Argos Therapeutics
ARGOS THERAPEUTICS INC (Form: 10-Q, Received: 08/14/2014 14:43:08)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
 
FORM 10-Q
_________________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 001-35443
 
ARGOS THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
56-2110007
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
4233 Technology Drive
Durham, North Carolina
27704
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (919) 287-6300
 
No changes
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
 
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   x     No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
 
As of August 8, 2014, there were 19,655,579 shares outstanding of the registrant’s common stock, par value $0.001 per share.
 
 
 

 
ARGOS THERAPEUTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2014
TABLE OF CONTENTS
 
 
   
   
   
   
   
 
 
 
 
 
 
 
 
 
 
 
 

 
PART I. FINANCIAL INFORMATION
 
Item  1. Financial Statements

ARGOS THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

   
December 31,
2013
   
June 30, 2014
 
Assets
           
Current assets
           
Cash and cash equivalents
 
$
33,297,970
   
$
44,307,394
 
Short-term investments
   
13,659,812
     
27,493,354
 
Prepaid expenses and interest receivable
   
629,935
     
818,581
 
Deferred financing costs
   
1,516,424
     
 
Other receivables
   
424,501
     
265,480
 
                 
Total current assets
   
49,528,642
     
72,884,809
 
Property and equipment, net
   
1,602,103
     
1,822,043
 
Other assets
   
550
     
11,020
 
                 
Total assets
 
$
51,131,295
   
$
74,717,872
 
                 
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity
               
Current liabilities
               
Accounts payable
 
$
1,317,072
   
$
2,243,058
 
Accrued expenses
   
1,800,794
     
1,470,397
 
Current portion of notes payable
   
45,447
     
46,170
 
                 
Total current liabilities
   
3,163,313
     
3,759,625
 
Long-term portion of notes payable
   
7,014,106
     
7,334,079
 
Deferred liability
   
3,066,000
     
3,066,000
 
Commitments
               
                 
Redeemable convertible preferred stock
   
113,664,469
     
 
Stockholders’ (deficit) equity
               
Preferred stock $0.001 par value; 5,000,000 and 0 shares authorized as of June 30, 2014 and December 31, 2013; 0 shares issued and outstanding as of June 30, 2014 and December 31, 2013
   
     
 
Common stock $0.001 par value; 120,000,000 and 200,000,000 shares authorized as of December 31, 2013 and June 30, 2014; 235,707 and 19,655,579 shares issued and outstanding as of December 31, 2013 and June 30, 2014
   
236
     
19,656
 
Accumulated other comprehensive loss
   
(102,531
)
   
(102,320
)
Additional paid-in capital
   
75,189,950
     
233,489,591
 
Accumulated deficit
   
(150,864,248
)
   
(172,848,759
)
                 
Total stockholders’ (deficit) equity
   
(75,776,593
)
   
60,558,168
 
                 
Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity
 
$
51,131,295
   
$
74,717,872
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
2

 
ARGOS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2014     2013    
2014
 
                         
Revenue
  $ 1,263,008     $ 473,163     $ 2,724,695     $ 1,271,951  
                                 
Operating expenses
                               
Research and development
    6,102,320       10,569,134       11,291,781       19,041,329  
General and administrative
    939,725       1,865,822       2,018,082       3,799,298  
                                 
Total operating expenses
    7,042,045       12,434,956       13,309,863       22,840,627  
                                 
Operating loss
    (5,779,037 )     (11,961,793 )     (10,585,168 )     (21,568,676 )
Other income (expense)
                               
Interest income
    367       21,260       2,134       37,670  
Interest expense
    (171 )     (171,604 )     (361 )     (346,436 )
Change in fair value of warrant liability
                355,352        
Investment tax credits
          140,556             140,556  
Other expense
          (11,950 )           (247,625 )
                                 
Other income (expense), net
    196       (21,738 )     357,125       (415,835 )
                                 
Net loss
    (5,778,841 )     (11,983,531 )     (10,228,043 )     (21,984,511 )
                                 
Accretion of redeemable convertible preferred stock
    (10,446 )           (75,386 )     (863,226 )
                                 
Net loss attributable to common stockholders
  $ (5,789,287 )   $ (11,983,531 )   $ (10,303,429 )   $ (22,847,737 )
                                 
Net loss attributable to common stockholders per share, basic and diluted
  $ (25.53 )   $ (0.61 )   $ (45.44 )   $ (1.52 )
                                 
Weighted average shares outstanding, basic and diluted
    226,757       19,655,187       226,757       15,041,501  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
ARGOS THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)

   
Three Months Ended June 30,
    Six Months Ended June 30,  
   
2013
    2014    
2013
   
2014
 
Net loss
  $ (5,778,841 )   $ (11,983,531 )   $ (10,228,043 )   $ (21,984,511 )
                                 
Other comprehensive gain (loss)
                               
Foreign currency translation adjustment
    (4,064 )     6,014       (7,216 )     4,511  
Unrealized gain (loss) on short-term investments
          250             (4,300 )
                                 
Total comprehensive loss
  $ (5,782,905 )   $ (11,977,267 )   $ (10,235,259 )   $ (21,984,300 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
ARGOS THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Six Months Ended June 30,
 
   
2013
   
2014
 
Cash flows from operating activities
           
Net loss
 
$
(10,228,043
)
 
$
(21,984,511
)
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
   
329,598
     
266,149
 
Compensation expense related to stock options
   
385,546
     
1,211,509
 
Decrease in fair value of warrant liability
   
(355,352
)
   
 
Issuance of restricted stock recorded as consulting expense
   
12,000
     
 
Gain on disposal of equipment
   
(50,433
)
   
(710
)
Changes in operating assets and liabilities:
               
Prepaid expenses and other receivables
   
122,666
     
(29,625
)
Deferred financing costs
   
     
(87,550
)
Other assets
   
     
(10,471
)
Accounts payable
   
938,313
     
925,986
 
Accrued expenses
   
171,217
     
16,040
 
                 
Net cash used in operating activities
   
(8,674,488
)
   
(19,693,183
)
                 
Cash flows from investing activities
               
Purchase of property and equipment
   
(363,746
)
   
(486,372
)
Proceeds from sale of fixed assets
   
50,433
     
1,000
 
Purchases of short-term investments
   
     
(17,955,747
)
Sales of short-term investments
   
4,148,871
     
 
Proceeds from maturity of short-term investments
   
     
4,117,905
 
                 
Net cash provided by (used in) investing activities
   
3,835,558
     
(14,323,214
)
                 
Cash flows from financing activities
               
Proceeds from sale of common stock
   
     
49,829,800
 
Stock issuance costs
   
     
(4,787,854
)
Payments on notes payable
   
(15,841
)
   
(25,740
)
Proceeds from exercise of common stock options
   
     
5,111
 
                 
Net cash (used in) provided by financing activities
   
(15,841
)
   
45,021,317
 
                 
Effect of exchange rates changes on cash
   
(7,102
)
   
4,504
 
Net (decrease) increase in cash and cash equivalents
   
(4,861,873
)
   
11,009,424
 
Cash and cash equivalents
               
Beginning of period
   
8,214,865
     
33,297,970
 
                 
End of period
 
$
3,352,992
   
$
44,307,394
 
                 
Supplemental disclosure of cash flow information
               
Cash paid for interest
 
$
361
   
$
3,195
 
Supplemental disclosure of noncash investing and financing activities
               
Conversion of preferred stock into common stock
 
$
   
$
114,527,695
 
Preferred stock accretion
 
$
75,386
   
$
863,226
 
Interest accrued on long-term debt
 
$
   
$
345,707
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1. Organization and Basis of Presentation
 
Argos Therapeutics, Inc. (the “Company”), was incorporated in the State of Delaware on May 8, 1997. The Company is a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on its proprietary technology platform called Arcelis. The Company’s most advanced product candidate is AGS-003, which the Company is developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. The Company is developing a second Arcelis-based product candidate, AGS-004, for the treatment of HIV.
 
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Accordingly, the statements do not include all information and footnotes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operations and cash flows for such periods. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014 or future operating periods. The information included in these interim financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Significant intercompany transactions and accounts have been eliminated.
 
Initial Public Offering
 
In February 2014, the Company issued and sold 6,228,725 shares of its common stock, including 603,725 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares, in the Company’s initial public offering, at a public offering price of $8.00 per share, for aggregate gross proceeds of $49.8 million. The net offering proceeds to the Company, after deducting underwriting discounts and commissions of approximately $3.5 million and offering expenses of approximately $2.9 million, were approximately $43.4 million. Upon the closing of the initial public offering, all of the then-outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 13,188,251 shares of common stock.
 
In connection with the initial public offering, the Company paid a former lender a $200,000 payment. This fee became due under a Loan and Security Agreement with two lending institutions in April 2007 for the purpose of borrowing $5,000,000 to be used for working capital. The Loan and Security Agreement terminated in April 2010 and we have repaid all amounts owing under the Loan and Security Agreement. In connection with the Loan and Security Agreement, the Company was required to pay a success fee of $200,000 upon consummation of a liquidity event, including an initial public offering. Accordingly, the Company paid this fee in March 2014. This fee was recorded in Other expense on the Condensed Consolidated Statements of Operations during the three months ended March 31, 2014.
 
Capitalization
 
In connection with the Company’s initial public offering in February 2014, the Company effected a one-for-six reverse split of its common stock. All references to shares of common stock outstanding, average number of shares outstanding and per share amounts in these consolidated financial statements and notes to consolidated financial statements have been restated to reflect the reverse split on a retroactive basis.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
6

 
Significant Accounting Policies

There have been no material changes in our significant accounting policies as of and for the three and six months ended June 30, 2014, as compared with the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013.

Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less as of the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States of America or Canada. The Company maintains cash in accounts which are in excess of federally insured limits. As of December 31, 2013 and June 30, 2014, $33,047,970 and $44,057,394, respectively, in cash and cash equivalents was uninsured.
 
Investment Tax Credits
 
Other income of $140,556 was recognized during the three months ended June 30, 2014 for scientific research and experimental development (“SR&ED”) investment tax credits in Canada. Under Canadian and Ontario law, the Company’s Canadian subsidiary is entitled to SR&ED. Because these credits are subject to a claims review, the Company recognizes such credits when received.

Recently Issued Accounting Pronouncements
 
In June 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update pertaining to disclosures for development stage entities. The new guidance eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders’ equity. The new standard is effective prospectively for annual reporting beginning after December 15, 2014, and interim periods within those annual periods, but early adoption is permitted. The Company adopted this new accounting standard during the three months ended June 30, 2014.

