payments of operating cash expenses, partially offset by a decrease in the 70% cash reimbursement of expenses related to our former collaboration with Merck KGaA.  

Net cash provided by investing activities for the three months ended March 31, 2017 was $4.9 million compared with net cash provided by investing activities of $12.2 million for the three months ended March 31, 2016. The $7.3 million decrease in net cash provided by investing activities was primarily due to a decrease from proceeds from maturities of marketable securities, partially offset by a decrease in purchases of marketable securities.

Net cash provided by financing activities for the three months ended March 31, 2017 and 2016 was $7,000 and $13,000, respectively.

We believe that our cash, cash equivalents and marketable securities will be sufficient to fund our projected operating requirements for at least the next 12 months based upon current operating plans and spending assumptions. However, we will need to raise additional capital to advance the clinical development of evofosfamide and tarloxotinib, whether through new collaborative or partnering arrangements or otherwise, and to in-license or otherwise acquire and develop additional product candidates or programs.  In particular, our ability to advance the clinical development of evofosfamide is dependent upon our ability to enter into new collaborative or partnering arrangements for evofosfamide, or to otherwise obtain sufficient additional funding for such development, particularly since we are no longer eligible to receive any further milestone payments or other funding from Merck KGaA, including the 70% of worldwide development costs for evofosfamide that were previously borne by Merck KGaA.

While we have been able to fund our operations to date, we currently have no ongoing collaborations for the development and commercialization of evofosfamide, and no source of revenue, nor do we expect to generate revenue for the foreseeable future. We also do not have any commitments for future external funding.    Until we can generate a sufficient amount of product revenue, which we may never do, we expect to finance future cash needs through a variety of sources, including:

 

the public equity market;

 

private equity financing;

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collaborative arrangements;

 

licensing arrangements; and/or

 

public or private debt.

Our ability to raise additional funds and the terms upon which we are able to raise such funds have been severely harmed by the negative results reported from our two pivotal Phase 3 clinical trials of evofosfamide and our decision to discontinue development o f tarloxotinib, and may in the future be adversely impacted by the uncertainty regarding the prospects for future development of evofosfamide and our ability to advance the development of e vofosfamide or otherwise realize any return on our investments in e vofosfamide , if at all. Our ability to raise additional funds and the terms upon which we are able to raise such funds may also be adversely affected by the uncertainties regarding our financial condition, the sufficiency of our capital resources, our ability to maintain the listing of our common stock on The NASDAQ Capital Market and recent and potential future management turnover. As a result of these and other factors, we cannot be certain that sufficient funds will be available to us or on satisfactory terms, if at all. To the extent we raise additional funds by issuing equity securities, our stockholders may experience significant dilution, particularly given our currently depressed stock price, and debt financing, if available, may involve restrictive covenants.  If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to our product candidates, technologies or potential markets, any of which could result in our stockholders having little or no continuing interest in our evofosfamide program as stockholders or otherwise, or which could delay or require that we curtail or eliminate some or all of our development activities or otherwise have a material adverse effect on our business, financial condition and results of operations.

On November 11, 2016, we received a notice from the staff (the “Staff”) of The NASDAQ Stock Market LLC (“Nasdaq”) that, for the previous 30 consecutive business days, the closing bid price for the Company’s common stock was below the $1.00 per share minimum bid price requirement for continued listing on The NASDAQ Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until May 10, 2017, to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time during this 180-day period. We did not regain compliance with the rule by May 10, 2017, but became eligible for an additional 180 calendar day compliance period by meeting the continued listing requirement for market value of  publicly held shares and all other applicable standards for initial listing on The NASDAQ Capital Market, with the exception of the bid price requirement, and by providing written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If we regain compliance with the Bid Price Rule, Nasdaq will provide us with written confirmation and will close the matter.  

However, if it appears to the Staff that we will not be able to cure the deficiency, Nasdaq will notify us that our common stock will be subject to delisting. In the event of such a notification, we may appeal the Staff’s determination to delist its securities, but there can be no assurance the Staff would grant our request for continued listing. If we fail to meet these requirements, including the Bid Price Requirement, Nasdaq may notify us that we have failed to meet the minimum listing requirements and initiate the delisting process. If our common stock is delisted, this would, among other things, substantially impair our ability to raise additional funds to fund our operations, to advance the development of evofosfamide and/or to acquire or in-license additional product candidates or development programs, and could result in the loss of institutional investor interest and fewer development opportunities for us.

