HGEN Humanigen Inc

You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Annual Report”). This Quarterly Report on Form 10-Q contains statements that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. These statements may relate to, among other things, our expectations regarding the scope, progress, timing, expansion, and costs of researching, developing and commercializing our product candidates; our expectations relating to regulatory pathways to marketing authorization and the opportunity to benefit from various regulatory incentives; expectations for our financial results, revenue, operating expenses and other financial measures in future periods; the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements; and our exploration of strategic alternatives. Among the factors that could cause actual results to differ materially are the factors discussed under “Risk Factors” in “Part I, Item 1A - Risk Factors” in the 2022 Annual Report, and the additional or modified risk factors disclosed in this Quarterly Report on Form 10-Q and each subsequently filed Quarterly Report on Form 10-Q. Some additional factors that could cause actual results to differ include:

These are only some of the factors that may affect the forward-looking statements contained in this Form 10-Q. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Risk Factors” in Item 1A of Part II below and in Part I, Item 1A of the 2022 Annual Report. You should review these risk factors, together, for a more complete understanding of the risks associated with an investment in our securities. However, we operate in a competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time-to-time. It is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Form 10-Q. You should be aware that the forward-looking statements contained in this Form 10-Q are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law.

Overview

We are a clinical stage biopharmaceutical company, developing our portfolio of proprietary Humaneered^® anti-inflammatory immunology and immuno-oncology monoclonal antibodies. Our proprietary, patented Humaneered technology platform is a method for converting existing antibodies (typically murine) into engineered, high-affinity human antibodies designed for therapeutic use, particularly with acute and chronic conditions. We have developed or in-licensed targets or research antibodies, typically from academic institutions, and then applied our Humaneered technology to optimize them. Our lead product candidate, lenzilumab, and our other product candidate, ifabotuzumab (“iFab”), are Humaneered monoclonal antibodies. Our Humaneered antibodies are closer to human antibodies than chimeric or conventionally humanized antibodies and have a high affinity for their target. In addition, we believe our Humaneered antibodies offer further important advantages, such as high potency, a slow off-rate and a lower likelihood to induce an inappropriate immune response or infusion related reaction.

We are focusing our efforts on the development of our lead product candidate, lenzilumab. Lenzilumab is a monoclonal antibody that has been demonstrated to neutralize human granulocyte-macrophage colony-stimulating factor (“GM-CSF”), a cytokine that we believe leads to the overproduction of monocytes which are responsible for CMML, a rare blood cancer and is of critical importance in aGvHD associated with bone marrow transplants.

We are currently developing lenzilumab in CMML for which the Precision Approach to Chronic Myelomonocytic Leukemia (“PREACH-M”) study is underway, and we are continuing plans for the Risk Adapted Therapy in Acute GvHD (“RATinG”) study in aGvHD, as these studies are majority funded by our partners.

In April 2023, we announced that as of December 31, 2022, eleven subjects had been dosed with lenzilumab and with current standard of care, azacytidine, in the PREACH-M study. Six subjects were evaluable based on at least three months of follow-up, including those with high risk CMML, and all demonstrated clinical benefit. In addition, lenzilumab appeared to be well-tolerated. We anticipate the first patient dosing in the RATinG study to occur in the second quarter of 2023.

A leading network of centers, The Mayo Clinics, is currently progressing with an IIT of lenzilumab in combination with CAR-T therapies. We are also developing iFab, an EpAh-3 targeted monoclonal antibody, currently in Phase 1 development, as part of an antibody drug conjugate (“ADC”), for certain solid tumors.

Recent Developments

Our current capital resources are not sufficient to fund our operations for the remainder of 2023. Accordingly, as previously disclosed, we have been pursuing strategic alternatives and seeking to raise additional capital and settle or otherwise resolve payment disputes and other ongoing arbitration and litigation.

As previously reported, during 2022 we engaged SC&H Capital, an affiliate of SC&H Group, (“SC&H”) to advise us on exploration of strategic options. SC&H is an investment banking and advisory firm providing merger and acquisition (M&A), financial restructuring and related business advisory solutions. SC&H has acted as our advisor as we explore strategic options to maximize value around lenzilumab and ifabotuzumab. We also have considered and pursued a full range of options to raise additional capital and to address, satisfy, defer or restructure our accounts payable and accrued liabilities to manufacturing and other parties.