In May 2014, the FASB issued a new accounting standard update pertaining to accounting for revenue from contracts with customers. The new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, which is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

In July 2013, the FASB issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance became effective for the Company on January 1, 2014 and it was applied prospectively to unrecognized tax benefits that existed as of the effective date with retrospective application permitted. This updated standard did not have a material impact on the Company’s condensed consolidated financial statements.
 
2. Fair Value of Financial Instruments
 
The carrying values of cash and cash equivalents, prepaid expenses and interest receivable, other receivables, accounts payable and accrued expenses as of December 31, 2013 and June 30, 2014 approximated their fair values due to the short-term nature of these items.
 
As of December 31, 2013 and June 30, 2014, the Company held certain assets that are required to be measured at fair value on a recurring basis. These assets include money market funds included in cash equivalents and short-term investments. The valuation of these financial instruments uses a three tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
 
The Company’s Level 1 assets consist of money-market funds and the method used to estimate the fair value of the Level 1 assets is based on observable market data as these money-market funds are publicly-traded. The Company’s Level 2 assets consist of short-term debt instruments valued using independent pricing services which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based on significant observable transactions. As of each balance sheet date, observable market inputs may include trade information, broker or dealer quotes, bids, offers or a combination of these data sources.
 
 
7

 
As of December 31, 2013 and June 30, 2014, these financial instruments and respective fair values have been classified as follows:
 
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Balance as of
December 31,
2013
 
Assets
                       
Money-market funds
 
$
22,891,418
   
$
   
$
   
$
22,891,418
 
Short-term investments
   
     
13,659,812
     
     
13,659,812
 
                                 
Total assets at fair value
 
$
22,891,418
   
$
13,659,812
   
$
   
$
36,551,230
 
 
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Balance as of
June 30,
2014
 
Assets
                       
Money-market funds
 
$
43,894,164
   
$
   
$
   
$
43,894,164
 
Short-term investments
   
     
27,493,354
     
     
27,493,354
 
                                 
Total assets at fair value
 
$
43,894,164
   
$
27,493,354
   
$
   
$
71,387,518
 
 
During the three and six months ended June 30, 2014, there were no transfers between Levels 1 and 2 assets.
 
3. Property and Equipment
 
Property and equipment consist of the following:
 
   
December 31, 2013
   
June 30, 2014
 
Office furniture and equipment
 
$
528,732
   
$
452,819
 
Computer equipment
   
712,609
     
722,818
 
Computer software
   
540,809
     
542,344
 
Laboratory equipment
   
5,264,952
     
5,234,948
 
Leasehold improvements
   
2,719,033
     
2,849,265
 
                 
     
9,766,135
     
9,802,194
 
Less: Accumulated depreciation and amortization
   
 (8,164,032
)
   
(7,980,151
)
                 
Property and equipment, net
 
$
1,602,103
   
$
1,822,043
 
 
Depreciation and amortization expense was as follows:
 
Three months ended June 30, 2013
 
$
166,269
 
Three months ended June 30, 2014
 
$
135,997
 
Six months ended June 30, 2013
 
$
329,598
 
Six months ended June 30, 2014
 
$
266,149
 
 
4. Income Taxes
 
The Company has incurred net operating losses since inception and is forecasting additional losses through December 31, 2014. Therefore, no U.S. Federal, state or foreign income taxes are expected for 2014 and none have been recorded as of June 30, 2014.
 
Due to the Company’s history of losses since inception, there is not enough evidence at this time to support the conclusion that we will generate future income of a sufficient amount and nature to utilize the benefits of the Company’s net deferred tax assets. Accordingly, the Company fully reduced its net deferred tax assets by a valuation allowance, since it has been determined that it is more likely than not that all of the deferred tax assets will not be realized.

 
8

 
5. Notes Payable
 
The Company entered into a Master Lease Agreement in July 2012 with a lending institution, which provides for the Company to borrow funds up to $100,000 to finance computer equipment. Through June 30, 2014, the Company has borrowed $95,756 under this agreement, of which $48,429 and $32,432 was outstanding as of December 31, 2013 and June 30, 2014. Borrowings are collateralized by substantially all of the computer equipment financed under the agreement, bear interest at a rate of 0.98% and are to be repaid in 36 equal monthly installments commencing on the date of borrowing.
 
During November 2013, the Company borrowed $77,832 from a lending institution to finance the purchase of additional computer equipment, of which $74,658 and $68,109 was outstanding as of December 31, 2013 and June 30, 2014. Borrowings are collateralized by substantially all of the computer equipment financed under the agreement, bear interest at a rate of 8.31% and are to be repaid in 60 equal monthly installments commencing on the date of borrowing.
 
In December 2013, in connection with the license agreement with Medinet Co., Ltd., or Medinet, as described in Note 9, the Company borrowed $9.0 million pursuant to an unsecured promissory note that bears interest at a rate of 3.0% per annum. The principal and interest under the note are due and payable on December 31, 2018. Under the terms of the note and the license agreement, any milestone payments related to the developmental and regulatory milestones that become due will be applied first to the repayment of the loan. The Company has the right to prepay the loan at any time. If the Company has not repaid the loan by December 31, 2018, then the Company has agreed to grant to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing under the loan as of December 18, 2018 may constitute pre-paid royalties under the license or would be due and payable. Royalties under this license would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If the Company and Medinet cannot agree on the royalty rate, they have agreed to submit the matter to arbitration. Because the $9.0 million promissory note was issued at a below market interest rate, the Company allocated the proceeds of the loan between the license agreement and the debt at the time of issuance. Accordingly, as of December 31, 2013, the Company recorded $6.9 million to notes payable, based upon an effective interest rate of 8.0%, and $2.1 million as a deferred liability. As of June 30, 2014, the Company recorded $7.3 million to notes payable, including $343,241 accrued interest recorded during the six months ended June 30, 2014. The deferred liability was $2.1 million as of June 30, 2014.

6. Stockholders’ (Deficit) Equity and Redeemable Convertible Preferred Stock
 
Initial Public Offering and Conversion of Redeemable Convertible Preferred Stock into Common Stock
 
In February 2014, the Company issued and sold 6,228,725 shares of its common stock, including 603,725 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares, in the Company’s initial public offering, at a public offering price of $8.00 per share, for aggregate gross proceeds of $49.8 million. The net offering proceeds to the Company, after deducting underwriting discounts and commissions of approximately $3.5 million and offering expenses of approximately $2.9 million, were approximately $43.4 million.
 
Prior to the initial public offering, the Company had outstanding 1,040,216 shares designated as Series A redeemable convertible preferred stock, 9,803,688 shares designated as Series B redeemable convertible preferred stock, 28,716,679 shares designated as Series C redeemable convertible preferred stock, 21,040,817 shares designated as Series D redeemable convertible preferred stock and 56,011,258 shares designated as Series E redeemable convertible preferred stock. Upon the closing of the initial public offering on February 12, 2014, all of the outstanding shares of redeemable convertible preferred stock automatically converted into 13,188,251 shares of the Company’s common stock.
 
  The table below represents a rollforward of the preferred stock:
 
   
Series A Preferred
   
Series B Preferred
   
Series C Preferred
   
Series D Preferred
   
Series E Preferred
   
Total Preferred Stock
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
Balance as of December 31, 2013
   
1,040,216
   
$
332,869
     
9,803,688
   
$
5,521,437
     
28,716,679
   
$
2,655,884
     
21,040,817
   
$
33,262,492
     
56,011,258
   
$
71,891,787
     
116,612,658
   
$
113,664,469
 
Accretion
   
     
     
     
 —
     
     
 —
     
     
336,350
     
     
526,876
     
     
 863,226
 
Shares converted to common stock
   
(1,040,216
)
   
 (332,869
)  
   
(9,803,688
)
   
(5,521,437
)  
   
(28,716,679
)
   
(2,655,884
)  
   
(21,040,817
)
   
(33,598,842
)  
   
(56,011,258
)
   
(72,418,423
)  
   
(116,612,658
)
   
(114,527,455
)  
Stock issuance costs
   
     
     
     
 —
     
     
 —
     
     
 —
     
     
 (240
)  
   
     
(240
)  
                                                                                                 
Balance as of June 30, 2014
   
   
$
     
   
$
 —
     
   
$
 —
     
   
$
 —
     
   
$
 —
     
   
$
 
 
 
9

 
7. Stock Options and Warrants
 
2014 Stock Incentive Plan and 2014 Employee Stock Purchase Plan
 
In January 2014, the Company’s board of directors and stockholders approved, effective upon the closing of the Company’s initial public offering, the 2014 Stock Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for the purchase of that number of shares of Common Stock equal to the sum of 1,951,182 shares, plus such number of shares, up to 357,841 shares, as is equal to the sum of the number of shares reserved for issuance under the Company’s 2008 Stock Incentive Plan (the “2008 Plan”) that remained available for grant under the 2008 Plan immediately prior to the closing of the Company’s initial public offering on February 12, 2014 (381,250 shares) and the number of shares subject to outstanding awards under the 2008 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right, plus an annual increase, to be added on the first day of the 2015 fiscal year and each subsequent anniversary through January 1, 2024, equal to the lowest of 2,309,023 shares of Common Stock, 4% of the number of the Company’s outstanding shares on the first day of each such fiscal year and an amount determined by the Company’s board of directors.
 
Also in January 2014, the Company’s board of directors and stockholders approved, effective upon the closing of the Company’s initial public offering, a 2014 Employee Stock Purchase Plan (the “2014 ESPP”). Under the 2014 ESPP, on the offering commencement date of each plan period, the Company will grant to each eligible employee who is then a participant in the 2014 ESPP an option to purchase shares of Common Stock. The employee may authorize up to a maximum of 10% of his or her base pay to be deducted by the Company during the purchase plan period. Each employee who continues to be a participant in the 2014 ESPP on the last business day of the purchase plan period is deemed to have exercised the option, to the extent of accumulated payroll deductions within the 2014 ESPP ownership limits. Under the terms of the 2014 ESPP, the option exercise price shall be determined by the Company’s board of directors for each purchase plan period and the option exercise price will be at least 85% of the applicable closing price of the Common Stock.
 
The Company recorded the following stock-based compensation expense:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
   
2013
   
2014
   
2013
   
2014
Research and development
  $ 95,907     $ 309,202     $ 186,535     $ 617,393  
General and administrative
    97,577       319,271       199,011       594,116  
                                 
Total stock-based compensation expense
  $ 193,484     $ 628,473     $ 385,546     $ 1,211,509  
 
Allocations to research and development and general and administrative expense are based upon the department to which the associated employee reported. No related tax benefits of the stock-based compensation expense have been recognized. Stock-based payments issued to nonemployees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period.
 
