Argos Therapeutics
ARGOS THERAPEUTICS INC (Form: 10-Q, Received: 11/14/2014 15:23:57)
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 September 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 November 10, 2014, there were 19,655,650 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 September 30, 2014

TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
Argos Therapeutics®, Argos® and Arcelis™, the Argos Therapeutics logo and other trademarks or service marks of Argos appearing in this Quarterly Report on Form 10-Q are the property of Argos Therapeutics. The other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.
 
 
 
 

 
PART I. FINANCIAL INFORMATION
 
Item  1. Financial Statements

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

   
December 31,
2013
   
September 30,
2014
 
Assets
           
Current assets
           
Cash and cash equivalents
 
$
33,297,970
   
$
50,254,355
 
Short-term investments
   
13,659,812
     
19,267,602
 
Prepaid expenses and interest receivable
   
629,935
     
860,927
 
Deferred financing costs
   
1,516,424
     
379,235
 
Other receivables
   
424,501
     
163,184
 
                 
Total current assets
   
49,528,642
     
70,925,303
 
Property and equipment, net
   
1,602,103
     
4,533,095
 
Long-term investment    
      1,325,000  
Other assets
   
550
     
11,020
 
                 
Total assets
 
$
51,131,295
   
$
76,794,418
 
                 
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity
               
Current liabilities
               
Accounts payable
 
$
1,317,072
   
$
3,115,904
 
Accrued bonuses
   
     
589,014
 
Other accrued expenses
   
1,800,794
     
1,130,054
 
Current portion of notes payable
   
45,447
     
38,636
 
                 
Total current liabilities
   
3,163,313
     
4,873,608
 
Long-term portion of notes payable
   
7,014,106
     
19,603,454
 
Long-term portion of facility lease obligation
   
     
2,563,320
 
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; 0 and 5,000,000 shares authorized as of December 31, 2013 and September 30, 2014; 0 shares issued and outstanding as of December 31, 2013 and September 30, 2014
   
     
 
Common stock $0.001 par value; 120,000,000 and 200,000,000 shares authorized as of December 31, 2013 and September 30, 2014; 235,707 and 19,655,650 shares issued and outstanding as of December 31, 2013 and September 30, 2014
   
236
     
19,656
 
Accumulated other comprehensive loss
   
(102,531
)
   
(114,894
)
Additional paid-in capital
   
75,189,950
     
234,733,048
 
Accumulated deficit
   
(150,864,248
)
   
(187,949,774
)
                 
Total stockholders’ (deficit) equity
   
(75,776,593
)
   
46,688,036
 
                 
Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity
 
$
51,131,295
   
$
76,794,418
 
 
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 
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                         
Revenue
 
$
981,247
   
$
398,615
   
$
3,705,942
   
$
1,670,566
 
                                 
Operating expenses
                               
Research and development
   
5,630,219
     
12,998,409
     
16,922,000
     
32,039,738
 
General and administrative
   
1,024,167
     
2,320,036
     
3,042,249
     
6,119,334
 
                                 
Total operating expenses
   
6,654,386
     
15,318,445
     
19,964,249
     
38,159,072
 
                                 
Operating loss
   
(5,673,139
)
   
(14,919,830
)
   
(16,258,307
)
   
(36,488,506
)
Other income (expense)
                               
Interest income
   
693
     
14,285
     
2,827
     
51,955
 
Interest expense
   
(152
)
   
(179,808
)
   
(513
)
   
(526,244
)
Change in fair value of warrant liability
   
     
     
355,352
     
 
Investment tax credits
   
     
     
     
140,556
 
Other expense
   
     
(15,664
)
   
     
(263,289
)
                                 
Other income (expense), net
   
541
     
(181,187
)
   
357,666
     
(597,022
)
                                 
Net loss
   
(5,672,598
)
   
(15,101,017
)
   
(15,900,641
)
   
(37,085,528
)
                                 
Accretion of redeemable convertible preferred stock
   
5,325,406
     
     
5,250,020
     
(863,226
)
Less: Preferred stock dividend due to exchanges of preferred shares
   
(14,726,088
)
   
     
(14,726,088
)
   
 
                                 
Net loss attributable to common stockholders
 
$
(15,073,280
)
 
$
(15,101,017
)
 
$
(25,376,709
)
 
$
(37,948,754
)
                                 
Net loss attributable to common stockholders per share, basic and diluted
 
$
(65.23
)
 
$
(0.77
)
 
$
(111.19
)
 
$
(2.29
)
                                 
Weighted average shares outstanding, basic and diluted
   
231,084
     
19,655,605
     
228,224
     
16,596,437
 
 
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
September 30,
   
Nine Months Ended
 September 30,
 
   
2013
   
2014
   
2013
   
2014
 
Net loss
 
$
(5,672,598
)
 
$
(15,101,017
)
 
$
(15,900,641
)
 
$
(37,085,528
)
                                 
Other comprehensive gain (loss)
                               
Foreign currency translation gain (loss)
   
2,180
     
(8,069
   
(5,036
)
   
(3,558
)
Unrealized (loss) on short-term investments
   
     
(4,505
   
     
(8,805
)
                                 
Total comprehensive loss
 
$
(5,670,418
)
 
$
(15,113,591
)
 
$
(15,905,677
)
 
$
(37,097,891
)
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
ARGOS THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Nine Months Ended
 September 30,
 
   
2013
   
2014
 
Cash flows from operating activities
           
Net loss
 
$
(15,900,641
)
 