If we are unable to secure additional funding on a timely basis or on terms favorable to us, we may be required to cease or reduce any product development activities, to conduct additional workforce reductions, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. Insufficient funds may require us to delay, scale back, or eliminate some or all of our activities, and if we are unable to obtain additional funding, there is uncertainty regarding our continued existence.

Obligations and Commitments

We leased certain of our facilities under noncancelable leases, which qualify for operating lease accounting treatment under ASC 840, “Leases,” and, as such, these facilities are not included on our unaudited condensed consolidated balance sheets.

During the three months ended March 31, 2017, there have been no significant changes in our payments due under contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, which we filed with Securities and Exchange Commission on March 27, 2017.

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Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For further information on our critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2016, which we filed with the SEC on March 27, 2017.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update regarding revenue from customer contracts to transfer goods and services or non-financial assets unless the contracts are covered by other standards (for example, insurance or lease contracts). Under the new guidance, an entity should recognize revenue in connection with the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of the update by one year, with early adoption on the original effective date permitted. The updates are effective for us beginning in the first quarter of the fiscal year 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.

In November 2015, the FASB issued an accounting standard update for the presentation of deferred income taxes. Under this new guidance, deferred tax liabilities and assets should be classified as noncurrent in a classified balance sheet. The update is effective for us beginning in the first quarter of fiscal year 2018 with early adoption permitted as of the beginning of an interim or annual reporting period. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. We are currently evaluating the impact the standard will have on our financial statements.

In February 2016, the FASB issued an accounting standard update, which requires the recognition of lease assets and lease liabilities arising from operating leases in the statement of financial position. We will adopt the standard effective the first quarter of 2019 and do not anticipate that this new accounting guidance will have a material impact on our consolidated statement of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable Securities and Exchange Commission regulations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the three months ended March 31, 2017, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our annual report on Form 10-K for the year ended December 31, 2016.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

We have carried out an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation as of March 31, 2017, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal controls over financial reporting.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Limitations on the effectiveness of controls.

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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 Threshold Pharmaceuticals, Inc. have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of 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 control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and we cannot be certain 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 the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation, that our disclosure controls and procedures were effective as of March 31, 2017 to provide reasonable assurance that the objectives of our disclosure control system were met.

 

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P ART II. OTHER INFORMATION

ITEM 1A. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 1B. RISK FACTORS

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should refer to the other information contained in this annual report on Form 10-Q, including our condensed consolidated financial statements and related notes.

Risks Related to Our Business

Our strategic transaction with Molecular Templates may not be consummated or may not deliver the anticipated benefits we expect.  

In March 2017, we entered into a Merger Agreement with Molecular Templates pursuant to which the shareholders of Molecular Templates will become the majority owners of Threshold. In addition the proposed $20 million commitment from Longitude is subject to certain conditions, including the closing of the Merger and the Company having secured commitments from additional investors for the purchase of an additional $20 million of such securities (the “Financing”).  The Merger, however, is not conditioned upon the closing of the Financing.  We are devoting substantially all of our time and resources to consummating the Merger and the Financing, however, there can be no assurance that such activities will result in the consummation of the Merger and the Financing or that such transaction will deliver the anticipated benefits or enhance shareholder value.  We cannot assure you that we will complete the Transaction in a timely manner or at all. The Merger Agreement is subject to many closing conditions and termination rights. If the Merger does not occur, our board of directors may elect to attempt to complete another strategic transaction similar to the Merger and the Financing.  Attempting to complete another similar strategic transaction will be costly and time-consuming, and we cannot make any assurances that a future strategic transaction will occur on terms that provide the same or greater opportunity for potential value to our stockholders, or at all. If we are unable to close another strategic transaction and unable to successfully obtain funding for the continued development of evofosfamide and/or partner TX-3424 or HX4, our board of directors may determine to sell or otherwise dispose of our various assets, and distribute any remaining cash proceeds to our stockholders. In that event, the Company would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, there would be no assurances as to the amount or timing of available cash remaining to distribute to stockholders after paying its obligations and setting aside funds for reserves.

Prior to September 2016, our business was almost entirely dependent on the success of evofosfamide and tarloxotinib, and we have suspended further clinical development of tarloxotinib.