During the three months ended June 30, 2013, the Company granted options to employees to purchase 124,878 shares of the Company’s common stock at an exercise price of $4.20 per share which was deemed the fair value per share of the Company’s common stock on the grant date. During the three months ended June 30, 2014, the Company granted options to employees to purchase a total of 617,378 shares of the Company’s common stock at exercise prices ranging from $6.62 to $9.28 per share which in each instance was the closing price of the Company’s common stock on the grant date.

During the six months ended June 30, 2013, the Company granted options to employees and a non-employee director to purchase a total of 154,973 shares of the Company’s common stock at an exercise price of $4.20 per share which was deemed the fair value per share of the Company’s common stock on the grant date. During the six months ended June 30, 2014, the Company granted options to employees and non-employee directors to purchase a total of 640,753 shares of the Company’s common stock at exercise prices ranging from $6.62 to $11.09 per share which in each instance was the closing price of the Company’s common stock on the grant date.
 
 
10

 
The following table summarizes the Company’s stock option activity during the six months ended June 30, 2014:
 
   
Number of
Shares
   
Weighted
Average Exercise
Price
   
Weighted
Average
Contractual
Term
(in years)
 
Outstanding as of December 31, 2013
   
1,957,069
   
$
5.48
       
Granted
   
640,753
   
$
6.83
       
Exercised
   
(1,217
)
 
$
4.20
       
Cancelled
   
(25,436
)
 
$
5.05
       
                       
Outstanding as of June 30, 2014
   
2,571,169
   
$
5.79
     
9.03
 
                         
Exercisable as of June 30, 2014
   
506,943
   
$
4.40
     
7.11
 
                         
Vested and expected to vest as of June 30, 2014
   
2,413,347
   
$
5.77
     
9.00
 
 
Valuation Assumptions for Stock Option Plans
 
The employee stock-based compensation expense recognized was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted average assumptions used were as follows for the periods indicated:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2014
   
2013
   
2014
 
Risk-free interest rate
    1.99 %     2.29 %     1.89 %     2.29 %
Dividend yield
    0 %     0 %     0 %     0 %
Expected option term (in years)
    7       7       7       7  
Volatility
    94 %     96 %     94 %     96 %

Warrants
 
During the six months ended June 30, 2014, warrants to purchase 9,598 shares of the Company’s common stock at $6.60 per share were settled in a cashless exercise for 1,679 shares of common stock in conjunction with the closing of the Company’s initial public offering on February 12, 2014.
 
Outstanding warrants to purchase the Company’s common stock as of June 30, 2014 were as follows:
 
Type of Warrant
 
Number of Warrants
   
Exercise Price
   
Expiration
Date(s)
Common stock
  1     $ 23,894.34    
7/13/16

8. Revenue and Concentration of Credit Risk
 
In September 2006, the Company entered into a multi-year research contract with the National Institute of Health (“NIH”) and the National Institute of Allergy and Infectious Diseases (“NIAID”) to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. The Company is using funds from this contract to develop AGS-004. Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $39.3 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $32.5 million and payment of other specified amounts totaling up to $1.4 million upon the Company’s achievement of specified development milestones. Since September 2010, the Company has received reimbursement of its allocated overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed to with the NIH and NIAID in September 2010. These provisional indirect cost rates are subject to adjustment based on the Company’s actual costs pursuant to the agreement with the NIH and NIAID. This commitment originally extended until May 2013. The Company agreed to an additional modification of the Company’s contract with the NIH and the NIAID under which the NIH and the NIAID agreed to increase their funding commitment to the Company by an additional $5.4 million in connection with the extension of the contract from May 2013 to September 2015, increasing the committed funds to $39.3 million. The Company has agreed to a statement of work under the contract, and is obligated to furnish all the services, qualified personnel, material, equipment, and facilities, not otherwise provided by the U.S. government, needed to perform the statement of work.

 
11

 
For the three months ended June 30, 2013 and 2014, the Company recorded revenue under this agreement of $1,263,008 and $473,163. For the six months ended June 30, 2013 and 2014, the Company recorded revenue under this agreement of $2,724,695 and $1,271,951. As of December 31, 2013 and June 30, 2014, the Company recorded a receivable from the NIH and NIAID of $424,501 and $265,480, respectively, and a payable to subcontractors of $27,925 and $37,302.
 
The Company’s grant revenue is earned under this contract with NIH and NIAID. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled balances and such risk is subject to the credit worthiness of the NIH and NIAID. There have been no credit losses under this arrangement.
 
9. Collaboration Agreements
 
Pharmstandard License Agreement
 
In August 2013, Pharmstandard International S.A. (“Pharmstandard”), purchased shares of the Company’s series E preferred stock. Concurrently with such purchase, the Company entered into an exclusive royalty-bearing license agreement with Pharmstandard. Under this license agreement, the Company granted Pharmstandard and its affiliates a license, with the right to sublicense, to develop, manufacture and commercialize AGS-003 and other products for the treatment of human diseases, which are developed by Pharmstandard using the Company’s personalized immunotherapy platform, in the Russian Federation, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, which the Company refers to as the Pharmstandard Territory. The Company also provided Pharmstandard with a right of first negotiation for development and commercialization rights in the Pharmstandard Territory to specified additional products the Company may develop.
 
Under the terms of the license agreement, Pharmstandard licensed the Company rights to clinical data generated by Pharmstandard under the agreement and granted the Company an option to obtain an exclusive license outside of the Pharmstandard Territory to develop and commercialize improvements to the Company’s Arcelis technology generated by Pharmstandard under the agreement, a non-exclusive worldwide royalty-free license to Pharmstandard improvements to manufacture products using the Company’s Arcelis technology and a license to specified follow-on licensed products generated by Pharmstandard outside of the Pharmstandard Territory, each on terms to be negotiated upon the Company’s request for a license. In addition, Pharmstandard agreed to pay the Company pass-through royalties on net sales of all licensed products in the low single digits until it has generated a specified amount of aggregate net sales. Once the net sales threshold is achieved, Pharmstandard will pay the Company royalties on net sales of specified licensed products, including AGS-003, in the low double digits below 20%. These royalty obligations last until the later of the expiration of specified licensed patent rights in a country or the twelfth anniversary of the first commercial sale in such country on a country by country basis and no further royalties on specified other licensed products. After the net sales threshold is achieved, Pharmstandard has the right to offset a portion of the royalties Pharmstandard pays to third parties for licenses to necessary third party intellectual property against the royalties that Pharmstandard pays to the Company.
 
The agreement will terminate upon expiration of the royalty term, upon which all licenses will become fully paid-up perpetual exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and the Company may terminate the agreement if Pharmstandard challenges or assists a third party in challenging specified patent rights of ours. If Pharmstandard terminates the agreement upon the Company’s material breach or bankruptcy, Pharmstandard is entitled to terminate the Company’s licenses to improvements generated by Pharmstandard, upon which the Company may come to rely for the development and commercialization of AGS-003 and other licensed products outside of the Pharmstandard Territory, and to retain its licenses from the Company and to pay the Company substantially reduced royalty payments following such termination.
 
In November 2013, the Company entered into an agreement with Pharmstandard under which Pharmstandard purchased additional shares of the Company’s series E preferred stock. Under this agreement, the Company agreed to enter into a manufacturing rights agreement for the European market with Pharmstandard and that the manufacturing rights agreement would provide for the issuance of warrants to Pharmstandard to purchase 499,788 shares of the Company’s common stock at an exercise price of $5.82 per share. The Company has not entered into this manufacturing rights agreement or issued the warrants. On February 12, 2014, all outstanding shares of our preferred stock converted into shares of our common stock upon the closing of our initial public offering.
 
Green Cross License Agreement
 
In July 2013, the Company entered into an exclusive royalty-bearing license agreement with Green Cross Corp. (“Green Cross”). Under this agreement the Company granted Green Cross a license to develop, manufacture and commercialize AGS-003 for mRCC in South Korea. The Company also provided Green Cross with a right of first negotiation for development and commercialization rights in South Korea to specified additional products the Company may develop.
   
Under the terms of the license, Green Cross has agreed to pay the Company $500,000 upon the initial submission of an application for regulatory approval of a licensed product in South Korea, $500,000 upon the initial regulatory approval of a licensed product in South Korea and royalties ranging from the mid-single digits to low double digits below 20% on net sales until the fifteenth anniversary of the first commercial sale in South Korea. In addition, Green Cross has granted the Company an exclusive royalty free license to develop and commercialize all Green Cross improvements to the Company’s licensed intellectual property in the rest of the world, excluding South Korea, except that, as to such improvements for which Green Cross makes a significant financial investment and that generate significant commercial benefit in the rest of the world, the Company is required to negotiate in good faith a reasonable royalty that the Company will be obligated to pay to Green Cross for such license. Under the terms of the agreement, the Company is required to continue to develop and to use commercially reasonable efforts to obtain regulatory approval for AGS-003 in the United States.
 
 
12

 
The agreement will terminate upon expiration of the royalty term, which is 15 years from the first commercial sale, upon which all licenses will become fully paid up perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and the Company may terminate the agreement if Green Cross challenges or assists a third party in challenging specified patent rights of ours. If Green Cross terminates the agreement upon the Company’s material breach or bankruptcy, Green Cross is entitled to terminate the Company’s licenses to improvements and retain its licenses from the Company and to pay the Company substantially reduced milestone and royalty payments following such termination.
 
Medinet License Agreement
 
In December 2013, the Company entered into a license agreement with Medinet. Under this agreement, the Company granted Medinet an exclusive, royalty-free license to manufacture in Japan AGS-003 and other products using the Company’s Arcelis technology solely for the purpose of the development and commercialization of AGS-003 and these other products for the treatment of mRCC. The Company refers to this license as the manufacturing license. In addition, under this agreement, the Company granted Medinet an option to acquire a nonexclusive, royalty-bearing license under the Company’s Arcelis technology to sell in Japan AGS-003 and other products for the treatment of mRCC. The Company refers to the option as the sale option and the license as the sale license.
 
Under the manufacturing license, if Medinet does not exercise the sale option, Medinet may only manufacture AGS-003 and these other products for the Company or its designee. If Medinet does not exercise the sale option, the Company and Medinet have agreed to negotiate in good faith a supply agreement under which Medinet would supply the Company or its designee with AGS-003 and these other products for development and sale for the treatment of mRCC in Japan. If Medinet exercises the sale option, it may only manufacture AGS-003 and these other products for itself, its related parties and its sublicensees. During the term of the manufacturing license, the Company may not manufacture AGS-003 or these other products for the Company or any designee for development or sale for the treatment of mRCC in Japan.
 