$
(37,085,528
)
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
   
472,666
     
412,537
 
Compensation expense related to stock options
   
586,676
     
2,126,557
 
Decrease in fair value of warrant liability
   
(355,352
)
   
 
Issuance of restricted stock recorded as consulting expense
   
16,500
     
 
Gain on disposal of equipment
   
(50,835
)
   
(1,710
)
Interest accrued on long-term debt
   
     
519,820
 
Changes in operating assets and liabilities:
               
Prepaid expenses and other receivables
   
270,005
     
30,325
 
Deferred financing costs
   
     
(139,796
)
Other assets
   
     
(10,471
)
Accounts payable
   
(590,193
)
   
1,798,832
 
Accrued expenses
   
305,042
     
(81,726
                 
Net cash used in operating activities
   
(15,246,132
)
   
(32,431,160
)
                 
Cash flows from investing activities
               
Purchase of property and equipment
   
(414,958
)
   
(780,582
)
Payment to restricted cash account securing letter of credit
   
     
(1,325,000
)
Proceeds from sale of fixed assets
   
50,835
     
2,000
 
Purchases of short-term investments
   
     
(20,192,499
)
Sales of short-term investments
   
4,148,871
     
 
Proceeds from maturity of short-term investments
   
     
14,575,905
 
                 
Net cash provided by (used in) investing activities
   
3,784,748
     
(7,720,176
)
                 
Cash flows from financing activities
               
Proceeds from sale of redeemable convertible preferred stock
   
21,417,272
     
 
Proceeds from issuance of common stock warrants
   
590,132
     
 
Proceeds from sale of common stock
   
     
49,829,800
 
Stock issuance costs
   
(507,877
)
   
(4,875,404
)
Proceeds from issuance of notes payable and warrants
   
     
12,500,000
 
Payment of debt issuance costs
   
     
(310,000
)
Payments on notes payable
   
(23,790
)
   
(38,610
)
Proceeds from exercise of common stock options
   
     
5,410
 
                 
Net cash provided by financing activities
   
21,475,737
     
57,111,196
 
                 
Effect of exchange rates changes on cash
   
(4,966
)
   
(3,475
)
Net increase in cash and cash equivalents
   
10,009,387
     
16,956,385
 
Cash and cash equivalents
               
Beginning of period
   
8,214,865
     
33,297,970
 
                 
End of period
 
$
18,224,252
   
$
50,254,355
 
                 
Supplemental disclosure of cash flow information
               
Cash paid for interest
 
$
512
   
$
4,659
 
Supplemental disclosure of noncash investing and financing activities
               
Conversion of preferred stock into common stock
 
$
   
$
114,527,695
 
Preferred stock accretion
 
$
5,250,020
   
$
(863,226
Interest accrued on long-term debt
 
$
   
$
519,820
 
Recognition of asset and facility lease obligation related to construction of new property
 
$
   
$
2,563,320
 
 
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 nine months ended September 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

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Significant Accounting Policies

There have been no material changes in our significant accounting policies as of and for the three and nine months ended September 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 September 30, 2014, $33.0 million and $50.0 million, respectively, in cash and cash equivalents was uninsured.
 
Long-Term Investment
 
The Company had a long-term investment of $1.3 million as of September 30, 2014 which consists of funds maintained in a separate deposit account for the purpose of securing a letter of credit issued by a bank to the landlord under a lease agreement signed in August 2014 for construction of the Company’s new corporate headquarters and primary manufacturing facility (see Note 6).

Investment Tax Credits
 
Other income of $140,556 was recognized during the nine months ended September 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.
 
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 September 30, 2014 approximated their fair values due to the short-term nature of these items.
 
As of December 31, 2013 and September 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

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
As of December 31, 2013 and September 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
September 30,
2014
 
Assets
                       
Money-market funds
 
$
37,029,293
   
$
   
$
   
$
37,029,293
 
Short-term investments
   
     
19,267,602
     
     
19,267,602
 
                                 
Total assets at fair value
 
$
37,029,293
   
$
19,267,602
   
$
   
$
56,296,895
 
 
During the three and nine months ended September 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
   
September 30,
2014
 
Office furniture and equipment
 
$
528,732
   
$
452,819
 
Computer equipment
   
712,609
     
755,549
 
Computer software
   
540,809
     
549,118
 
Laboratory equipment
   
5,264,952
     
5,351,515
 
Leasehold improvements
   
2,643,023
     
2,642,281
 
Asset related to facility lease obligation
   
     
2,563,320
 
Construction of manufacturing facility in progress
   
76,010
     
329,680
 
                 
     
9,766,135
     
12,644,282
 
Less: Accumulated depreciation and amortization
   
 (8,164,032
)
   
(8,111,187
)
                 
Property and equipment, net
 
$
1,602,103
   
$
4,533,095
 
 
The asset related to facility lease obligation was recognized during the three months ended September 30, 2014 due to the Company deemed to be the accounting owner of the facility during its construction period under build-to-suite lease accounting (see Note 6).
 
Depreciation and amortization expense was as follows:
 
Three months ended September 30, 2013
 
$
143,068
 
Three months ended September 30, 2014
 
$
146,388
 
Nine months ended September 30, 2013
 
$
472,666
 
Nine months ended September 30, 2014
 
$
412,537
 
 
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 September 30, 2014.
 
 
8

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Due to the Company’s history of losses since inception, there is not enough evidence at this time to support the conclusion that the Company 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.