We have executed a non-binding letter of intent and are engaged in exclusive negotiations relating to a proposed business combination with a privately held biopharmaceutical company (the “Partner Company”). The proposed terms for the business combination contemplate a tax-free stock-for-stock merger, as a result of which we would issue shares of our capital stock to stockholders of the Partner Company which are expected to represent roughly two times the number of our currently outstanding shares of common stock.

We cannot assure you that we and the Partner Company will enter into a definitive agreement for the proposed transaction, and the final form and terms of any such transaction may be materially different from the terms described above. Our ability to enter into a definitive agreement is subject to conditions, including that we have received binding commitments for investment of additional capital that will be necessary to fund the operations of the combined company going forward and enable the combined company to maintain a listing of its common stock on the Nasdaq Capital Market or another national securities exchange, as well as customary matters such as approval of the terms of the definitive agreement by the Partner Company’s board of directors and stockholders. Certain of these conditions will be out of our control. Accordingly, we cannot provide any assurance that we will effect the proposed business combination or related financing transactions. If we are unable to complete the proposed transactions or identify and complete another strategic or financing transaction in the first half of 2023, we may elect or be required to pursue a reorganization or seek other protection under the federal bankruptcy code. See Part I, Item 1A, “Risk Factors” to the 2022 Annual Report.

Our Pipeline

Our product candidates are in the clinical stage of development and require substantial time, resources, research and development, and regulatory approval prior to commercialization. Our pipeline is depicted below:

Nasdaq Listing Deficiencies

As previously reported, we have received two notices from The Nasdaq Stock Market, LLC (“Nasdaq”) regarding our failures to satisfy the $1 minimum bid price and $35 million total market value of listed securities standards for continued listing. On April 18, 2023, we were notified that we had been granted an extension until August 21, 2023 to demonstrate compliance with all applicable requirements for listing of our common stock on Nasdaq by the Nasdaq Hearings Panel (the “Panel”), subject to our compliance with the Panel’s requirements for periodic updates relating to the status of our progress against achievement of the compliance plan presented at the April 6, 2023 hearing with the Panel. There can be no assurance that we will be successful in our execution of the compliance plan or otherwise regain compliance with the applicable Nasdaq listing requirements within the extended compliance period. In addition, our common stock may be subject to immediate delisting from the Nasdaq Capital Market if our common stock has a closing bid price of $0.10 or less for any ten consecutive trading days. See Part I, Item 1A, “Risk Factors” to the 2022 Annual Report.

Critical Accounting Policies and Use of Estimates

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

There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended March 31, 2023, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in the 2022 Annual Report.

Results of Operations

At March 31, 2023, we had an accumulated deficit of $686.0 million, primarily as a result of research and development and general and administrative expenses. Since inception, we have recognized a nominal amount of revenue from payments for license or collaboration fees. While we may in the future generate additional revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates may never be successfully developed or commercialized and we may therefore never realize revenue from any product sales. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits. Our ability to continue as a going concern depends on our ability to attain a significant amount of additional financing, as more fully described under “—Liquidity and Capital Resources” below and in “Risk Factors” in the 2022 Annual Report.

Revenue

Revenue in the three months ended March 31, 2023 and 2022, represents license revenue under the license agreement (the “South Korea Agreement”) with KPM Tech Co., Ltd. (“KPM”) and its affiliate, Telcon RF Pharmaceutical, Inc. (together with KPM, the “Licensee”) described in more detail in Note 4 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. License revenue was $0.2 million for the three months ended March 31, 2023, as compared to $1.0 million for the three months ended March 31, 2022. The decrease in revenue for the three months ended March 31, 2023, compared to March 31, 2022, is due to a change in the length of the performance period in the third quarter of 2022, as described in more detail in Note 4 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Research and Development Expenses

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

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees, stock-based compensation charges, and travel costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project.

The following table shows our total research and development expenses for the three months ended March 31, 2023 and 2022:

Research and development expenses decreased by $16.5 million from $17.2 million for the three months ended March 31, 2022 to $0.7 million for the three months ended March 31, 2023. The decrease is primarily due to a $13.9 million decrease in lenzilumab manufacturing costs and a $2.6 million decrease in clinical trial expenses as the LIVE-AIR study has been completed.