Prior to September 2016, we invested substantially all of our efforts and financial resources in the research and development of evofosfamide and tarloxotinib. In December 2015, we announced topline results from two pivotal Phase 3 clinical trials of evofosfamide: TH-CR-406 conducted by Threshold in patients with soft tissue sarcoma and MAESTRO conducted by Merck KGaA, Darmstadt, Germany (“, or Merck KGaA”), in patients with advanced pancreatic cancer; and that neither trial met its primary endpoint of demonstrating a statistically significant improvement in overall survival.  In March 2017, we received minutes from the Company’s formal meeting with the PMDA indicating that the Company’s analysis of the data from the randomized Phase III study, EMR200592-001 (N=693), conducted under a Special Protocol Agreement with the FDA, and the data from the supporting randomized Phase II study, TH-CR-404 (N=214),would not provide adequate efficacy data to support the submission of a New Drug Application (“JNDA”) for evofosfamide for the treatment of patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy.  In September, 2016, the Company announced that its Phase 2 proof-of-concept trial evaluating tarloxotinib bromide for the treatment of patients with mutant EGFR-positive, T790M-negative advanced non-small cell lung cancer(NSCLC) progressing on an EGFR tyrosine kinase inhibitor (TH-CR-601) did not achieve its primary interim response rate endpoint. We are conducting only limited evofosfamide development activities and have suspended all further development of tarloxotinib.

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If we are unable to consummate the Merger with Molecular Templates, there can be no assurance that we will conduct drug development activities in the future.  Pharmaceutical product development is a highly speculative undertaki ng and involves a substantial degree of risk. To date, we have focused substantially all of our efforts on our research and development activities on our lead product candidate, evofosfamide. To date, we have not commercialized any products or generated an y revenue from product sales. We are not profitable and have incurred losses in each year since our inception in 2001, and we do not know whether or when we will become profitable. We have only a limited operating history upon which to evaluate our busines s and prospects. We continue to incur significant development and other expenses related to our ongoing operations. Our net loss for the quarter ended March  31, 201 7 was $ 5.1  million and as of March  31, 201 7 , we had an accumulated deficit of $35 8.6  million . To date, we have financed our operations primarily through the sale of equity securities and debt facilities. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equit y and/or debt financings and strategic collaborations. It will be several years, if ever, before evofosfamide is ready for commercialization.

Our history of net losses and our expectation of future losses, together with our limited operating history, may make it difficult to evaluate our current business and predict our future performance. In addition, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our stock price to decline.

We may not be able to complete the Merger, and we may not have sufficient funds to pursue another strategic transaction similar to such merger.

We cannot be sure that we will be able to complete the Merger in a timely manner, or at all. The Merger Agreement is subject to many closing conditions and termination rights.

If the Merger with Molecular Templates is not consummated, we may require substantial additional funding to operate.    

Our future capital requirements will depend on many factors, including:  

 

our ability to identify and consummate a new strategic transaction for the company;

 

the timing and nature of any new strategic transactions that we undertake, including, but not limited to potential joint developments or partnerships;

 

whether, as a result of our strategic and financial review with a financial advisor we enter into a new partnership or business combination;

 

the time and cost necessary to obtain regulatory approvals for evofosfamide and the costs of post-marketing studies that could be required by regulatory authorities;

 

our ability to successfully commercialize evofosfamide;

 

our ability to establish and maintain collaboration partnerships, in-license/out-license or other similar arrangements and the financial terms of such agreements;

 

the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of evofosfamide or any other future product candidates; and

 

the cost incurred in responding to disruptive actions by activist stockholders.

Until such time, if ever, as we can generate substantial revenue, we would need to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding and licensing or collaboration arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

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Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to curtail our operations .

If we do not successfully consummate the Merger with Molecular Templates, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that we can successfully consummate the Merger with Molecular Templates.  If the transaction is not completed, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as we fund our operations in preparation for the consummation of the transaction with Molecular Templates.  Further, the Merger Agreement with Molecular Templates contains certain termination rights for each party, and provides that, upon termination under specified circumstances, we may be required to pay Molecular Templates a termination fee of $750,000 and to reimburse certain fees and expenses incurred by Molecular Templates which would further decrease our available cash resources.  If our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations remaining under our evofosfamide trial; (ii) obligations under our employment and separation agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of our company; and (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business.  As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company.

If the merger is not completed, and we would need to raise significant capital to support our operations, and successfully develop and complete clinical trials for our existing drug candidate, or acquire and develop other products or product candidates at all or on commercially reasonable terms.