5. Notes Payable
 
Notes payable consist of the following:
 
   
December 31,
2013
   
September 30,
2014
 
Notes payable under the venture loan and security agreement
 
$
   
$
12,500,000
 
Less related debt discount
   
     
(398,673
)
Notes payable under the venture loan and security agreement, net of debt discount
   
     
12,101,327
 
Promissory note payable to Medinet including accrued interest
   
6,936,466
     
7,451,627
 
Other notes payable
   
123,087
     
89,136
 
Total notes payable
   
7,059,553
     
19,642,090
 
Less current portion
   
(45,447
)
   
(38,636
)
Long-term portion of notes payable
 
$
7,014,106
   
$
19,603,454
 
 
On September 29, 2014, the Company entered into a venture loan and security agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation and Fortress Credit Co LLC (together, the “Lenders”) under which the Company may borrow up to $25.0 million in two tranches of $12.5 million each (the “Loan Facility”).

The Company borrowed the first tranche of $12.5 million upon the closing of the transaction on September 29, 2014.  Subject to certain other funding conditions, the second tranche of $12.5 million will be available for drawdown at any time commencing on the date the Company completes the enrollment and randomization of patients in the Company’s phase 3 clinical trial of AGS-003 and continuing until September 30, 2015.  The per annum interest rate for each tranche will be a floating rate equal to 9.25% plus the amount by which the one-month London Interbank Offered Rate (“LIBOR”) exceeds 0.50% (effectively a floating rate equal to 8.75% plus the one-month LIBOR Rate).  The total per annum interest rate shall not exceed 10.75%.

The Company incurred $449,796 for costs in connection with the closing of the Loan Agreement. These costs were capitalized as deferred financing costs and amortized to interest expense over the terms of the related debt.

The Company has agreed to repay the first tranche of $12.5 million on an interest only basis monthly until September 30, 2016, followed by monthly payments of principal and accrued interest through the scheduled maturity date for the first tranche loan on September 30, 2018. In addition, a final payment for the first tranche loan equal to $625,000 will be due on September 30, 2018, or such earlier date specified in the Loan Agreement.  The Company has agreed to repay any amounts advanced under the second tranche of $12.5 million in 18 monthly payments of interest only followed by 24 monthly payments of principal and accrued interest through the scheduled maturity date for the second tranche loan, which is 42 months following the date the Company draws down the second tranche loan.  In addition, a final payment equal to 5.0% of the amount drawn down under the second tranche loan will be due on the scheduled maturity date for such loan, or such earlier date specified in the Loan Agreement.  In addition, if the Company repays all or a portion of the loan prior to the applicable maturity date, it will pay the Lenders a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 3% if the prepayment occurs on or before 24 months after the funding date, 2% if the prepayment occurs more than 24 months after, but on or before 36 months after, the funding date thereof, or 1% if the prepayment occurs more than 36 months after the funding date thereof.

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets other than its intellectual property. The Company also has agreed not to pledge or otherwise encumber its intellectual property assets, subject to certain exceptions.

The Loan Agreement includes customary affirmative and restrictive covenants, but does not include any covenants to attain or maintain certain financial metrics, and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default.  Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

In connection with the Loan Agreement, the Company issued to the Lenders and their affiliates warrants to purchase a total of 82,780 shares of Common Stock at a per share exercise price of $9.06 (the “Warrants”).  The Lenders may not exercise the warrants for more than 41,390 of such shares of Common Stock until the earliest to occur of (i) a merger or consolidation of the Company, or a sale of all or substantially all of its assets, (ii) the Company’s satisfaction of the conditions precedent to the making of the second tranche loan, and (iii) the funding of the second tranche loan.  The Warrants will terminate on September 29, 2021 or such earlier date as specified in the Warrants.  The Company recorded a debt discount of $338,673 equal to the value of these warrants.  This debt discount is offset against the note payable balance and included in additional paid-in capital on the Company's balance sheet.

 
9

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
In December 2013, in connection with the license agreement with Medinet Co., Ltd. (“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 September 30, 2014, the Company recorded $7.5 million to notes payable, including $515,161 accrued interest recorded during the nine months ended September 30, 2014. The total deferred liability was $3.1 million as of September 30, 2014 including the $1.0 million received by the Company for a manufacturing license (see Note 10).

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 September 30, 2014, the Company has borrowed $95,756 under this agreement, of which $48,429 and $24,404 was outstanding as of December 31, 2013 and September 30, 2014, respectively. Borrowings are collateralized by substantially all of the computer equipment financed under the agreement, bear interest at a rate of 0.98% per annum 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 $64,732 in principal was outstanding as of December 31, 2013 and September 30, 2014, respectively. Borrowings are collateralized by substantially all of the computer equipment financed under the agreement, bear interest at a rate of 8.31% per annum and are to be repaid in 60 equal monthly installments commencing on the date of borrowing.
 
6. Facility Lease Obligation
 
On August 18, 2014,  the Company entered into a Lease Agreement (the “Lease Agreement”) with TKC LXXII, LLC, a North Carolina limited liability company (“TKC”).

Under the Lease Agreement, the Company agreed to lease certain land and an approximately 97,500 square-foot building to be constructed on approximately 11 acres in Durham County, North Carolina. This facility will house the Company’s corporate headquarters and primary manufacturing facility.  The Lease Agreement is intended to replace the Company’s existing lease, located at 4233 Technology Drive, Durham North Carolina, which currently expires in November 2016. The shell of the new facility will be constructed on a build-to-suit basis by TKC, at its expense, in accordance with agreed upon specifications and plans as set forth in the Lease Agreement.