Medinet may exercise the option at any time until the earlier of December 31, 2015 and the date 30 days after the Company has provided Medinet with an interim report on the Company’s phase 3 clinical trial of AGS-003 following such time as 50% of the required events in the trial have occurred.
 
In consideration for the manufacturing license, Medinet paid the Company $1.0 million. Medinet also loaned the Company $9.0 million in connection with the Company entering into the agreement. The Company has agreed to use these funds in the development and manufacturing of AGS-003 and the other products. Medinet also agreed to pay the Company milestone payments of up to a total of $9.0 million upon the achievement of developmental and regulatory milestones and $5.0 million upon the achievement of a sales milestone related to AGS-003 and these products. If Medinet exercises the sale option, it will pay the Company $1.0 million, as well as royalties on net sales at a rate to be negotiated until the later of the expiration of the licensed patent rights in Japan and the twelfth anniversary of the first commercial sale in Japan. If the Company and Medinet cannot agree on the royalty rate, the Company and Medinet have agreed to submit the matter to arbitration.
 
In December 2013, in connection with the manufacturing license agreement with Medinet, the Company borrowed the $9.0 million pursuant to an unsecured promissory note that bears interest at a rate of 3.0% per annum. The principal and interest under the note are due and payable on December 31, 2018. Under the terms of the note and the manufacturing license agreement, any milestone payments related to the developmental and regulatory milestones that become due will be applied first to the repayment of the loan. The Company has the right to prepay the loan at any time. If the Company has not repaid the loan by December 31, 2018, then the Company has agreed to grant to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing under the loan as of December 18, 2018 may constitute pre-paid royalties under the license or would be due and payable. Royalties under this license would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If the Company and Medinet cannot agree on the royalty rate, Company and Medinet have agreed to submit the matter to arbitration. The Company recorded the $1.0 million payment from Medinet as a deferred liability. In addition, because the $9.0 million promissory note was issued at a below market interest rate, the Company allocated the proceeds of the loan between the manufacturing license agreement and the debt at the time of issuance. Accordingly, as of December 31, 2013, the Company recorded $6.9 million to notes payable, based upon an effective interest rate of 8.0%, and $2.1 million as a deferred liability. As of June 30, 2014, the Company recorded $7.3 million to notes payable, including $343,241 accrued interest recorded during the six months ended June 30, 2014. The deferred liability was $2.1 million as of June 30, 2014.

The agreement will terminate upon expiration of the royalty term, upon which all licenses will become fully paid up, perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy, and the Company may terminate the agreement if Medinet challenges or assists a third party in challenging specified patent rights of the Company. If Medinet terminates the agreement upon the Company’s material breach or bankruptcy, Medinet is entitled to terminate the Company’s licenses to improvements and retain its royalty-bearing licenses from the Company.
 
 
13

 
10. Net Loss Per Share
 
Basic and diluted net loss per common share was determined by dividing net loss attributable to common stockholders by the weighted average common shares outstanding during the period. The Company’s potentially dilutive shares, which include redeemable convertible preferred stock, common stock options and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

The following table presents the computation of basic and diluted net loss per share of common stock:
 
   
Three Months Ended
June 30,
   
Six Months Ended June 30,
 
   
2013
   
2014
   
2013
   
2014
 
Net loss
  $ (5,778,841 )   $ (11,983,531 )   $ (10,228,043 )   $ (21,984,511 )
Accretion of redeemable convertible preferred stock
    (10,446 )           (75,386 )     (863,226 )
                                 
Net loss attributable to common stockholders
  $ (5,789,287 )   $ (11,983,531 )   $ (10,303,429 )   $ (22,847,737 )
                                 
Weighted average common shares outstanding, basic and diluted
    226,757       19,655,187       226,757       15,041,501  
                                 
Net loss per share attributable to common stockholders, basic and diluted
  $ (25.53 )   $ (0.61 )   $ (45.44 )   $ (1.52 )
 
The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2014
   
2013
   
2014
 
Redeemable convertible preferred stock
    3,132,963             3,132,963       3,133,120  
Stock options outstanding
    579,057       2,045,730       562,023       1,991,521  
Warrants outstanding
    464,204       1       464,211       2,281  

 
14

 
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q,for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
 
Overview
 
We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Our most advanced product candidate is AGS-003, which we are developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. We are currently enrolling patients in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib (Sutent) for the treatment of clear cell mRCC under a special protocol assessment, or SPA, with the Food and Drug Administration, or FDA. We also plan to conduct phase 2 clinical trials to explore the use of AGS-003 in non-clear cell mRCC, in early stage RCC prior to and following nephrectomy, and in other solid tumors. We are developing our second Arcelis product candidate, AGS-004, for the treatment of HIV and are conducting a phase 2b clinical trial of AGS-004 that is being funded entirely by the National Institutes of Health, or NIH, under a $39.3 million contract. In addition, an investigator initiated phase 2 clinical trial of AGS-004 in adult HIV patients is ongoing to evaluate the use of AGS-004 in combination with a latency reversing drug for HIV eradication, and we expect to initiate a second phase 2 clinical trial of AGS-004 in the fourth quarter of 2014, to evaluate AGS-004 for long-term viral control in pediatric patients.
 
We have devoted substantially all of our resources to our drug development efforts, including advancing our Arcelis platform, conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue from product sales and, to date, have funded our operations primarily through private placements of our preferred stock, convertible debt financings, bank debt, government contracts, government and other third party grants and license and collaboration agreements. From inception in May 1997 through June 30, 2014, we have raised a total of $351.8 million in cash, including:
 
 
$215.3 million from the sale of our common stock, convertible debt, warrants and preferred stock;
 
 
$32.9 million from the licensing of our technology; and
 
 
$103.6 million from government contracts, grants and license and collaboration agreements.
 
In February 2014, we issued and sold 6,228,725 shares of our common stock, including 603,725 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares, in our initial public offering, at a public offering price of $8.00 per share, for aggregate gross proceeds of $49.8 million. The net offering proceeds to us, after deducting underwriting discounts and commissions of approximately $3.5 million and offering expenses of approximately $2.9 million, were approximately $43.4 million.
 
We have incurred losses in each year since our inception in May 1997. Our net loss was $10.2 million for the six months ended June 30, 2013 and $22.0 million for the six months ended June 30, 2014. As of June 30, 2014, we had an accumulated deficit of $172.8 million. Substantially all of our operating losses have resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.
 
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:
 
 
continue our ongoing phase 3 clinical trial of AGS-003 for the treatment of mRCC and initiate additional clinical trials of AGS-003 for the treatment of cancers;
 
 
initiate additional clinical trials of AGS-004 for the treatment of HIV;
 
 
seek regulatory approvals for our product candidates that successfully complete clinical trials;
 
 
lease, build out and equip a new commercial facility for the manufacture of our Arcelis-based products;
 
 
establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;
 
 
15

 
 
maintain, expand and protect our intellectual property portfolio;
 
 
continue our other research and development efforts;
 
 
hire additional clinical, quality control, scientific and management personnel; and
 
 
add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.
 
We do not expect to generate significant funds or product revenue, other than under our contract with the NIH as described below, unless and until we successfully complete development, obtain marketing approval and commercialize our product candidates, either alone or in collaboration with third parties, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of AGS-003, AGS-004 or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds through these means when needed, on favorable terms or at all.
 
Our Development Programs
 
The following table summarizes our development programs for AGS-003 and AGS-004.
 
Product Candidate
 
Primary Indication
 
     Status
AGS-003
 
mRCC (clear cell)
     
Ongoing pivotal phase 3 clinical trial; completion of tumor collection expected by the end of 2014 and enrollment and randomization in the first quarter of 2015; overall survival data expected in mid-2016
               
   
mRCC (non-clear cell)
     
Phase 2 clinical trial expected to be initiated in the fourth quarter of 2014
               
   
Early stage RCC
     
Two investigator-initiated phase 2 clinical trials expected to begin in the fourth quarter of 2014
               
   
Other solid tumors
     
Two phase 2 clinical trials expected to be initiated in the fourth quarter of 2014
               
AGS-004
 
HIV
     
Enrollment in phase 2b clinical trial complete; data expected in the third quarter of 2014
               
           
First stage of investigator-initiated clinical trial for HIV eradication began in May 2014
               
           
Clinical trial for long-term viral control in pediatric patients expected to be initiated in the fourth quarter of 2014
 
We hold all commercial rights to AGS-003 and AGS-004 in all geographies other than rights to AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, which we exclusively licensed to Pharmstandard International S.A., and rights to AGS-003 in South Korea, which we exclusively licensed to Green Cross Corp. We have granted to Medinet Co., Ltd., or Medinet, an exclusive license to manufacture in Japan AGS-003 for the treatment of mRCC and an option to acquire a non-exclusive license to sell in Japan AGS-003 for the treatment of mRCC

AGS-003

We are initially developing AGS-003 to be used in combination with sunitinib and other targeted therapies for first-line treatment of mRCC We are currently enrolling patients in our pivotal phase 3 ADAPT clinical trial of AGS-003 in combination with sunitinib compared to sunitinib monotherapy for the treatment of newly diagnosed mRCC under an SPA with the FDA. We plan to enroll approximately 450 intermediate and poor risk patients with mRCC that pathologists have classified as predominately clear cell. The primary endpoint of the trial is overall survival. As of July 31, 2014, we had collected tumor from approximately 530 patients for eligibility and had enrolled and randomized approximately 190 patients in the trial. We expect to complete tumor collection of patients by the end of 2014 and to complete enrollment and randomization of patients for the clinical trial in the first quarter of 2015. We have established an independent data monitoring committee that will conduct interim analyses of the trial data for safety and futility at such times as 25%, 50% and 75% of the required events for subjects randomized to the treatment phase of the trial have occurred.
 
 
16

 
We are also exploring the use of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors. We plan to initiate clinical trials of AGS-003 for the treatment of these indications in the fourth quarter of 2014.
 
AGS-004
 
We are developing AGS-004 for the treatment of HIV and plan to focus this program on the use of AGS-004 in combination with other therapies for the eradication of HIV. The current standard of care, antiretroviral drug therapy, can reduce levels of HIV in a patient’s blood, increase the patient’s life expectancy and improve the patient’s quality of life. However, antiretroviral drug therapy cannot eliminate the virus, which persists in latently infected cells, remains undetectable by the immune system and can recur. In addition, antiretroviral therapy requires daily, life-long treatment and can have significant side effects.
 