Given the limited development of evofosfamide, our limited cash resources, and the additional capital and resources that would be required to pursue such development, if the Merger is not completed, we could be required to rely on securing a collaborative or strategic arrangement for one of our existing drug candidates to support our operations and our future development and clinical trial costs. Due to our history, limited cash resources, limited operational and management capabilities and the intense competition for pharmaceutical product candidates, even if we generate interest in a collaborative or strategic arrangement to support the further development of one of our drug candidates, we may not be able to enter into a final agreement on commercially reasonable terms, on a timely basis or at all. Proposing, negotiating and implementing an economically viable collaborative or strategic arrangement is a lengthy and complex process. As of March 31, 2017, Threshold had cash and cash equivalents totaling $17.6 million. The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note. Threshold believes that its current cash and cash equivalents will only be sufficient to fund its operations through next twelve months. Threshold competes for collaborative arrangements and license agreements with the drug candidates and technology developed by other pharmaceutical and biotechnology companies and academic research institutions. Threshold's competitors may have stronger relationships with third parties with whom they may be interested in collaborating, or which have greater financial, development and commercialization resources and/or more established histories of developing and commercializing products than Threshold. As a result, competitors may have a competitive advantage over Threshold in entering into collaborative arrangements with such third parties. In addition, even if Threshold enters into a collaborative or strategic arrangement, the arrangement may not provide Threshold with sufficient funds to support its operations and there is no assurance that its drug candidates would satisfy the development and/or clinical milestones established in the collaborative or strategic arrangement. Further, any drug candidate Threshold pursues will require additional development and regulatory efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and other non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities and the possibility that, due to strategic considerations, Threshold will discontinue research or development with respect to a product candidate for which it has already incurred significant expense. Even if the product candidates are approved, Threshold cannot be sure that they would be capable of economically feasible production or commercial success.

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If we do not successfully complete the Merger, we will require substantial additional funding in the event to continue our operations, and will need to curtail operations if we have insufficient capital.

Threshold had cash and cash equivalents of $17.6 million at March 31, 2017. The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note. Threshold believes that its current cash and cash equivalents will only be sufficient to fund its operations through next twelve months unless Threshold sells additional shares of its common stock through its ATM Sales Agreement or otherwise.    Based on the development and clinical status of its existing drug candidates, Threshold expects its negative cash flows from operations to continue for the foreseeable future.

As such, if the Merger is not consummated, our future capital requirements will depend on many factors, including:

 

our ability to identify, negotiate and consummate an alternate strategic transaction; 

 

our ability to secure a collaborative or licensing arrangement on commercially reasonable terms, on a timely basis or at all; 

 

the timing and nature of any future strategic transactions that Threshold undertake;

 

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; 

 

the effect of competing technological and market developments; and

 

the cost incurred in responding to disruptive actions by activist stockholders.

There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us or our stockholders. As a result, if Threshold is unable complete the merger or otherwise raise funds to satisfy its capital needs on a timely basis, there can be no assurance that Threshold will be able to continue to operate its business beyond the next twelve months.

We are substantially dependent on our remaining employees to facilitate the consummation of a Merger.

 

Threshold’s ability to successfully complete the merger  depends in large part on Threshold’s ability to retain Threshold’s remaining personnel, particularly Wilfred E. Jaeger, M.D., Threshold’s Interim Chief Executive Officer, Kristen Quigley, Threshold’s Vice President of Clinical Operations, and Joel Fernandes, Threshold’s Senior Vice President of Finance. However, despite Threshold’s efforts to retain these members of Threshold’s management, one or more may terminate their employment with Threshold on short notice. The loss of the services of any of these employees could potentially harm Threshold’s ability to consummate the merge r , as well as fulfill Threshold’s reporting obligations as a public company.

 

Risks Related to the Merger 

The exchange ratio is not adjustable based on the market price of the Company’s common stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.

The Merger Agreement has set the exchange ratio for the Molecular Templates common stock, and the exchange ratio is only adjustable upward or downward if the net cash of the Company changes, prior to completion of the Merger. Any changes in the market price of Threshold common stock before the completion of the Merger will not affect the number of shares Molecular Templates security holders will be entitled to receive pursuant to the Merger Agreement.

Failure to complete the Merger may result in us paying a termination fee or reimbursing expenses to Molecular Templates and could harm the price of our common stock.

If the merger is not completed, we are subject to the following risks:

 

if the Merger Agreement is terminated under certain circumstances, we will be required to pay a termination fee of $750,0000 and reimburse certain transaction fees expenses incurred by Molecular Templates;

 

the price of our stock may decline and remain volatile; and

 

costs related to the merger, such as financial advisor, legal and accounting fees, some which must be paid even if the Merger is not completed. 

In addition, if the Merger is not consummated and Molecular Templates were to be unable to repay the $2.0 million bridge loan we made to Molecular Templates in connection with the execution of the Merger Agreement, we would be an unsecured creditor of Molecular Templates.  Moreover, our bridge loan is effectively subordinated to Molecular Templates’ secured debt.