The term of the Lease Agreement will be 10 years from the commencement date for the initial term, currently estimated to be May 1, 2015, with the Company having the option to extend the Lease Agreement by six five-year renewal terms. Initial rent will be approximately $46,917 per month, subject to certain fixed increases over the course of the term as set forth in the Lease Agreement and to adjustment based on the Company’s use of certain amounts allocated for upfitting the interior of the facility.
 
The Lease Agreement required us to provide the landlord with a letter of credit. We have provided the bank that issued the letter of credit on our behalf a security deposit of $1.325 million to guarantee the letter of credit. The deposit is recorded as a long-term investment as of September 30, 2014 on the Company's consolidated balance sheet.
 
Under the Lease Agreement, the Company has an option to purchase the property for an amount currently estimated at $7.6 million. Due to the existence of the fixed price purchase option, the letter of credit and the nature of the tenant improvements being outside the scope of normal tenant improvements, the Company is deemed to be the accounting owner of this facility during its construction period under build-to-suite lease accounting. The Company therefore recorded an asset related to the facility lease obligation included in property and equipment of $2.6 million during the three months ended September 30, 2014. The facility lease obligation on the Company’s consolidated balance sheet is $2.6 million as of September 30, 2014.
 
If the purchase option is not executed, future minimum payments due under the Lease Agreement are as follows as of September 30, 2014:

Year ending December 31:
       
2015
 
$
375,333
 
2016
   
571,445
 
2017
   
584,303
 
2018
   
597,449
 
2019
   
610,892
 
Thereafter
   
3,496,201
 
Total future minimum lease payments
 
$
6,235,623
 
 
 
10

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
7. 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 September 30, 2014
   
   
$
     
   
$
 —
     
   
$
 —
     
   
$
 —
     
   
$
 —
     
   
$
 

8. 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
September 30,
 
Nine Months Ended
September 30,
   
2013
   
2014
   
2013
   
2014
Research and development
 
$
95,191
   
$
497,524
   
$
281,726
   
$
1,114,917
 
General and administrative
   
117,939
     
417,524
     
316,950
     
1,011,640
 
                                 
Total stock-based compensation expense
 
$
213,130
   
$
915,048
   
$
598,676
   
$
2,126,557
 
 
 
11

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
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.
 
The Company did not grant options during the three months ended September 30, 2013. During the three months ended September 30, 2014, the Company granted options to employees to purchase a total of 123,450 shares of the Company’s common stock at exercise prices ranging from $5.98 to $8.82 per share, which, in each instance was the closing price of the Company’s common stock on the grant date.

During the nine months ended September 30, 2013, the Company granted options to employees and a non-employee director to purchase a total of 25,814 shares of the Company’s common stock at an exercise price of $4.20 per share, which was deemed to be the fair value per share of the Company’s common stock on the grant date. During the nine months ended September 30, 2014, the Company granted options to employees and non-employee directors to purchase a total of 764,203 shares of the Company’s common stock at exercise prices ranging from $5.98 to $11.09 per share, which, in each instance was the closing price of the Company’s common stock on the grant date.

Additionally, on July 28, 2014, the Company granted performance-based options to five executives to purchase a total of 160,500 shares of the Company’s common stock at an exercise price of $6.09 per share. These options vest based on the successful completion of various performance requirements of each of the five executives at various times through December 31, 2018.

The following table summarizes the Company’s stock option activity during the nine months ended September 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
   
924,703
   
$
6.74
       
Exercised
   
(1,288
)
 
$
4.20
       
Cancelled
   
(32,998
)
 
$
4.92
       
                       
Outstanding as of September 30, 2014
   
2,847,486
   
$
5.83
     
8.89
 
                         
Exercisable as of September 30, 2014
   
549,163
   
$
4.46
     
7.01
 
                         
Vested and expected to vest as of September 30, 2014
   
2,676,992
   
$
5.80
     
8.84
 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
Risk-free interest rate
   
1.85
%
   
2.22
%
   
1.85
%
   
2.28
%
Dividend yield
   
0
%
   
0
%
   
0
%
   
0
%
Expected option term (in years)
   
7
     
7
     
7
     
7
 
Volatility
   
94
%
   
98
%
   
94
%
   
96
%

Warrants
 
As discussed in Note 5 regarding the Company’s notes payable, in connection with the Company’s Loan Agreement signed on September 29, 2014, the Company issued to the Lenders and their affiliates warrants to purchase a total of 82,780 shares of Common Stock at a per share exercise price of $9.06.  The Lenders may not exercise the warrants for more than 41,390 of such shares of Common Stock until the earliest to occur of (i) a merger or consolidation of the Company, or a sale of all or substantially all of its assets, (ii) the Company’s satisfaction of the conditions precedent to the making of the second tranche loan, and (iii) the funding of the second tranche loan.  The Warrants will terminate on the earlier of September 29, 2021 or such earlier date as specified in the Warrants.

During the nine months ended September 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.
 
 
12

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Outstanding warrants to purchase the Company’s common stock as of September 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
Common stock
82,780
 
$
9.06
   
9/29/21

9. 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 $39.8 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. Additionally, a contract modification for a $0.5 million increase was agreed to by the NIH on September 18, 2014 to cover a portion of the manufacturing costs of the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients. The NIH’s commitment under the contract extends to July 2016. 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.
 
For the three months ended September 30, 2013 and 2014, the Company recorded revenue under this agreement of $981,247 and $281,210, respectively. For the nine months ended September 30, 2013 and 2014, the Company recorded revenue under this agreement of $3,705,942 and $1,553,161, respectively. As of December 31, 2013 and September 30, 2014, the Company recorded a receivable from the NIH and NIAID of $424,501 and $163,184, respectively, and a payable to subcontractors of $27,925 and $16,450, respectively.
 
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.
 
10. 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.
 
 
13

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
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. 

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.
 
 
14

 
ARGOS THERAPEUTICS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
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 September 30, 2014, the Company recorded $7.5 million to notes payable, including $515,161 accrued interest recorded during the nine months ended September 30, 2014. The total deferred liability was $3.1 million as of September 30, 2014 including the $1.0 million received by the Company for the manufacturing license.

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.
 
11. 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
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
Net loss
 
$
(5,672,598
)
 
$
(15,101,017
)
 
$
(15,900,641
)
 
$
(37,085,528
)
Accretion of redeemable convertible preferred stock
   
(332,232
)
   
     
(407,618
)
   
(863,226
)
Reverse prior accretion on redeemable preferred stock due to reduction in liquidation value of Series A, B, and C
   
5,657,638
     
     
5,657,638
     
 
Preferred stock dividend due to exchanges of preferred shares
   
(14,726,088
)
   
     
(14,726,088
)
   
 
                                 
Net loss attributable to common stockholders
 
$
(15,073,280
)
 
$
(15,101,017
)
 
$
(25,376,709
)
 
$
(37,948,754
)
                                 
Weighted average common shares outstanding, basic and diluted
   
231,084
     
19,655,605
     
228,224
     
16,596,437
 
                                 
Net loss per share attributable to common stockholders, basic and diluted
 
$
(65.23
)
 
$
(0.77
)
 
$
(111.19
)
 
$
(2.29
)
 
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
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
Redeemable convertible preferred stock
   
7,282,052
     
     
4,515,971
     
2,077,270
 
Stock options outstanding
   
581,831
     
2,769,043
     
568,701
     
2,252,817
 
Warrants outstanding
   
390,421
     
911
     
439,614
     
1,816
 
 
15

 
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 nephrectomy, which we initiated in the fourth quarter of 2014, in early stage RCC following nephrectomy and in other solid tumors. We are developing our second Arcelis product candidate, AGS-004, for the treatment of HIV. We recently completed treatment of patients in a phase 2b clinical trial of AGS-004 that is funded entirely by the National Institutes of Health, or NIH, under a $39.8 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 early 2015, to evaluate AGS-004 for long-term viral control in pediatric patients. In September 2014, NIH agreed to modify the contract amount from $39.3 million to $39.8 million. This modification is intended to cover a portion of the manufacturing costs of the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients. The commitment under the contract extends to July 2016.
 
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 our initial public offering, a venture loan, private placements of our preferred stock, convertible debt financings, government contracts, government and other third party grants and license and collaboration agreements. From inception in May 1997 through September 30, 2014, we have raised a total of $364.5 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;
 
 
$103.8 million from government contracts, grants and license and collaboration agreements; and
 
 
$12.5 million from our venture loan and security agreement with Horizon Technology Finance Corporation and Fortress Credit Co LLC.
   
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.
 
On September 29, 2014, we entered into a venture loan and security agreement with Horizon Technology Finance Corporation and Fortress Credit Co LLC under which we may borrow up to $25.0 million in two tranches of $12.5 million each. We borrowed the first tranche of $12.5 million upon the closing of the transaction on September 29, 2014.

We have incurred losses in each year since our inception in May 1997. Our net loss was $15.9 million for the nine months ended September 30, 2013 and $37.1 million for the nine months ended September 30, 2014. As of September 30, 2014, we had an accumulated deficit of $187.9 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 other cancers;
 
 
initiate and conduct additional clinical trials of AGS-004 for the treatment of HIV;
 
 
seek regulatory approvals for our product candidates that successfully complete clinical trials;
 
 
build out and equip a new commercial facility for the manufacture of our Arcelis-based products;
 
 
16

 
 
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.
 
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 enrollment by the end of first quarter of 2015; overall survival data expected in mid-2016
               
   
mRCC (non-clear cell)
   
 
Phase 2 clinical trial expected to be initiated in early 2015
               
   
Early stage RCC (neoadjuvant)
   
 
Investigator-initiated phase 2 clinical trial initiated in the fourth quarter of 2014
               
   
Early stage RCC (adjuvant)
   
  Investigator-initiated phase 2 clinical trial to be initiated in early 2015
               
   
Other solid tumors
   
 
Two phase 2 clinical trials expected to be initiated in late 2014 or early 2015
               
AGS-004
 
HIV
   
 
Enrollment in phase 2b clinical trial complete; data expected in the fourth 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 early 2015
 
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 October 31, 2014, we had collected tumor from approximately 700 patients for eligibility and had enrolled and randomized approximately 260 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.
 
 
17

 
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 are sponsoring investigator initiated clinical trials of AGS-003 for the treatment of these indications which we expect will begin in early 2015.
 
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 October 31, 2014, six patients had been enrolled 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, Collaboratory of AIDS Researchers for Eradication, or CARE, 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 early 2015 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 (see NIH Funding below).
 
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 fourth 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 $39.8 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $38.4 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This amount includes the September 2014 modification of the contract under which the NIH and NIAID agreed to fund up to an additional $500,000 to cover a portion of the manufacturing costs of the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients. The NIH’s commitment under the contract extends to July 2016. 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 $36.7 million through September 30, 2014 under the NIH contract. This contract is the only arrangement under which we currently generate revenue. As of September 30, 2014, there was up to $3.1 million of potential revenue remaining to be earned under the agreement with the NIH.
 
 
18

 
Results of Operations
 
Comparison of the Three and Nine Months Ended September 30, 2013 and the Three and Nine Months Ended September 30, 2014

The following table summarizes the results of our operations for the three and nine months ended September 30, 2013 and 2014, together with the changes in those items in dollars and as a percentage:
 
   
Three Months Ended
September 30,
   
$
   
%
   
Nine Months Ended
September 30,
   
$
   
%
 
   
2013
   
2014
   
Change
   
Change
   
2013
   
2014
   
Change
   
Change
 
   
(in thousands)
 
Revenue
 
$
981
   
$
399
   
$
(582
)
   
(59.3
)%
 
$
3,706
   
$
1,671
   
$
(2,035
)
   
(54.9
)%
Operating expenses
                                                               
Research and development
   
5,630
     
12,999
     
7,369
     
130.9
%
   
16,922
     
32,040
     
15,118
     
89.3
%
General and administrative
   
1,024
     
2,320
     
1,296
     
126.6
%
   
3,042
     
6,120
     
3,078
     
101.2
%
                                                                 
Total operating expenses
   
6,654
     
15,319
     
8,665
     
130.2
%
   
19,964
     
38,160
     
18,196
     
91.1
%
                                                                 
Loss from operations
   
(5,673
)
   
(14,920
)
   
(9,247
)
   
163.0
%
   
(16,258
)
   
(36,489
)
   
(20,231
)
   
124.4
%
                                                                 
Interest income
   
     
14
     
14
     
*
     
2
     
51
     
49
     
*
 
Interest expense
   
     
(180
)
   
(180
)
   
*
     
     
(526
)
   
(526
)
   
*
 
Change in fair value of warrant liability
   
     
     
     
*
     
355
     
     
(355
)
   
*
 
Investment tax credits
   
     
     
     
*
     
     
141
     
141
     
*
 
Other expense
   
     
(15
)
   
(15
)
   
*
     
     
(263
)
   
(263
)
   
*
 
                                                                 
Net loss
 
$
(5,673
)
 
$
(15,101
)
 
$
(9,428
)
   
166.2
%
 
$
(15,901
)
 
$
(37,086
)
 
$
(21,185
)
   
133.2
%
 
_______________
*
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 has been derived from our NIH contract. Revenue was $1.0 million for the three months ended September 30, 2013, compared with $0.4 million for the three months ended September 30, 2014, a decrease of $0.6 million, or 59.3%. The $0.6 million decrease for the three months ended September 30, 2014 is due to a $0.7 million decline in reimbursement under our NIH contract associated with decreased activity in the three months ended September 30, 2014 with respect to our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined. This decrease in revenue was partially offset by $0.1 million in revenue recognized in connection with a technology transfer with Medinet during the three months ended September 30, 2014.

Revenue was $3.7 million for the nine months ended September 30, 2013, compared with $1.7 million for the nine months ended September 30, 2014, a decrease of $2.0 million, or 54.9%. The $2.0 million decrease for the nine months ended September 30, 2014 is due to a $2.1 million decline in reimbursement under our NIH contract associated with decreased activity in the nine months ended September 30, 2014 with respect to our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined. This decrease in revenue was partially offset by $0.1 million in revenue recognized in connection with a technology transfer with Medinet during the nine months ended September 30, 2014.
 
 
19

 
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:
 
 
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 
September 30,
 
Nine Months Ended 
September 30,
 
   
2013
 
2014
 
2013
   
2014
 
   
(in thousands)
 
Direct research and development expense by program:
                           
AGS-003
 
$
2,413
   
$
4,912
   
$
7,920
   
$
11,788
 
AGS-004
   
303
     
153
     
1,385
     
809
 
Commercial manufacturing development
   
     
3,600
     
     
7,843
 
Other
   
16
     
49
     
38
     
113
 
                                 
Total direct research and development program expense
   
2,732
     
8,714
     
9,343
     
20,553
 
Indirect research and development expense
   
2,898
     
4,285
     
7,579
     
11,487
 
                                 
Total research and development expense
 
$
5,630
   
$
12,999
   
$
16,922
   
$
32,040
 
 
Research and development expenses were $5.6 million for the three months ended September 30, 2013, compared with $13.0 million for the three months ended September 30, 2014, an increase of $7.4 million, or 130.9%. The increase in research and development expense primarily reflects a $6.0 million increase in direct research and development expense and a $1.4 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 $2.4 million for the three months ended September 30, 2013 to $4.9 million in the three months ended September 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 September 30, 2014 as compared with the three months ended September 30, 2013; and
 
 
Direct research and development expense with respect to AGS-004 decreased from $0.3 million in the three months ended September 30, 2013 to $0.2 million in the three months ended September 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 $3.6 million of direct research and development expense related to the initiation of our commercial manufacturing development efforts during the three months ended September 30, 2014.
 
20

 
The increase in indirect research and development expense was primarily due to higher personnel costs, as we had 75 employees engaged in research and development activities as of September 30, 2013 compared with 91 employees as of September 30, 2014.