We expect our development costs will decrease in 2023 as compared to 2022. In connection with our realignment to deemphasize the deployment of certain resources for the development of lenzilumab for COVID-19, with the exception of one lenzilumab batch in process, we have discontinued the manufacturing of lenzilumab and are consolidating the remaining inventory of lenzilumab bulk drug substance and drug product in a central location for potential future use. We believe we have sufficient drug product for our currently planned clinical trials.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs (including stock-based compensation), professional fees for legal and patent expenses, insurance, consulting, audit, investor relations costs, and other general operating expenses not otherwise included in research and development.

General and administrative expenses decreased by $0.6 million from $4.3 million for the three months ended March 31, 2022 to $3.7 million for the three months ended March 31, 2023. The decrease for the three months ended March 31, 2023, is primarily due to a reduction in headcount in 2023 as compared to 2022. We expect our overall general and administrative costs to continue to decrease as compared to 2022.

Interest Expense

Interest expense for the three months ended March 31, 2022 related to the Loan and Security Agreement with Hercules Capital as agent for its affiliates serving as lenders thereunder (the “Term Loan”). See Note 5 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on the Term Loan.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our common and preferred stock, debt financings, interest income earned on cash, and cash equivalents, and marketable securities, and borrowings against lines of credit, and with the proceeds under the South Korea Agreement. At March 31, 2023, we had cash and cash equivalents of $3.1 million. In the first quarter of 2022, we sold an aggregate of 5,926,748 shares of our common stock under the Sales Agreement for net proceeds of $18.4 million. No shares were sold under the Sales Agreement in the first quarter of 2023.

Net cash used in operating activities was $7.1 million and $19.4 million for the three months ended March 31, 2023 and 2022, respectively. Cash used in operating activities of $7.1 million for the three months ended March 31, 2023, primarily related to our net loss of $4.2 million, adjusted for non-cash items, such as $1.2 million in stock-based compensation, and a net change in operating assets and liabilities of $4.1 million.

Cash used in operating activities of $19.4 million for the three months ended March 31, 2022, primarily related to our net loss of $21.3 million, adjusted for non-cash items, such as $1.5 million in stock-based compensation, and a net change in operating assets and liabilities of $0.1 million.

There were no financing activities for the three months ended March 31, 2023. Net cash provided by financing activities was $18.4 million for the three months ended March 31, 2022 and consists of net proceeds received from the issuance of common stock in connection with the Sales Agreement with Cantor.

Liquidity and Manufacturing Commitments

As of March 31, 2023, we had cash and cash equivalents of $3.1 million; combined accounts payable and accrued expenses of $52.4 million, certain of which were in dispute; and manufacturing commitments of $1.8 million for the remainder of 2023 with no significant commitments, thereafter, as further described below (see “– Contracts”). We intend to seek to defer these disputed payment obligations, negotiate lower amounts or seek other courses of action, which may include legal recourse for the amounts in question. Our capital resources are not sufficient to fund our operations for the remainder of 2023.

Our ability to enter into a definitive agreement with the Partner Company for the strategic transaction described above is subject to numerous conditions, including (among others) that we have received binding commitments for investment of additional capital that will be necessary to enable us to fund the operations of the combined company going forward and enable the combined company to maintain a listing of its common stock on the Nasdaq Capital Market or another national securities exchange. We cannot provide any assurance that we will be able to raise sufficient funds to permit us to effect the proposed business combination. If we are unable to complete the proposed transactions or identify and complete another strategic or financing transaction in the first half of 2023, we may elect or be required to pursue a reorganization or seek other protection under the federal bankruptcy code. If the proposed business combination with the Partner Company and related financing is completed, we would expect to issue a significant number of shares of common stock and/or convertible equity securities to the stockholders of the Partner Company as discussed above and to new investors in the financing, each of which would have a significant dilutive effect on our existing stockholders.

See Part I, Item 1A, “Risk Factors” in the 2022 Annual Report for further discussion of the risks surrounding the proposed transaction and our company.  

Contracts

Eversana Agreement

On January 10, 2021, we announced that we had entered into a master services agreement (the “Eversana Agreement”) with Eversana Life Science Services, LLC (“Eversana”) pursuant to which Eversana will provide us with services in connection with the potential launch of lenzilumab.