We believe that by combining AGS-004 with therapies that are being developed to expose the virus in latently infected cells to the immune system, we can potentially eradicate the virus. In May 2014, the first patient was enrolled in an investigator-initiated Phase 2 clinical trial of AGS-004 in up to twelve adult HIV patients to evaluate the use of AGS-004 in combination with one of these latency reversing therapies for this purpose that we are conducting in collaboration with the University of North Carolina.  As of July 31, 2014, we had enrolled five patients in the trial.  This trial is being conducted in two stages. Stage 1 of this trial is designed to study immune response kinetics to AGS-004 in patients on continuous ART therapy. The purpose is to better define the optimal dosing strategy in combination with a latency-reversing therapy. We plan for these patients to rollover into Stage 2, a separate protocol that will study AGS-004 in combination with one of the latency-reversing drugs. In January 2014, CARE ("Collaboratory of AIDS Researchers for Eradication") agreed that it would fund all patient clinical costs of this phase 2 clinical trial, except for the associated manufacturing costs for which we will be responsible. We also plan to explore the use of AGS-004 monotherapy to provide long-term control of HIV viral load in otherwise immunologically healthy patients and eliminate their need for antiretroviral drug therapy. Accordingly, we plan to initiate in the fourth quarter of 2014 a phase 2 clinical trial of AGS-004 monotherapy in pediatric patients infected with HIV who have otherwise healthy immune systems, have been treated with antiretroviral therapy since birth or shortly thereafter and, as a result, are lacking the antiviral memory T-cells to combat the virus.
 
In September 2013, we completed patient enrollment in our ongoing NIH-funded phase 2b clinical trial of AGS-004 in 53 HIV-infected patients. The primary endpoint of this trial is a comparison of the median viral load in AGS-004-treated patients with the median viral load in patients receiving placebo after 12 weeks of antiretroviral treatment interruption. Secondary endpoints of this trial include comparisons between AGS-004-treated patients and patients receiving placebo with respect to viral measurement changes from immediately prior to the commencement of antiretroviral therapy to the end of the planned treatment interruption, duration of treatment interruption, changes in CD4+ T-cell counts, an indicator of the health of the immune system, and assessment of increases in antiviral immunity between AGS-004 treated and placebo-treated patients. We designed this trial to confirm the data obtained in our phase 2a clinical trial and provide proof of concept of the ability of AGS-004 to induce an immune response to eliminate the cells responsible for viral replication. We expect to report data from this trial in the third quarter of 2014.
 
NIH Funding
 
In September 2006, we entered into a multi-year research contract with the NIH and the National Institute of Allergy and Infectious Diseases, or NIAID, to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We are using funds from this contract to develop AGS-004, including to fund in full our phase 2b clinical trial of AGS-004. We have agreed to a statement of work under the contract, and are obligated to furnish all the services, qualified personnel, material, equipment, and facilities, not otherwise provided by the U.S. government, needed to perform the statement of work.
 
Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $39.3 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $37.9 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This commitment extends to September 2015. Since September 2010, we have received reimbursement of our allocated overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed to with the NIH in September 2010. These provisional indirect cost rates are subject to adjustment based on our actual costs pursuant to the agreement with the NIH and may result in additional payments to us from the NIH and the NIAID to reflect our actual costs since September 2010.

We have recorded revenue of $36.3 million through June 30, 2014 under the NIH contract. This contract is the only arrangement under which we currently generate revenue. As of June 30, 2014, there was up to approximately $3.0 million of potential revenue remaining to be earned under the agreement with the NIH.

 
17

 
Results of Operations
 
Comparison of the Three and Six Months Ended June 30, 2013 and the Three and Six Months Ended June 30, 2014

The following table summarizes the results of our operations for the three and six months ended June 30, 2013 and 2014, together with the changes in those items in dollars and as a percentage:
 
   
Three Months Ended
June 30,
    $     %    
Six Months Ended
June 30,
    $     %  
   
2013
   
2014
   
Change
   
Change
    2013     2014    
Change
   
Change
 
   
(in thousands)
 
Revenue
  $ 1,263     $ 473     $ (790 )     (62.5 )%   $ 2,725     $ 1,272     $ (1,453 )     (53.3 )%
Operating expenses
                                                               
Research and development
    6,102       10,569       4,467       73.2 %     11,292       19,041       7,749       68.6 %
General and administrative
    940       1,866       926       98.5 %     2,018       3,800       1,782       88.3 %
                                                                 
Total operating expenses
    7,042       12,435       5,393       76.6 %     13,310       22,841       9,531       71.6 %
                                                                 
Loss from operations
    (5,779 )     (11,962 )     (6,183 )     107.0 %     (10,585 )     (21,569 )     (10,984 )     103.8 %
                                                                 
Interest income
          21       21       *       2       37       35       *  
Interest expense
          (172 )     (172 )     *             (346 )     (346 )     *  
Change in fair value of warrant liability
                      *       355             (355 )     *  
Investment tax credits
          141       141       *             141       141       *  
Other expense
          (12 )     (12 )     *             (248 )     (248 )     *  
                                                                 
Net loss
  $ (5,779 )   $ (11,984 )   $ (6,205 )     107.4 %   $ (10,228 )   $ (21,985 )   $ (11,757 )     114.9 %
 
_______________
*
Not meaningful
 
Revenue
 
To date, we have not generated revenue from the sale of any products. All of our revenue has been derived from government contracts and grants and payments under license and collaboration agreements. We may generate revenue in the future from government contracts and grants, payments from future license or collaboration agreements and product sales. We expect that any revenue we generate will fluctuate from quarter to quarter.
 
Substantially all of our revenue is currently derived from our NIH contract. Revenue was $1.3 million for the three months ended June 30, 2013, compared with $0.5 million for the three months ended June 30, 2014, a decrease of approximately $0.8 million, or 62.5%. The $0.8 million decrease for the three months ended June 30, 2014 is due to decreased reimbursement under our NIH contract associated with decreased activity with respect to our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined.

Revenue was $2.7 million for the six months ended June 30, 2013, compared with $1.3 million for the six months ended June 30, 2014, a decrease of approximately $1.4 million, or 53.3%. The $1.4 million decrease for the six months ended June 30, 2014 is due to decreased reimbursement under our NIH contract associated with decreased activity with respect to our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined.

Research and Development Expenses
 
Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:
 
 
18

 
 
salaries and related expenses for personnel in research and development functions;
 
 
fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;
 
 
allocation of facility lease and maintenance costs;
 
 
depreciation of leasehold improvements, laboratory equipment and computers;
 
 
costs related to production of product candidates for clinical trials;
 
 
costs related to compliance with regulatory requirements;
 
 
consulting fees paid to third parties related to non-clinical research and development;
 
 
costs related to stock options or other stock-based compensation granted to personnel in research and development functions; and
 
 
acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies.

The table below summarizes our direct research and development expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and clinical research organizations, including in connection with our clinical trials, and related clinical trial fees. We have been developing AGS-003 and AGS-004, in parallel, and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate salaries, stock-based compensation, employee benefit or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table below.
 
   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
   
2013
 
2014
 
2013
   
2014
 
   
(in thousands)
 
Direct research and development expense by program:
                           
AGS-003
 
$
3,154
   
$
3,716
   
$
5,507
   
$
6,876
 
AGS-004
   
500
     
202
     
1,081
     
656
 
Commercial manufacturing development
   
     
2,880
     
     
4,243
 
Other
   
10
     
15
     
23
     
64
 
                                 
Total direct research and development program expense
   
3,664
     
6,813
     
6,611
     
11,839
 
Indirect research and development expense
   
2,438
     
3,756
     
4,681
     
7,202
 
                                 
Total research and development expense
 
$
6,102
   
$
10,569
   
$
11,292
   
$
19,041
 
 
Research and development expenses were $6.1 million for the three months ended June 30, 2013, compared with $10.6 million for the three months ended June 30, 2014, an increase of approximately $4.5 million, or 73.2%. The increase in research and development expense primarily reflects a $3.2 million increase in direct research and development expense and a $1.3 million increase in indirect research and development expense. The increase in direct research and development expenses resulted primarily from the following:
 
 
Direct research and development expense for AGS-003 increased from $3.2 million for the three months ended June 30, 2013 to $3.7 million in the three months ended June 30, 2014. This increase primarily reflects increased patient enrollment in the ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib in the three months ended June 30, 2014 as compared with the three months ended June 30, 2013; and
 
 
Direct research and development expense with respect to AGS-004 decreased from $0.5 million in the three months ended June 30, 2013 to $0.2 million in the three months ended June 30, 2014 primarily due to the decreased activity in our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined, partially offset by $0.2 million in costs for stage 1 of an investigator-initiated phase 2 clinical trial of AGS-004 in adult HIV patients aimed at eradication of the virus that began in May 2014.
 
 
We also incurred $2.9 million of direct research and development expense related to the initiation of our commercial manufacturing development efforts during the three months ended June 30, 2014.
 
 
19

 
The increase in indirect research and development was primarily due to higher personnel costs, as we had 74 employees engaged in research and development activities as of June 30, 2013 compared with 86 employees as of June 30, 2014.

Research and development expenses were $11.3 million for the six months ended June 30, 2013, compared with $19.0 million for the six months ended June 30, 2014, an increase of approximately $7.7 million, or 68.6%. The increase in research and development expense primarily reflects a $5.2 million increase in direct research and development expense and a $2.5 million increase in indirect research and development expense. The increase in direct research and development expenses resulted primarily from the following:
 
 
Direct research and development expense for AGS-003 increased from $5.5 million for the six months ended June 30, 2013 to $6.9 million in the six months ended June 30, 2014. This increase primarily reflects increased patient enrollment in the ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013; and
 
 
Direct research and development expense with respect to AGS-004 decreased from $1.1 million in the six months ended June 30, 2013 to $0.7 million in the six months ended June 30, 2014 primarily due to the decreased activity in our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined.
 
 
We also incurred $4.2 million of direct research and development expense related to the initiation of our commercial manufacturing development efforts during the six months ended June 30, 2014.
 
The increase in indirect research and development was primarily due to higher personnel costs, as we had 74 employees engaged in research and development activities as of June 30, 2013 compared with 86 employees as of June 30, 2014.
 
We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of AGS-003 and AGS-004.
 
The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
 
 
the scope, rate of progress, expense and results of our ongoing clinical trials;
 
 
the scope, rate of progress, expense and results of additional clinical trials that we may conduct;
 
 
other research and development activities; and
 
 
the timing of regulatory approvals.
 
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
 
General and Administrative Expenses
 
General and administrative expenses were $0.9 million for the three months ended June 30, 2013, compared with $1.9 million for the three months ended June 30, 2014, an increase of 98.5%. This reflects an increase of $0.4 million in personnel costs, including salaries, benefits and stock-based compensation. Additionally, outside services including legal, patent, and other consulting services, increased by $0.2 million and expenses relating to our new status as a public company, including liability and directors’ and officers’ insurance, increased $0.3 million during the three months ended June 30, 2014 compared with the same period in 2013.
 
General and administrative expenses were $2.0 million for the six months ended June 30, 2013, compared with $3.8 million for the six months ended June 30, 2014, an increase of 88.3%. This reflects an increase of $0.8 million in personnel costs, including salaries, benefits and stock-based compensation. Additionally, outside services including legal, patent, and other consulting services, increased by $0.4 million and expenses relating to our new status as a public company, including liability and directors’ and officers’ insurance, increased $0.5 million during the six months ended June 30, 2014 compared with the same period in 2013.

 
20

 
We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.
 
Interest Expense
 
Interest expense was $171 for the three months ended June 30, 2013, compared with $171,604 for the three months ended June 30, 2014. During the three months ended June 30, 2014, interest expense primarily resulted from accrued interest on our note payable to Medinet, which was issued in December 2013.

Interest expense was $361 for the six months ended June 30, 2013, compared with $346,436 for the six months ended June 30, 2014. During the six months ended June 30, 2014, interest expense primarily resulted from accrued interest on our note payable to Medinet, which was issued in December 2013.
 
Change in Fair Value of Warrant Liability
 
Income from the change in fair value of the warrant liability was $0.4 million for the six months ended June 30, 2013, compared with none for the six months ended June 30, 2014. The 2013 amount represented the decrease in the fair value of the warrant liability during the six months ended June 30, 2013. In July 2013, in connection with the series D-1 exchange, all of our outstanding warrants to purchase shares of our series C preferred stock and series D-1 preferred stock were cancelled. As a result, there were no warrants to purchase preferred stock outstanding as of December 31, 2013 or June 30, 2014.
 
Investment Tax Credits
 
Other income of $140,556 was recognized during the three months ended June 30, 2014 for scientific research and experimental development (“SR&ED”) investment tax credits in Canada. Under Canadian and Ontario law, the Company’s Canadian subsidiary is entitled to SR&ED. Because these credits are subject to a claims review, the Company recognizes such credits when received. No such credits were received during the three or six month periods ended June 30, 2013.

Other Expense
 
Other expense was zero for the six months ended June 30, 2013, compared with $0.2 million for the six months ended June 30, 2014. Under a loan and security agreement to which we were a party, we had agreed to pay a success fee of $200,000 upon consummation of a liquidity event, including an initial public offering. The Company’s initial public offering closed on February 12, 2014. Accordingly, this fee was paid in March 2014 and was recorded in Other expense on the Condensed Consolidated Statement of Operations during the six months ended June 30, 2014.

Liquidity and Capital Resources
 
Sources of Liquidity
 
As of June 30, 2014, we had cash, cash equivalents and short-term investments of approximately $71.8 million.
 
Since our inception in May 1997 through June 30, 2014, we have funded our operations principally with $215.3 million from the sale of common stock, convertible debt, warrants and preferred stock, $32.9 million from the licensing of our technology, and $103.3 million from government contracts, grants and license and collaboration agreements.

As of June 30, 2014, the gross proceeds we have received from the issuance and sale of our preferred stock were as follows:
 
Issue
 
Year
 
Gross
Proceeds
 
       
(in thousands)
 
Series A Preferred
 
2000
 
$
1,594
 
Series B Preferred
 
2001
 
$
39,382
 
Series B-1 Preferred
 
2004
 
$
5,000
 
Series C Preferred
 
2008
 
$
33,462
 
Series D Preferred
 
2012
 
$
9,022
 
Series D-1 Preferred
 
2012
 
$
15,978
 
Series E Preferred
 
2013
 
$
48,000
 
 
 
21

 
In February 2014, we issued and sold 6,228,725 shares of our common stock, including 603,725 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares, in our initial public offering at a public offering price of $8.00 per share, for aggregate gross proceeds of $49.8 million. The net offering proceeds to us, after deducting underwriting discounts and commissions of approximately $3.5 million and offering expenses of approximately $2.6 million, were approximately $43.7 million.
 
Cash Flows
 
The following table sets forth the major sources and uses of cash for the periods set forth below:
 
   
Six Months Ended June 30,
 
   
2013
   
2014
 
   
(in thousands)
 
Net cash provided by (used in):
           
Operating activities
 
$
(8,674
)
 
$
(19,693
)
Investing activities
   
3,835
     
(14,323
)
Financing activities
   
(16
)
   
45,021
 
Effect of exchange rate changes on cash
   
(7
)
   
4
 
                 
Net (decrease) increase in cash and cash equivalents
 
$
(4,862
)
 
$
11,009
 
 
Operating Activities .  Net cash used in operating activities of $8.7 million during the six months ended June 30, 2013 was primarily a result of our $10.2 million net loss, partially offset by changes in operating assets and liabilities of $1.2 million and non-cash items of $0.3 million. These non-cash items included depreciation of $0.3 million and compensation expense related to stock options of $0.4 million, partially offset by the gain recorded due to the decrease in fair value of our warrant liability of $0.4 million.
 
Net cash used in operating activities of $19.7 million during the six months ended June 30, 2014 was primarily a result of our $22.0 million net loss, partially offset by non-cash items of $1.5 million and changes in operating assets and liabilities of $0.8 million. These non-cash items primarily consisted of depreciation and amortization of $0.3 million and compensation expense related to stock options of $1.2 million. Accounts payable increased by $0.9 million, which was partially offset by an increase in deferred financing costs of $0.1 million.
 
Investing Activities.  Net cash provided by (used in) investing activities amounted to $3.8 million and ($14.3) million for the six months ended June 30, 2013 and 2014, respectively. Cash provided by and used in investing activities during each of these periods primarily reflected our purchases of property and equipment and purchases, sales and maturities of short-term investments. Cash provided by investment activities during the six months ended June 30, 2013 was primarily due to sales of short-term investments. Cash used in investment activities during the six months ended June 30, 2014 primarily consisted of purchases of short-term investments with funds received in our initial public offering.
 
Financing Activities.  Net cash (used in) provided by financing activities amounted to approximately (less than $0.1 million) and $45.0 million for the six months ended June 30, 2013 and 2014, respectively. Cash used in financing activities for the six months ended June 30, 2013 consisted solely of payments on notes payable. Cash provided by financing activities for the six months ended June 30, 2014 consisted of proceeds of $49.8 million from the sale of common stock in our initial public offering, which closed on February 12, 2014, partially offset by stock issuance costs of $4.8 million and less than $0.1 million of payments on notes payable.
 
Funding Requirements
 
To date, we have not generated any product revenue from our development stage product candidates. We do not know when, or if, we will generate any product revenue. We do not expect to generate significant product revenue unless or until we obtain marketing approval of, and commercialize AGS-003 or AGS-004. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue our phase 3 clinical trial of AGS-003, initiate additional clinical trials of AGS-003 and AGS-004, seek regulatory approval for our product candidates and lease, build out and equip a new commercial manufacturing facility. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. We will need substantial additional funding in connection with our continuing operations.
 
We expect that our existing cash, cash equivalents and short-term investments, including anticipated funding under our NIH contract, will enable us to fund our operating expenses into the second half of 2016. We intend to devote our cash, cash equivalents and short term investments to fund our pivotal phase 3 clinical trial of AGS-003 through data, to fund our planned phase 2 clinical trials of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors, to fund certain of the costs of the ongoing phase 2 clinical trial of AGS-004 for HIV eradication and the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients, to initiate, but not complete, the planned leasing, build-out and equipping of a new commercial manufacturing facility and for working capital and general corporate purposes.

 
22

 
We will need to obtain significant financing prior to the commercialization of AGS-003, including to complete the planned leasing, build-out and equipping of a new commercial manufacturing facility and to fund any commercialization efforts in advance of regulatory approval of AGS-003. We expect that we will require approximately an additional $35.0 million prior to the commercialization of AGS-003 to lease, build out and equip the new commercial manufacturing facility that we plan to establish. We have initiated expenditures for this purpose and expect to initiate construction of this facility by the fourth quarter of 2014. We are actively exploring potential sites and financing arrangements in connection with the lease, build out and equipping of a commercial manufacturing facility and are in discussions with developers and governmental authorities regarding potential sites and financial support. We expect to enter into arrangements that include financial support, and we expect such arrangements will likely involve material obligations and debt liabilities. If we are unable to obtain additional financing when needed, in the required amounts or at all, we may not be able to complete the planned leasing, build-out and equipping of the new commercial facility or may be delayed in doing so.
 
We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.
 
Our future capital requirements will depend on many factors, including:
 
 
the progress and results of our ongoing pivotal phase 3 clinical trial of AGS-003 and other clinical trials of AGS-003 that we may conduct;
 
 
the progress and results of our ongoing phase 2b clinical trial, our ongoing phase 2 clinical trial for HIV eradication and other clinical trials of AGS-004 that we may conduct and our ability to obtain additional funding under our NIH contract for our AGS-004 program;
 
 
the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;
 
 
the costs and timing of our planned leasing, build-out and equipping of a new commercial manufacturing facility;
 
 
the potential need to repay the $9.0 million loan under our license agreement with Medinet;
 
 
the costs, timing and outcome of regulatory review of our product candidates;
 
 
the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;
 
 
revenue, if any, received from sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;
 
 
the costs of preparing, filing and prosecuting patent applications, maintaining, enforcing our intellectual property rights and defending intellectual property-related claims;
 
 
the extent to which we acquire or invest in businesses, products and technologies;
 
 
our ability to obtain government or other third party funding for the development of our product candidates; and
 
 
our ability to establish collaborations on favorable terms, if at all, particularly arrangements to develop, market and distribute AGS-003 outside North America and arrangements for the development and commercialization of our non-oncology product candidates, including AGS-004.
 