Research and development expenses were $16.9 million for the nine months ended September 30, 2013, compared with $32.0 million for the nine months ended September 30, 2014, an increase of $15.1 million, or 89.3%. The increase in research and development expense primarily reflects a $11.2 million increase in direct research and development expense and a $3.9 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 $7.9 million for the nine months ended September 30, 2013 to $11.8 million in the nine months ended September 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 nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013; and
 
 
Direct research and development expense with respect to AGS-004 decreased from $1.4 million in the nine months ended September 30, 2013 to $0.8 million in the nine months ended September 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 costs to support 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 $7.8 million of direct research and development expense related to the initiation of our commercial manufacturing development efforts during the nine months ended September 30, 2014.
 
The increase in indirect research and development expense was primarily due to higher personnel costs, as we had 75 employees engaged in research and development activities as of September 30, 2013 compared with 91 employees as of September 30, 2014.
 
We expect that our research and development expenses will increase 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 $1.0 million for the three months ended September 30, 2013, compared with $2.3 million for the three months ended September 30, 2014, an increase of $1.3 million or 126.6%. This increase is primarily due to an additional $0.3 million in personnel costs, including salaries, benefits and stock-based compensation; an increase of $0.7 million in outside services including legal, patent, and other consulting services; and an increase of $0.3 million in expenses relating to our new status as a public company, including liability and directors’ and officers’ insurance.
 
General and administrative expenses were $3.0 million for the nine months ended September 30, 2013, compared with $6.1 million for the nine months ended September 30, 2014, an increase of $3.1 million or 101.2%. This increase is primarily due to an additional $1.1 million in personnel costs, including salaries, benefits and stock-based compensation; an increase of $1.2 million in outside services including legal, patent, and other consulting services; and an increase of $0.8 million in expenses relating to our new status as a public company, including liability and directors’ and officers’ insurance.
 
 
21

 
We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we adjust to operating 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 $152 for the three months ended September 30, 2013, compared with $179,808 for the three months ended September 30, 2014. Interest expense was $513 for the nine months ended September 30, 2013, compared with $526,244 for the nine months ended September 30, 2014. During the three and nine months ended September 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 nine months ended September 30, 2013, compared with none for the nine months ended September 30, 2014. The 2013 amount represented the decrease in the fair value of the warrant liability during the nine months ended September 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 September 30, 2014.
 
Investment Tax Credits
 
Other income of $140,556 was recognized during the nine months ended September 30, 2014 for scientific research and experimental development, or 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 nine month periods ended September 30, 2013.

Other Expense
 
We had no other expenses for the three months ended September 30, 2013, compared with $15,664 in other expense for the three months ended September 30, 2014. We had no other expenses for the nine months ended September 30, 2013, compared with $263,289 for the nine months ended September 30, 2014. Under a previous 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 nine months ended September 30, 2014.

Liquidity and Capital Resources
 
Sources of Liquidity
 
As of September 30, 2014, we had cash, cash equivalents and short-term investments of $69.5 million.
 
Since our inception in May 1997 through September 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 $103.8 million from government contracts, grants and license and collaboration agreements.

As of September 30, 2014, the gross proceeds we had 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
 

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.

 
22

 
On September 29, 2014, we entered into a venture loan and security agreement, or the Loan Agreement, with Horizon Technology Finance Corporation and Fortress Credit Co LLC, or the Lenders, under which we may borrow up to $25.0 million in two tranches of $12.5 million each, or the Loan Facility.

We borrowed the first tranche of $12.5 million upon the closing of the transaction on September 29, 2014.  Subject to certain other funding conditions, the second tranche of $12.5 million will be available for drawdown at any time commencing on the date we complete the enrollment and randomization of patients in our Phase 3 trial of AGS-003 and continuing until September 30, 2015.  The per annum interest rate for each tranche will be a floating rate equal to 9.25% plus the amount by which the one-month LIBOR Rate exceeds 0.50% (effectively a floating rate equal to 8.75% plus the one-month LIBOR Rate).  The total per annum interest rate shall not exceed 10.75%.

We have agreed to repay the first tranche of $12.5 million on an interest only basis monthly until September 30, 2016, followed by monthly payments of principal and accrued interest through the scheduled maturity date for the first tranche loan on September 30, 2018. In addition, a final payment for the first tranche loan equal to $625,000 will be due on September 30, 2018, or such earlier date specified in the Loan Agreement.  We have agreed to repay any amounts advanced under the second tranche of $12.5 million in 18 monthly payments of interest only followed by 24 monthly payments of principal and accrued interest through the scheduled maturity date for the second tranche loan, which is 42 months following the date we draw down the second tranche loan.  In addition, a final payment equal to 5.0 % of the amount drawn under the second tranche loan will be due on the scheduled maturity date for such loan, or such earlier date specified in the Loan Agreement.  In addition, if we repay all or a portion of the loan prior to the applicable maturity date, we will pay the Lenders a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 3% if the prepayment occurs on or before 24 months after the funding date thereof, 2% if the prepayment occurs more than 24 months after, but on or before 36 months after, the funding date thereof, or 1% if the prepayment occurs more than 36 months after the funding date thereof.

Our obligations under the Loan Agreement are secured by a first priority security interest in substantially all of our assets other than our intellectual property. We also have agreed not to pledge or otherwise encumber its intellectual property assets, subject to certain exceptions.

The Loan Agreement includes customary affirmative and restrictive covenants, but does not include any covenants to attain or maintain certain financial metrics, and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default.  Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

In connection with the Loan Agreement, we issued to the Lenders and their affiliates warrants to purchase a total of 82,780 shares of our Common Stock at a per share exercise price of $9.06, or the Warrants.  The Lenders may not exercise the Warrants for more than 41,390 of such shares of Common Stock until the earliest to occur of (i) a merger or consolidation of the Company, or a sale of all or substantially all of its assets, (ii) our satisfaction of the conditions precedent to the making of the second tranche loan, and (iii) the funding of the second tranche loan.  The Warrants will terminate on the earlier of September 29, 2021 or such earlier date as specified in the Warrants.