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In addition, if the Merger Agreement is terminated and our board of directors determines to seek another strategic transaction, there can be no a ssurance that we will be able to find a partner willing to proscribe equivalent or more attractive value to us than the value proscribed by Molecular Templates in the Merger Agreement.  Any termination or inability to complete the Merger could result in a significant decline in our stock price and could have a material adverse effect on our business. 

 

If the conditions to the Merger are not met, the Merger may not occur.

 

Even if the M erger is approved by the stockholders of Molecular and the related share issuance is approved by the Threshold stockholders, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the M erger A greement. Threshold and Molecular cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger may not occur or will be delayed, and Threshold and Molecular each may lose some or all of the intended benefits of the M erger.

 

The completion of the Merger is not conditioned upon Threshold holding a minimum amount of net cash at the effective time of the Merger.

 

While the M erger A greement provides that the exchange ratio may be adjusted upward or downward depending on variations in Threshold’s net cash determined shortly prior to the closing of the merger, the merger agreement does not condition the completion of the merger upon Threshold’s holding a minimum amount of net cash at the effective time of the merger. If Threshold has less cash at the time of the merger than the parties currently expect, the combined company will need to raise substantial additional capital sooner than expected. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on the financial condition of the combined company and its ability to develop product candidates. If the combined company is unable to obtain funding on a timely basis, it may be required to delay or discontinue one or more of its development programs or the commercialization of any product candidates or be unable to expand its operations or otherwise capitalize on potential business opportunities, which could materially harm its business, financial condition, and results of operations.

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either we or Molecular Templates can refuse to complete the merger if there is a material adverse change affecting the other party between March 16, 2017, the date of the Merger Agreement and the closing. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on us or Molecular Templates, including:

 

any effect resulting from the execution, delivery, announcement or performance of obligations under the Merger Agreement or the announcement or pendency or anticipated consummation of the merger or any related transactions;

 

any natural disaster or any act of terrorism, sabotage, military action or war (whether or not declared) or escalation or any worsening thereof;

 

any change in United States generally accepted accounting principles or any change in applicable laws, rules or regulations or the interpretation thereof; 

 

any conditions generally affecting the industries in which Molecular Templates and Threshold and their respective subsidiaries participate or the United States or global economy or capital markets as a whole to the extent such conditions do not have a disproportionate impact on Molecular Templates or Threshold and their respective subsidiaries, as applicable;

 

any failure by Molecular Templates or Threshold to meet internal projections of forecasts or third-party revenue or earnings predictions for any period ending on or after the date of the Merger Agreement; or

 

the resignation or termination of a key director or officer of Molecular Templates or Threshold.

If adverse changes occur and Threshold and Molecular Templates still complete the merger, the combined organization stock price may suffer. This in turn may reduce the value of the merger to the stockholders of Threshold, Molecular Templates or both.

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While Threshold and Molecular have received commitmen t s for t he purchase of $40.0 million in equity securities of the combined company, consummation of the concurrent financing is subject to conditions and is not a condition to closing the merger. If Molecular and Threshold complete the merger, but they do not complete the concurrent financing, then the combined company may need to raise additional capital by issuing securities or debt or through licensing arrangements, which may be on worse commercial terms than the concurrent financing, cause significant dilution to the combined company’s stockholders, restrict the combined company’s operations or require the combined company to relinquish proprietary rights.

 

Threshold and Molecular have received from Longitude Venture Partners III, L.P., or Longitude, an equity commitment letter, pursuant to which, immediately following the closing of the merger, Longitude will purchase $20.0 million of equity securities in the combined company. Longitude’s investment is subject to certain conditions, including the closing of the merger and the parties’ having secured commitments from additional investors for the purchase of an additional $20.0 million of such securities, which minimum condition has been satisfie d . The closing of the merger is not contingent upon the completion of this financing. Holders of equity in the combined company immediately following the merger will experience significant dilution as a result of the closing of the concurrent financing, which, assuming the conditions to the closing of the concurrent financing are satisfied, will take place immediately following the completion of the merger. Since the concurrent financing is subject to conditions and is not a condition to the merger, Molecular and Threshold may complete the merger but not the concurrent financing. If this were to occur, the combined company would have substantially less funds than Molecular and Threshold currently anticipate and may be required to raise additional funds sooner than currently planned.

 

Additional financing may not be available to the combined company when it needs it or may not be available on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, the terms of such an issuance may be on worse commercial terms than the concurrent financing and may cause more significant dilution to the combined company’s stockholders’ ownership, and the terms of any new equity securities may have preferences over the combined company’s common stock. Any debt financing the combined company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing <