News Column

ARGOS THERAPEUTICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing in "Item 1. Financial Statements" in this Quarterly Report on Form 10-Q. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties. You should read "Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q,for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.



Overview

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Our most advanced product candidate is AGS-003, which we are developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. We are currently enrolling patients in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib (Sutent) for the treatment of clear cell mRCC under a special protocol assessment, or SPA, with the Food and Drug Administration, or FDA. We also plan to conduct phase 2 clinical trials to explore the use of AGS-003 in non-clear cell mRCC, in early stage RCC prior to and following nephrectomy, and in other solid tumors. We are developing our second Arcelis product candidate, AGS-004, for the treatment of HIV and are conducting a phase 2b clinical trial of AGS-004 that is being funded entirely by the National Institutes of Health, or NIH, under a $39.3 million contract. In addition, an investigator initiated phase 2 clinical trial of AGS-004 in adult HIV patients is ongoing to evaluate the use of AGS-004 in combination with a latency reversing drug for HIV eradication, and we expect to initiate a second phase 2 clinical trial of AGS-004 in the fourth quarter of 2014, to evaluate AGS-004 for long-term viral control in pediatric patients. We have devoted substantially all of our resources to our drug development efforts, including advancing our Arcelis platform, conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue from product sales and, to date, have funded our operations primarily through private placements of our preferred stock, convertible debt financings, bank debt, government contracts, government and other third party grants and license and collaboration agreements. From inception in May 1997 through June 30, 2014, we have raised a total of $351.8 million in cash, including:



• $215.3 million from the sale of our common stock, convertible debt,

warrants and preferred stock; • $32.9 million from the licensing of our technology; and • $103.6 million from government contracts, grants and license and collaboration agreements. In February 2014, we issued and sold 6,228,725 shares of our common stock, including 603,725 shares of common stock sold pursuant to the underwriters' exercise of their option to purchase additional shares, in our initial public offering, at a public offering price of $8.00 per share, for aggregate gross proceeds of $49.8 million. The net offering proceeds to us, after deducting underwriting discounts and commissions of approximately $3.5 million and offering expenses of approximately $2.9 million, were approximately $43.4 million. We have incurred losses in each year since our inception in May 1997. Our net loss was $10.2 million for the six months ended June 30, 2013 and $22.0 million for the six months ended June 30, 2014. As of June 30, 2014, we had an accumulated deficit of $172.8 million. Substantially all of our operating losses have resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:



• continue our ongoing phase 3 clinical trial of AGS-003 for the

treatment of mRCC and initiate additional clinical trials of AGS-003

for the treatment of cancers;



• initiate additional clinical trials of AGS-004 for the treatment of HIV;

• seek regulatory approvals for our product candidates that successfully complete clinical trials; • lease, build out and equip a new commercial facility for the manufacture of our Arcelis-based products; • establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval; 15

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• maintain, expand and protect our intellectual property portfolio; • continue our other research and development efforts;



• hire additional clinical, quality control, scientific and management

personnel; and • add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts. We do not expect to generate significant funds or product revenue, other than under our contract with the NIH as described below, unless and until we successfully complete development, obtain marketing approval and commercialize our product candidates, either alone or in collaboration with third parties, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of AGS-003, AGS-004 or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds through these means when needed, on favorable terms or at all.



Our Development Programs

The following table summarizes our development programs for AGS-003 and AGS-004.

Product Candidate Primary Indication Status AGS-003

mRCC (clear cell) • Ongoing pivotal phase 3 clinical trial; completion of tumor collection expected by the end of 2014 and enrollment and randomization in the first quarter of 2015; overall survival data expected in mid-2016 • Phase 2 clinical trial expected to be mRCC (non-clear cell) initiated in the



fourth quarter of 2014

• Two



investigator-initiated phase 2

clinical trials



expected to begin in

Early stage RCC the fourth quarter of 2014 • Two phase 2 clinical trials expected to be initiated in the fourth quarter of Other solid tumors 2014 Enrollment in phase 2b clinical trial complete; data expected in the third AGS-004 HIV • quarter of 2014 • First stage of investigator-initiated clinical trial for HIV eradication began in May 2014 • Clinical trial for long-term viral control in pediatric patients expected to be initiated in the fourth quarter of 2014 We hold all commercial rights to AGS-003 and AGS-004 in all geographies other than rights to AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, which we exclusively licensed to Pharmstandard International S.A., and rights to AGS-003 in South Korea, which we exclusively licensed to Green Cross Corp. We have granted to Medinet Co., Ltd., or Medinet, an exclusive license to manufacture in Japan AGS-003 for the treatment of mRCC and an option to acquire a non-exclusive license to sell in Japan AGS-003 for the treatment of mRCC



AGS-003

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

-------------------------------------------------------------------------------- We are also exploring the use of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors. We plan to initiate clinical trials of AGS-003 for the treatment of these indications in the fourth quarter of 2014. AGS-004 We are developing AGS-004 for the treatment of HIV and plan to focus this program on the use of AGS-004 in combination with other therapies for the eradication of HIV. The current standard of care, antiretroviral drug therapy, can reduce levels of HIV in a patient's blood, increase the patient's life expectancy and improve the patient's quality of life. However, antiretroviral drug therapy cannot eliminate the virus, which persists in latently infected cells, remains undetectable by the immune system and can recur. In addition, antiretroviral therapy requires daily, life-long treatment and can have significant side effects. We believe that by combining AGS-004 with therapies that are being developed to expose the virus in latently infected cells to the immune system, we can potentially eradicate the virus. In May 2014, the first patient was enrolled in an investigator-initiated Phase 2 clinical trial of AGS-004 in up to twelve adult HIV patients to evaluate the use of AGS-004 in combination with one of these latency reversing therapies for this purpose that we are conducting in collaboration with the University of North Carolina. As of July 31, 2014, we had enrolled five patients in the trial. This trial is being conducted in two stages. Stage 1 of this trial is designed to study immune response kinetics to AGS-004 in patients on continuous ART therapy. The purpose is to better define the optimal dosing strategy in combination with a latency-reversing therapy. We plan for these patients to rollover into Stage 2, a separate protocol that will study AGS-004 in combination with one of the latency-reversing drugs. In January 2014, CARE ("Collaboratory of AIDS Researchers for Eradication") agreed that it would fund all patient clinical costs of this phase 2 clinical trial, except for the associated manufacturing costs for which we will be responsible. We also plan to explore the use of AGS-004 monotherapy to provide long-term control of HIV viral load in otherwise immunologically healthy patients and eliminate their need for antiretroviral drug therapy. Accordingly, we plan to initiate in the fourth quarter of 2014 a phase 2 clinical trial of AGS-004 monotherapy in pediatric patients infected with HIV who have otherwise healthy immune systems, have been treated with antiretroviral therapy since birth or shortly thereafter and, as a result, are lacking the antiviral memory T-cells to combat the virus. In September 2013, we completed patient enrollment in our ongoing NIH-funded phase 2b clinical trial of AGS-004 in 53 HIV-infected patients. The primary endpoint of this trial is a comparison of the median viral load in AGS-004-treated patients with the median viral load in patients receiving placebo after 12 weeks of antiretroviral treatment interruption. Secondary endpoints of this trial include comparisons between AGS-004-treated patients and patients receiving placebo with respect to viral measurement changes from immediately prior to the commencement of antiretroviral therapy to the end of the planned treatment interruption, duration of treatment interruption, changes in CD4+ T-cell counts, an indicator of the health of the immune system, and assessment of increases in antiviral immunity between AGS-004 treated and placebo-treated patients. We designed this trial to confirm the data obtained in our phase 2a clinical trial and provide proof of concept of the ability of AGS-004 to induce an immune response to eliminate the cells responsible for viral replication. We expect to report data from this trial in the third quarter of 2014. NIH Funding In September 2006, we entered into a multi-year research contract with the NIH and the National Institute of Allergy and Infectious Diseases, or NIAID, to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We are using funds from this contract to develop AGS-004, including to fund in full our phase 2b clinical trial of AGS-004. We have agreed to a statement of work under the contract, and are obligated to furnish all the services, qualified personnel, material, equipment, and facilities, not otherwise provided by the U.S. government, needed to perform the statement of work. Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $39.3 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $37.9 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This commitment extends to September 2015. Since September 2010, we have received reimbursement of our allocated overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed to with the NIH in September 2010. These provisional indirect cost rates are subject to adjustment based on our actual costs pursuant to the agreement with the NIH and may result in additional payments to us from the NIH and the NIAID to reflect our actual costs since September 2010. We have recorded revenue of $36.3 million through June 30, 2014 under the NIH contract. This contract is the only arrangement under which we currently generate revenue. As of June 30, 2014, there was up to approximately $3.0 million of potential revenue remaining to be earned under the agreement with the NIH. 17

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Results of Operations

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

The following table summarizes the results of our operations for the three and six months ended June 30, 2013 and 2014, together with the changes in those items in dollars and as a percentage:

Three Months Ended Six Months Ended June 30, $ % June 30, $ % 2013 2014 Change Change 2013 2014 Change Change (in thousands) Revenue $ 1,263$ 473$ (790 ) (62.5 )% $ 2,725$ 1,272$ (1,453 ) (53.3 )% Operating expenses Research and development 6,102 10,569 4,467 73.2 % 11,292 19,041 7,749 68.6 % General and administrative 940 1,866 926 98.5 % 2,018 3,800 1,782 88.3 %



Total operating expenses 7,042 12,435 5,393 76.6 % 13,310 22,841 9,531 71.6 %

Loss from operations (5,779 ) (11,962 ) (6,183 )



107.0 % (10,585 ) (21,569 ) (10,984 ) 103.8 %

Interest income - 21 21 * 2 37 35 * Interest expense - (172 ) (172 ) * - (346 ) (346 ) * Change in fair value of warrant liability - - - * 355 - (355 ) * Investment tax credits - 141 141 * - 141 141 * Other expense - (12 ) (12 ) * - (248 ) (248 ) * Net loss $ (5,779 )$ (11,984 )$ (6,205 ) 107.4 % $ (10,228 )$ (21,985 )$ (11,757 ) 114.9 % _______________ * Not meaningful Revenue To date, we have not generated revenue from the sale of any products. All of our revenue has been derived from government contracts and grants and payments under license and collaboration agreements. We may generate revenue in the future from government contracts and grants, payments from future license or collaboration agreements and product sales. We expect that any revenue we generate will fluctuate from quarter to quarter. Substantially all of our revenue is currently derived from our NIH contract. Revenue was $1.3 million for the three months ended June 30, 2013, compared with $0.5 million for the three months ended June 30, 2014, a decrease of approximately $0.8 million, or 62.5%. The $0.8 million decrease for the three months ended June 30, 2014 is due to decreased reimbursement under our NIH contract associated with decreased activity with respect to our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined. Revenue was $2.7 million for the six months ended June 30, 2013, compared with $1.3 million for the six months ended June 30, 2014, a decrease of approximately $1.4 million, or 53.3%. The $1.4 million decrease for the six months ended June 30, 2014 is due to decreased reimbursement under our NIH contract associated with decreased activity with respect to our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined.



Research and Development Expenses

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

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• salaries and related expenses for personnel in research and development functions; • fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other



related clinical trial fees, such as for investigator grants, patient

screening, laboratory work and statistical compilation and analysis;

• allocation of facility lease and maintenance costs;



• depreciation of leasehold improvements, laboratory equipment and computers;

• costs related to production of product candidates for clinical trials;

• costs related to compliance with regulatory requirements; • consulting fees paid to third parties related to non-clinical research and development; • costs related to stock options or other stock-based compensation granted to personnel in research and development functions; and • acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies. The table below summarizes our direct research and development expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and clinical research organizations, including in connection with our clinical trials, and related clinical trial fees. We have been developing AGS-003 and AGS-004, in parallel, and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate salaries, stock-based compensation, employee benefit or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in "Indirect research and development expense" in the table below. Three Months Ended June 30, Six Months Ended June 30, 2013 2014 2013 2014



(in thousands) Direct research and development expense by program: AGS-003

$ 3,154



$ 3,716$ 5,507$ 6,876 AGS-004

500 202 1,081 656 Commercial manufacturing development - 2,880 - 4,243 Other 10 15 23 64



Total direct research and development program expense 3,664

6,813 6,611 11,839 Indirect research and development expense 2,438 3,756 4,681 7,202 Total research and development expense $ 6,102



$ 10,569$ 11,292$ 19,041

Research and development expenses were $6.1 million for the three months ended June 30, 2013, compared with $10.6 million for the three months ended June 30, 2014, an increase of approximately $4.5 million, or 73.2%. The increase in research and development expense primarily reflects a $3.2 million increase in direct research and development expense and a $1.3 million increase in indirect research and development expense. The increase in direct research and development expenses resulted primarily from the following:



• Direct research and development expense for AGS-003 increased from

$3.2 million for the three months ended June 30, 2013 to $3.7 million

in the three months ended June 30, 2014. This increase primarily reflects increased patient enrollment in the ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib in the three months ended June 30, 2014 as compared with the three months ended June 30, 2013; and • Direct research and development expense with respect to AGS-004 decreased from $0.5 million in the three months ended June 30, 2013 to $0.2 million in the three months ended June 30, 2014 primarily due to the decreased activity in our phase 2b clinical trial of AGS-004



as the number of patients receiving treatment in the trial declined,

partially offset by $0.2 million in costs for stage 1 of an investigator-initiated phase 2 clinical trial of AGS-004 in adult HIV patients aimed at eradication of the virus that began in May 2014. • We also incurred $2.9 million of direct research and development expense related to the initiation of our commercial manufacturing development efforts during the three months ended June 30, 2014. 19