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. 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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We are seeking government or other third party funding for the continued development of AGS-004 following completion of the phase 2b clinical trial of AGS-004. In January 2014, CARE agreed that it would fund all patient clinical costs of our planned phase 2 adult eradication clinical trial of AGS-004, except for the associated manufacturing costs for which we will be responsible. In addition, we are discussing with the NIH the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients and potential funding by the NIH of the costs of the trial. If we are unable to raise government or other third party funding when needed, we may be required to delay, limit, reduce or terminate our development of AGS-004 or to grant rights to develop and market AGS-004 that we would otherwise prefer to keep for ourselves.
 
Critical Accounting Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
 
Our significant accounting policies are described in Note 2 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013.  There have been no significant changes to our critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2013.
 
Contractual Obligations
 
During the three months ended June 30, 2014, there were no material changes outside the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
 
Item  3. Quantitative and Qualitative Disclosures about Market Risk
 
Our primary exposure to market risk is limited to our cash, cash equivalents and short-term investments, all of which have maturities of one year or less. The related interest income sensitivity is affected by changes in the general level of short-term U.S. interest rates. We primarily invest in high quality, short-term marketable debt securities issued by high quality financial and industrial companies.
 
Due to the short-term duration and low risk profile of our cash, cash equivalents and short-term investments, an immediate 10.0% change in interest rates would not have a material effect on the fair value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our cash, cash equivalents and short-term investments.
 
We do not believe that our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and short-term investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in fair value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

Item  4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of June 30, 2014, the Company’s principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance levels.

 
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Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item  1. Legal Proceedings
 
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any material litigation.
 
Item  1A. Risk Factors
 
We operate in a dynamic and rapidly changing business environment that involves multiple risks and substantial uncertainty. The following discussion addresses risks and uncertainties that could cause, or contribute to causing, actual results to differ from expectations in material ways. In evaluating our business, investors should pay particular attention to the risks and uncertainties described below and in other sections of this Quarterly Report on Form 10-Q and in our subsequent filings with the SEC. These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. The trading price of our common stock could also decline due to any of these risks, and you could lose all or part of your investment.
 
Risks Related to the Development and Regulatory Approval of Our Product Candidates
 
We depend heavily on the success of our two product candidates, AGS-003 and AGS-004, both of which are still in clinical development. Clinical trials of our product candidates may not be successful. If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.
 
We currently have no products approved for sale. We have invested a significant portion of our efforts and financial resources in the development of AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers and AGS-004 for the treatment of HIV. Our ability to generate product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of these product candidates. The success of these product candidates will depend on several factors, including the following:
 
 
successful completion of clinical trials, including clinical results that are statistically significant as well as clinically meaningful in the context of the indications for which we are developing our product candidates;
 
 
receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States;
 
 
establishing commercial manufacturing capabilities by identifying, leasing, building out and equipping a commercial manufacturing facility for our Arcelis-based product candidates;
 
 
maintaining patent and trade secret protection and regulatory exclusivity for our product candidates, both in the United States and internationally;
 
 
launching commercial sales of the products, if and when approved, whether alone or in collaboration with others;
 
 
commercial acceptance of our products, if and when approved, by patients, the medical community and third party payors;
 
 
obtaining and maintaining healthcare coverage and adequate reimbursement;
 
 
effectively competing with other therapies; and
 
 
a continued acceptable safety profile of the products following any marketing approval.
 
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business.

 
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  If clinical trials of our product candidates, such as our ongoing pivotal phase 3 clinical trial of AGS-003 and our ongoing phase 2b clinical trial of AGS-004, fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
 
Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.
 
In particular, to date, we have not completed a clinical trial of AGS-003 against a placebo or a comparator therapy. While we believe comparisons to results from other reported clinical trials or from analyses of data from the International Metastatic Renal Cell Carcinoma Database Consortium, or the Consortium, can assist in evaluating the potential efficacy of our AGS-003 product candidate, there are many factors that affect the outcome for patients, some of which are not apparent in published reports. As a result, results from two different trials or between a trial and an analysis of a treatment database often cannot be reliably compared. Our ongoing pivotal phase 3 clinical trial of AGS-003 is intended to compare directly the combination of AGS-003 and sunitinib to treatment with sunitinib monotherapy. Based on the design of the trial, the data from the trial will need to demonstrate an increase of approximately six months in median overall survival for the AGS-003 plus sunitinib arm as compared to the sunitinib monotherapy control arm in order to show statistical significance and achieve the primary endpoint of the trial. We will need to show this statistically significant benefit of the combined therapy as compared to treatment with the sunitinib monotherapy as part of a submission for approval of AGS-003. However, demonstration of statistical significance and achievement of the primary endpoint of the trial do not assure approval by the FDA or similar regulatory authorities outside the United States.
 
Patients in our ongoing pivotal phase 3 clinical trial who receive treatment with sunitinib monotherapy may not have results similar to patients studied in other clinical trials of sunitinib or to patients in the Consortium database. If the patients in our ongoing pivotal phase 3 clinical trial who receive sunitinib plus placebo have results which are better than the results that occurred in those other clinical trials or the results described in the Consortium database, we may not demonstrate a sufficient benefit from AGS-003 in combination with sunitinib to allow the FDA to approve AGS-003 for marketing. In addition, only 21 patients received the combination of AGS-003 and sunitinib in our phase 2 clinical trial. If the patients in our ongoing pivotal phase 3 clinical trial who receive the combination of AGS-003 and sunitinib have results which are worse than the results that occurred in our phase 2 clinical trial, we may not demonstrate a sufficient benefit from the combination therapy to allow the FDA to approve AGS-003 for marketing.
 
For drug and biological products, the FDA typically requires the successful completion of two adequate and well-controlled clinical trials to support marketing approval because a conclusion based on two such trials will be more reliable than a conclusion based on a single trial. In the case of AGS-003, which is intended for a life-threatening disease, we intend to seek approval based upon the results of a single pivotal phase 3 clinical trial. The FDA reviewed our plans to conduct a single pivotal phase 3 clinical trial under its SPA process. In February 2013, the FDA advised us in a letter that it had completed its review of our plans under the SPA process. The FDA also informed us that in order for a single trial to support approval of an indication, the trial must be well conducted, and the results of the trial must be internally consistent, clinically meaningful and statistically very persuasive. If the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other trial endpoints, the FDA may refuse to approve our BLA based upon a single clinical trial. In addition, because only 21 patients received the combination of AGS-003 and sunitinib in our phase 2 clinical trial, and as a result, we did not have enough evaluable patients to perform the statistical analysis to determine whether the primary endpoint of complete response rate was achieved in that trial, we expect that the data from our phase 2 clinical trial will have only a limited impact on the FDA’s ultimate assessment of efficacy of AGS-003. Thus, there can be no guarantee that the FDA will not require additional pivotal clinical trials as a condition for approving AGS-003.
 
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
 
 
be delayed in obtaining marketing approval for our product candidates;
 
 
not obtain marketing approval at all;
 
 
obtain approval for indications or patient populations that are not as broad as intended or desired;
 
 
obtain approval with labeling that includes significant use restrictions or safety warnings, including boxed warnings;
 
 
be subject to additional post-marketing testing requirements;
 
 
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be subject to restrictions on how the product is distributed or used; or
 
 
have the product removed from the market after obtaining marketing approval.
 
If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing or commercialization of our product candidates could be delayed or prevented.
 
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates. For example, in September 2011, the FDA placed the original protocol for our ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib on partial clinical hold due to unresolved questions regarding the planned measurement of the secretion of the cytokine interleukin-12, or IL-12, as part of the specifications for the release of AGS-003. We subsequently reached an agreement with the FDA regarding the IL-12 release specifications and the FDA lifted the partial clinical hold. Unforeseen events that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates include:
 
 
regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
 
 
we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
 
 
clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
 
 
the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate; for example, in our phase 2b clinical trial of AGS-004, we experienced a higher dropout rate than we anticipated due to the higher than expected number of patients who did not complete the full 12 week antiretroviral treatment interruption required by the protocol for the trial;
 
 
our third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
 
 
we may decide, or regulators or institutional review boards may require us or our investigators to, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;
 
 
the cost of clinical trials of our product candidates may be greater than we anticipate; and
 
 
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.
 
In addition, the patients recruited for clinical trials of our product candidates may have a disease profile or other characteristics that are different than we expect and different than the clinical trials were designed for, which could adversely impact the results of the clinical trials. For instance, our phase 2 combination therapy clinical trial of AGS-003 in combination with sunitinib was originally designed to enroll patients with favorable disease risk profiles and intermediate disease risk profiles and with a primary endpoint of complete response rate. However, the actual trial population consisted entirely of patients with intermediate disease risk profiles and poor disease risk profiles. This is a population for which published research has shown that sunitinib alone, as well as other of the targeted therapies for mRCC, rarely if ever produce complete responses in mRCC, and in our phase 2 clinical trial in this population the combination therapy of AGS-003 and sunitinib did not show a complete response rate that met the endpoint of the trial.
 
Our product development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. For example, in response to our submission of an investigational new drug application, or IND, for AGS-004, the FDA raised safety concerns regarding the analytical treatment interruption contemplated by our protocol for our phase 2 clinical trial of AGS-004, and required a one year safety follow-up after the final dose for each patient. This resulted in the need for an amendment to the trial protocol and a four month delay prior to initiating the phase 2 clinical trial in the United States. In addition to additional costs, significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates and may harm our business and results of operations.
 
 
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The FDA has reviewed the protocol for our ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib under the SPA process. However, agreement by the FDA with the protocol under the SPA process does not guarantee that the trial will be successful or that, if successful, AGS-003 will receive marketing approval.
 
The FDA has reviewed, under the SPA process, the protocol for our ongoing phase 3 clinical trial of AGS-003 in combination with sunitinib. The SPA process is designed to facilitate the FDA’s review and approval of drug and biological products by allowing the FDA to evaluate the proposed design and size of phase 3 clinical trials that are intended to form the primary basis for determining a drug candidate’s efficacy. In February 2012, we received a letter from the FDA advising us that the FDA had completed its review of our protocol for the pivotal phase 3 clinical trial under the SPA process. In the letter, the FDA stated that it had determined that the protocol sufficiently addressed the trial’s objectives and that the trial was adequately designed to provide the necessary data to support a submission for marketing approval.
 
An SPA does not guarantee that AGS-003 will receive marketing approval. The FDA may raise issues related to safety, trial conduct, bias, deviation from the protocol, statistical power, patient completion rates, changes in scientific or medical parameters or internal inconsistencies in the data prior to making its final decision. The FDA may also seek the guidance of an outside advisory committee prior to making its final decision. In addition, the combination of AGS-003 and sunitinib may not achieve the primary endpoint of the trial. Even if the primary endpoint in our pivotal phase 3 clinical trial is achieved, AGS-003 may not be approved. Many companies which have been granted SPAs have ultimately failed to obtain final approval to market their products.
 