On August 18, 2014, we entered into a Lease Agreement, or the Lease Agreement, with TKC LXXII, LLC, a North Carolina limited liability company, or TKC.

Under the Lease Agreement, we will lease certain land and an approximately 97,500 square-foot building to be constructed on approximately 11 acres in Durham County, North Carolina. This facility will house our corporate headquarters and primary manufacturing facility.  The Lease Agreement is intended to replace our existing lease, located at 4233 Technology Drive, Durham North Carolina, which currently expires in November 2016. The shell of the new facility will be constructed on a build-to-suit basis by TKC, at its expense, in accordance with agreed upon specifications and plans as set forth in the Lease Agreement.

The term of the Lease Agreement will be 10 years from the commencement date for the initial term, currently estimated to be May 1, 2015.  We have the option to extend the Lease Agreement by six five-year renewal terms. Initial rent will be approximately $46,917 per month, subject to certain fixed increases over the course of the term as set forth in the Lease Agreement and to adjustment based on the Company’s use of certain amounts allocated for upfitting the interior of the facility.
 
Cash Flows
 
The following table sets forth the major sources and uses of cash for the periods set forth below:
 
   
Nine Months Ended
September 30,
 
   
2013
   
2014
 
   
(in thousands)
 
Net cash provided by (used in):
           
Operating activities
 
$
(15,247
)
 
$
(32,431
)
Investing activities
   
3,785
     
(7,720
)
Financing activities
   
21,476
     
57,111
 
Effect of exchange rate changes on cash
   
(5
)
   
(4
                 
Net (decrease) increase in cash and cash equivalents
 
$
10,009
   
$
16,956
 
 
 
23

 
Operating Activities .  Net cash used in operating activities of $15.2 million during the nine months ended September 30, 2013 was primarily a result of our $15.9 million net loss and non-cash items of $0.7 million. These non-cash items reflect depreciation and amortization expense of $0.5 million and compensation expense related to stock options of $0.6 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 $32.4 million during the nine months ended September 30, 2014 was primarily a result of our $37.1 million net loss, partially offset by non-cash items of $3.1 million and changes in operating assets and liabilities of $1.6 million. These non-cash items primarily consisted of depreciation and amortization of $0.4 million, compensation expense related to stock options of $2.1 million and interest accrued on long-term debt of $0.5 million. Accounts payable increased by $1.8 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 ($7.7) million for the nine months ended September 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 nine months ended September 30, 2013 was primarily due to sales of short-term investments. Cash used in investment activities during the nine months ended September 30, 2014 primarily consisted of $20.2 million of purchases of short-term investments with funds received in our initial public offering, a transfer of 1.3 million of cash as a deposit to a bank to secure a letter of credit under a long-term facilities lease, partially offset by $14.6 million of sales and maturities of short-term investments. Purchases of property and equipment totaled $0.4 million and $0.8 million during the nine months ended September 30, 2013 and 2014, respectively.
 
Financing Activities.  Net cash provided by financing activities amounted to $21.5 million and $57.1 million for the nine months ended September 30, 2013 and 2014, respectively. Cash provided by financing activities for the nine months ended September 30, 2013 consisted primarily of proceeds of $22.0 million from the sale of our series E preferred stock, partially offset by stock issuance costs of $0.5 million. Cash provided by financing activities for the nine months ended September 30, 2014 consisted primarily of proceeds of $49.8 million from the sale of common stock in our initial public offering, which closed on February 12, 2014, $12.5 million of loan proceeds from our Loan Agreement, which closed on September 29, 2014, partially offset by stock and debt issuance costs totaling $5.2 million and payments on notes payable.
 
Other Significant Changes in Consolidated Balance Sheet as of September 30, 2014 Compared with December 31, 2013

Short-term investments increased by $5.6 million due to proceeds received from our initial public offering in February 2014. Property and equipment, net, increased by $2.9 million primarily due to the $2.6 million asset that we recognized related to a lease agreement signed in August 2014 for our new manufacturing facility and $0.3 million from construction in progress. Additionally, we recognized a $2.6 million facility lease obligation as of September 30, 2014 related to this lease agreement. Accounts payable increased by $1.8 million primarily due to the commencement of construction of the manufacturing facility. Long-term debt increased by $12.7 million primarily related to the borrowing of $12.5 million under the venture loan and security agreement on September 29, 2014 and accrued interest on the promissory note payable to Medinet.

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.

We will need to obtain significant financing prior to the commercialization of AGS-003, including to complete the planned 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 $30.0 million prior to the commercialization of AGS-003 to build out and equip the new commercial manufacturing facility that we plan to establish. In addition, we expect to spend approximately an additional $15.0 million on development, equipment and disposables, including costs incurred under the Development Agreement we entered into with Invetech Pty Ltd in October 2014. We have initiated expenditures for these purposes and construction of the facility began in October 2014. We are actively exploring additional financing arrangements in connection with the build out and equipping of the commercial manufacturing facility and are in discussions with developers, lenders and other potential financing sources regarding potential financial support. We expect to enter into such arrangements in the fourth quarter of 2014 or the first half of 2015 and that 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 build-out and equipping of the new commercial facility or may be delayed in doing so.
 
 
24

 
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 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;