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

Research and development expenses were $11.3 million for the six months ended June 30, 2013, compared with $19.0 million for the six months ended June 30, 2014, an increase of approximately $7.7 million, or 68.6%. The increase in research and development expense primarily reflects a $5.2 million increase in direct research and development expense and a $2.5 million increase in indirect research and development expense. The increase in direct research and development expenses resulted primarily from the following: • Direct research and development expense for AGS-003 increased from $5.5 million for the six months ended June 30, 2013 to $6.9 million in the six months ended June 30, 2014. This increase primarily reflects increased patient enrollment in the ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013; and • Direct research and development expense with respect to AGS-004 decreased from $1.1 million in the six months ended June 30, 2013 to $0.7 million in the six months ended June 30, 2014 primarily due to the decreased activity in our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined. • We also incurred $4.2 million of direct research and development expense related to the initiation of our commercial manufacturing development efforts during the six months ended June 30, 2014.



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

We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of AGS-003 and AGS-004.

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of: • the scope, rate of progress, expense and results of our ongoing clinical trials; • the scope, rate of progress, expense and results of additional clinical trials that we may conduct;



• other research and development activities; and

• the timing of regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.



General and Administrative Expenses

General and administrative expenses were $0.9 million for the three months ended June 30, 2013, compared with $1.9 million for the three months ended June 30, 2014, an increase of 98.5%. This reflects an increase of $0.4 million in personnel costs, including salaries, benefits and stock-based compensation. Additionally, outside services including legal, patent, and other consulting services, increased by $0.2 million and expenses relating to our new status as a public company, including liability and directors' and officers' insurance, increased $0.3 million during the three months ended June 30, 2014 compared with the same period in 2013. General and administrative expenses were $2.0 million for the six months ended June 30, 2013, compared with $3.8 million for the six months ended June 30, 2014, an increase of 88.3%. This reflects an increase of $0.8 million in personnel costs, including salaries, benefits and stock-based compensation. Additionally, outside services including legal, patent, and other consulting services, increased by $0.4 million and expenses relating to our new status as a public company, including liability and directors' and officers' insurance, increased $0.5 million during the six months ended June 30, 2014 compared with the same period in 2013. 20

-------------------------------------------------------------------------------- We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.



Interest Expense

Interest expense was $171 for the three months ended June 30, 2013, compared with $171,604 for the three months ended June 30, 2014. During the three months ended June 30, 2014, interest expense primarily resulted from accrued interest on our note payable to Medinet, which was issued in December 2013. Interest expense was $361 for the six months ended June 30, 2013, compared with $346,436 for the six months ended June 30, 2014. During the six months ended June 30, 2014, interest expense primarily resulted from accrued interest on our note payable to Medinet, which was issued in December 2013.



Change in Fair Value of Warrant Liability

Income from the change in fair value of the warrant liability was $0.4 million for the six months ended June 30, 2013, compared with none for the six months ended June 30, 2014. The 2013 amount represented the decrease in the fair value of the warrant liability during the six months ended June 30, 2013. In July 2013, in connection with the series D-1 exchange, all of our outstanding warrants to purchase shares of our series C preferred stock and series D-1 preferred stock were cancelled. As a result, there were no warrants to purchase preferred stock outstanding as of December 31, 2013 or June 30, 2014.



Investment Tax Credits

Other income of $140,556 was recognized during the three months ended June 30, 2014 for scientific research and experimental development ("SR&ED") investment tax credits in Canada. Under Canadian and Ontario law, the Company's Canadian subsidiary is entitled to SR&ED. Because these credits are subject to a claims review, the Company recognizes such credits when received. No such credits were received during the three or six month periods ended June 30, 2013.



Other Expense

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



Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2014, we had cash, cash equivalents and short-term investments of approximately $71.8 million.

Since our inception in May 1997 through June 30, 2014, we have funded our operations principally with $215.3 million from the sale of common stock, convertible debt, warrants and preferred stock, $32.9 million from the licensing of our technology, and $103.3 million from government contracts, grants and license and collaboration agreements.