On September 21, 2021, we notified Eversana that due to the Emergency Use Authorization status in the US, we were terminating the initial statement of work related to commercialization support of lenzilumab for the treatment of COVID-19 in the United States. Eversana disputed the termination notice and requested payment of approximately $4.5 million it asserted we owed for services rendered from April 1, 2021 to September 30, 2021. We have agreed in principle on a conditional resolution of the matters being disputed with Eversana and are negotiating a formal settlement agreement. See Note 9 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information.

Manufacturing Agreements

We entered into agreements with several CMOs to manufacture bulk drug substance (“BDS”) and fill/finish/drug product (“DP”) for our lenzilumab clinical trial activities. We also entered into agreements for packaging of the drug. These agreements provided for upfront amounts prior to commencement of manufacturing and progress payments through the course of the manufacturing process and payments for technology transfer. Certain of these CMOs were unsuccessful in their efforts to manufacture some batches of lenzilumab to our specifications for various reasons. We have amended, and in some cases canceled, certain of these agreements. In addition, we have sought to mitigate our financial commitments by ceasing additional manufacturing of lenzilumab in connection with our realignment plan and, more recently, we have settled our disputes with two of our CMOs. See Note 11 to the Consolidated Financial Statements in the 2022 Annual Report for more information on these settlement agreements.

We believe we have sufficient supply to conduct our contemplated clinical development efforts. We have discontinued the manufacturing of lenzilumab, with the exception of one batch in process at one of our CMOs, Catalent Pharma Solutions, LLC (“Catalent”). If we are unable to obtain regulatory approval for lenzilumab prior to the expiration of the shelf life at that time, the remaining inventory will not be available for commercial use.

There is significant drug product that was in production at one of our other CMOs, Thermo Fisher Scientific, Inc. (“Thermo”), for which material has not yet been released by us because the batches produced are out of specification. Nonetheless, Thermo has notified us that they have stopped production and have recently filed a lawsuit against us in Delaware Superior Court for $25.9 million. We have filed a countersuit against Thermo for breach of contract seeking more than $37.5 million. We have agreed in principle on a conditional resolution of the matters being disputed with Thermo and are negotiating a formal settlement agreement. See Note 9 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information.

Please see our Form 10-K for the year ended December 31, 2022, Part I, Item 1A - Risk Factors—“Risks Related to our Financial Condition, Need for Additional Capital and Ability to Continue as a Going Concern— Currently pending, threatened or future litigation, arbitration, governmental proceedings or inquiries could result in material adverse consequences, including judgments or settlements, and adversely affect our ability to continue as a going concern.”

License Agreements

We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones.

We record upfront and milestone payments made to third parties under licensing arrangements as an expense. Upfront payments are recorded when incurred and milestone payments are recorded when the specific milestone has been achieved.

Outlicensing Agreements

The South Korea Agreement

On November 3, 2020, we entered into a License Agreement (the “South Korea Agreement”) with KPM and Telcon (together, the “Licensee”). Pursuant to the South Korea Agreement, among other things, we granted the Licensee a license under certain patents and other intellectual property to develop and commercialize our lead product candidate, lenzilumab (the “Product”), for treatment of COVID-19 pneumonia, in South Korea and the Philippines (the “Territory”), subject to certain reservations and limitations. The Licensee will be responsible for gaining regulatory approval for, and subsequent commercialization of, lenzilumab in those territories.

As consideration for the license, the Licensee has agreed to pay us (i) an up-front license fee of $6.0 million (or $4.5 million net of withholding taxes and other fees and royalties), payable promptly following the execution of the License Agreement, which was received in the fourth quarter of 2020, (ii) up to an aggregate of $14.0 million in two payments based on our achievement of two specified milestones in the US, of which the first milestone was met in the first quarter of 2021 and $6.0 million (or $4.5 million net of withholding taxes and other fees and royalties) was received in the second quarter of 2021, and (iii) subsequent to the receipt by the Licensee of the requisite regulatory approvals, double-digit royalties on the net sales of lenzilumab in South Korea and the Philippines. The Licensee has agreed to certain development and commercial performance obligations. It is expected that we will supply lenzilumab to the Licensee for a minimum of 7.5 years at a cost-plus basis from an existing or future manufacturer. The Licensee has agreed to certain minimum purchases of lenzilumab on an annual basis.

Indemnification

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.