In its February 2012 letter, the FDA informed us that in order for a single trial to support approval of an indication, the trial must be well conducted, and the results of the trial must be internally consistent, clinically meaningful and statistically very persuasive. If the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other trial endpoints, the FDA may refuse to approve our BLA based upon a single clinical trial. There can be no guarantee that the FDA will not require additional pivotal clinical trials as a condition for approving AGS-003.
 
If we experience delays or difficulties in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
 
We may not be able to initiate or continue clinical trials for our product candidates, including our pivotal phase 3 clinical trial of AGS-003, if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. Our competitors may have ongoing clinical trials for product candidates that could be competitive with our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates. For example, during the phase 1/2 monotherapy clinical trial of AGS-003 that we conducted, our ability to enroll patients in the trial was adversely affected by the FDA’s approval of sorafenib and sunitinib, because patients did not want to receive, and physicians were reluctant to administer, AGS-003 as a monotherapy once new therapies that showed efficacy in clinical trials were introduced to the market and became widely available.
 
Patient enrollment is affected by other factors including:
 
 
severity of the disease under investigation;
 
 
eligibility criteria for the trial in question;
 
 
perceived risks and benefits of the product candidate under study;
 
 
efforts to facilitate timely enrollment in clinical trials;
 
 
patient referral practices of physicians;
 
 
the ability to monitor patients adequately during and after treatment; and
 
 
proximity and availability of clinical trial sites for prospective patients.
 
Based on the rate of enrollment in our ongoing pivotal phase 3 clinical trial of AGS-003, we expect to complete tumor collection of patients by the end of 2014 and to complete enrollment and randomization in the first quarter of 2015. However, the actual amount of time for full enrollment randomization could be longer than planned. Enrollment delays in this phase 3 clinical trial or any of our other clinical trials may result in increased development costs for our product candidates, which would cause the value of the company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for this ongoing phase 3 clinical trial or any of our other clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. In addition, any significant delays or increases in costs of our ongoing phase 3 clinical trial of AGS-003 could result in the need for us to obtain additional funding to complete the trial.
 
 
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We are developing AGS-004 for use with latency reversing drugs to eradicate HIV. If latency reversing drugs are not successfully developed for HIV on a timely basis or at all, we will be unable to develop AGS-004 for this use or will be delayed in doing so. In addition, because there are currently no products approved for HIV eradication, we cannot be certain of the clinical trials we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 for this purpose.
 
We are focusing our development program for AGS-004 on the use of AGS-004 in combination with latency reversing drugs to eradicate HIV. We rely on these latency reversing drugs because we recognize that the ultimate objective of virus eradication is unlikely to be achieved with immunotherapy alone because the immune system is not able to recognize the HIV virus in latently infected cells with a low level or lack of expression of HIV antigens.
 
Several companies and academic groups are evaluating latency reversing drugs that can potentially activate latently infected cells to increase viral antigen expression and make the cells vulnerable to elimination by the immune system. We are not a party to any arrangements with these companies or academic groups. If these companies or academic groups determine not to develop latency reversing drugs for this purpose because the drugs do not sufficiently increase viral antigen expression or have unacceptable toxicities, or these companies or academic groups otherwise determine to collaborate with other developers of immunotherapies on a combination therapy for complete virus eradication, we will not be able to complete our AGS-004 development program. In addition, if these companies or academic groups do not proceed with such development on a timely basis, our AGS-004 program correspondingly would be delayed.
 
A number of the latency reversing drugs being evaluated for use in HIV patients are currently approved in the United States and elsewhere for use in the treatment of specified cancer indications. If these drugs are not approved by the FDA or equivalent foreign regulatory authorities for use in HIV, the FDA and these other regulatory authorities may not approve AGS-004 without the latency reversing drug having received marketing approval for HIV. If the FDA and these other regulatory authorities approve AGS-004 without the approval of the latency reversing drug for HIV, the use of AGS-004 in combination with the latency reversing drug for virus eradication would require sales of the latency reversing drug for off-label use. In such event, the success of the combination of AGS-004 and the latency reversing drug would be subject to the willingness of physicians, patients, healthcare payors and others in the medical community to use the latency reversing drug for off-label use and of government authorities and third party payors to pay for the combination therapy. In addition, we would be limited in our ability to market the combination for its intended use if the latency reversing drug were to be used off-label.
 
Currently, there are no products approved for the eradication of HIV. As a result, we cannot be certain as to the clinical trials we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 for the eradication of HIV.
 
If serious adverse or inappropriate side effects are identified during the development of our product candidates, we may need to abandon or limit our development of some of our product candidates.
 
All of our product candidates are still in preclinical or clinical development and their risk of failure is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive regulatory approval. If our product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. In addition, such effects or characteristics could cause an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates, require us to conduct additional clinical trials or other tests or studies, and could result in a more restrictive label, or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities.
 
Our Arcelis-based product candidates are immunotherapies that are based on a novel technology utilizing a patient’s own tissue. This may raise development issues that we may not be able to resolve, regulatory issues that could delay or prevent approval or personnel issues that may prevent us from further developing and commercializing our product candidates.
 
AGS-003 and AGS-004 are based on our novel Arcelis technology platform. In the course of developing this platform and these product candidates, we have encountered difficulties in the development process. For example, we terminated the development of MB-002, the predecessor to AGS-003, when the results from the initial clinical trial of MB-002 indicated that the product candidate only corrected defects in the production of one of two critical cytokines required for effective immune response. There can be no assurance that additional development problems will not arise in the future which we may not be able to resolve or which may cause significant delays in development.
 
In addition, regulatory approval of novel product candidates such as our Arcelis-based product candidates manufactured using novel manufacturing processes such as ours can be more expensive and take longer than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical products, due to our and regulatory agencies’ lack of experience with them. The FDA has only approved one personalized immunotherapy product to date. This lack of experience may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these product candidates or lead to significant post-approval limitations or restrictions.

 
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The novel nature of our product candidates also means that fewer people are trained in or experienced with product candidates of this type, which may make it difficult to find, hire and retain capable personnel for research, development and manufacturing positions.
 
Development of our Arcelis-based product candidates is subject to significant uncertainty because each product candidate is derived from source material that is inherently variable. This variability could reduce the effectiveness of our Arcelis-based product candidates, delay any FDA approval of our Arcelis-based product candidates, cause us to change our manufacturing methods and adversely affect the commercial success of any approved Arcelis-based products.
 
The disease samples from the patients to be treated with our Arcelis-based products vary from patient to patient. This inherent variability may adversely affect our ability to manufacture our products because each tumor or virus sample that we receive and process will yield a different product. As a result, we may not be able to consistently produce a product for every patient and we may not be able to treat all patients effectively. Such inconsistency could delay FDA or other regulatory approval of our Arcelis-based product candidates or if approved, adversely affect market acceptance and use of our Arcelis-based products. If we have to change our manufacturing methods to address any inconsistency, we may have to perform additional clinical trials, which would delay FDA or other regulatory approval of our Arcelis-based product candidates and increase the costs of development of our Arcelis-based product candidates.
 
The inherent variability of the disease samples from the patients to be treated with our Arcelis-based products may further adversely affect our ability to manufacture our products because variability in the source material for our product candidates, such as tumor cells or viruses, may cause variability in the composition of other cells in our product candidates. Such variability in composition or purity could adversely affect our ability to establish acceptable release specifications and the development and regulatory approval processes for our product candidates may be delayed, which would increase the costs of development of our Arcelis-based product candidates.
 
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.
 
Failure to obtain regulatory approval for either of our product candidates will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.
 
The process of obtaining regulatory approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. To date, the FDA has only approved one personalized immunotherapy product. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
 
If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.
 
Failure to obtain regulatory approval in international jurisdictions would prevent our product candidates from being marketed abroad.
 
We are a party to arrangements with third parties, and intend to enter into additional arrangements with third parties, under which they would market our products outside the United States. In order to market and sell our products in the European Union and many other jurisdictions, we or such third parties must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.
 
 
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A fast track designation by the FDA may not actually lead to a faster development, regulatory review or approval process.
 
If a product is intended for the treatment of a serious or life-threatening condition and the product demonstrates the potential to address unmet needs for this condition, the treatment sponsor may apply for FDA fast track designation. In April 2012, the FDA notified us that we obtained fast track designation for AGS-003 for the treatment of mRCC. Fast track designation does not ensure that we will experience a faster development, regulatory review or approval process compared to conventional FDA procedures. Additionally, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.
 
Risks Related to Our Financial Position and Need for Additional Capital
 
We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.
 
Since inception, we have incurred significant operating losses. Our net loss, after attribution to the noncontrolling interest, was $20.1 million for the year ended December 31, 2011, $10.5 million for the year ended December 31, 2012, $23.9 million for the year ended December 31, 2013 and $22.0 million for the six months ended June 30, 2014. As of June 30, 2014, we had an accumulated deficit of $160.9 million. To date, we have financed our operations primarily through our initial public offering of common stock, private placements of our preferred stock, convertible debt financings, bank debt, government contracts, government and other third party grants and license and collaboration agreements. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any product candidates. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:
 
 
continue our ongoing phase 3 clinical trial of AGS-003 for the treatment of mRCC and initiate additional clinical trials of AGS-003 for the treatment of cancers;
 
 
initiate additional clinical trials of AGS-004 for the treatment of HIV;
 
 
seek regulatory approvals for our product candidates that successfully complete clinical trials;
 
 
lease, build out and equip a new commercial facility for the manufacture of our Arcelis-based products;
 
 
establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;
 
 
maintain, expand and protect our intellectual property portfolio;
 
 
continue our other research and development efforts;
 
 
hire additional clinical, quality control, scientific and management personnel; and
 
 
add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.
 
To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This development and commercialization will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates, leasing, building out and equipping a new commercial manufacturing facility and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability.
 
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.
 
We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our product development programs, including our phase 3 clinical trial of AGS-003, our plans to lease, build out and equip a new commercial manufacturing facility or our commercialization efforts.
 
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue our phase 3 clinical trial of AGS-003, initiate additional clinical trials of AGS-003 and AGS-004, seek regulatory approval for our product candidates and lease, build out and equip a new commercial manufacturing facility. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, terminate or eliminate our product development programs, our plans to lease, build out and equip a new commercial manufacturing facility or our commercialization efforts.
 
 
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