As of June 30, 2014, the gross proceeds we have received from the issuance and sale of our preferred stock were as follows:

Gross Issue Year Proceeds (in thousands) Series A Preferred 2000 $ 1,594 Series B Preferred 2001 $ 39,382 Series B-1 Preferred 2004 $ 5,000 Series C Preferred 2008 $ 33,462 Series D Preferred 2012 $ 9,022 Series D-1 Preferred 2012 $ 15,978 Series E Preferred 2013 $ 48,000 21

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In February 2014, we issued and sold 6,228,725 shares of our common stock, including 603,725 shares of common stock sold pursuant to the underwriters' exercise of their option to purchase additional shares, in our initial public offering at a public offering price of $8.00 per share, for aggregate gross proceeds of $49.8 million. The net offering proceeds to us, after deducting underwriting discounts and commissions of approximately $3.5 million and offering expenses of approximately $2.6 million, were approximately $43.7 million.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below: Six Months Ended June 30, 2013 2014 (in thousands) Net cash provided by (used in): Operating activities $ (8,674 )$ (19,693 ) Investing activities 3,835 (14,323 ) Financing activities (16 ) 45,021 Effect of exchange rate changes on cash (7 ) 4 Net (decrease) increase in cash and cash equivalents $



(4,862 ) $ 11,009

Operating Activities. Net cash used in operating activities of $8.7 million during the six months ended June 30, 2013 was primarily a result of our $10.2 million net loss, partially offset by changes in operating assets and liabilities of $1.2 million and non-cash items of $0.3 million. These non-cash items included depreciation of $0.3 million and compensation expense related to stock options of $0.4 million, partially offset by the gain recorded due to the decrease in fair value of our warrant liability of $0.4 million. Net cash used in operating activities of $19.7 million during the six months ended June 30, 2014 was primarily a result of our $22.0 million net loss, partially offset by non-cash items of $1.5 million and changes in operating assets and liabilities of $0.8 million. These non-cash items primarily consisted of depreciation and amortization of $0.3 million and compensation expense related to stock options of $1.2 million. Accounts payable increased by $0.9 million, which was partially offset by an increase in deferred financing costs of $0.1 million. Investing Activities. Net cash provided by (used in) investing activities amounted to $3.8 million and ($14.3) million for the six months ended June 30, 2013 and 2014, respectively. Cash provided by and used in investing activities during each of these periods primarily reflected our purchases of property and equipment and purchases, sales and maturities of short-term investments. Cash provided by investment activities during the six months ended June 30, 2013 was primarily due to sales of short-term investments. Cash used in investment activities during the six months ended June 30, 2014 primarily consisted of purchases of short-term investments with funds received in our initial public offering. Financing Activities. Net cash (used in) provided by financing activities amounted to approximately (less than $0.1 million) and $45.0 million for the six months ended June 30, 2013 and 2014, respectively. Cash used in financing activities for the six months ended June 30, 2013 consisted solely of payments on notes payable. Cash provided by financing activities for the six months ended June 30, 2014 consisted of proceeds of $49.8 million from the sale of common stock in our initial public offering, which closed on February 12, 2014, partially offset by stock issuance costs of $4.8 million and less than $0.1 million of payments on notes payable.



Funding Requirements

To date, we have not generated any product revenue from our development stage product candidates. We do not know when, or if, we will generate any product revenue. We do not expect to generate significant product revenue unless or until we obtain marketing approval of, and commercialize AGS-003 or AGS-004. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue our phase 3 clinical trial of AGS-003, initiate additional clinical trials of AGS-003 and AGS-004, seek regulatory approval for our product candidates and lease, build out and equip a new commercial manufacturing facility. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. We will need substantial additional funding in connection with our continuing operations. We expect that our existing cash, cash equivalents and short-term investments, including anticipated funding under our NIH contract, will enable us to fund our operating expenses into the second half of 2016. We intend to devote our cash, cash equivalents and short term investments to fund our pivotal phase 3 clinical trial of AGS-003 through data, to fund our planned phase 2 clinical trials of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors, to fund certain of the costs of the ongoing phase 2 clinical trial of AGS-004 for HIV eradication and the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients, to initiate, but not complete, the planned leasing, build-out and equipping of a new commercial manufacturing facility and for working capital and general corporate purposes. 22 -------------------------------------------------------------------------------- We will need to obtain significant financing prior to the commercialization of AGS-003, including to complete the planned leasing, build-out and equipping of a new commercial manufacturing facility and to fund any commercialization efforts in advance of regulatory approval of AGS-003. We expect that we will require approximately an additional $35.0 million prior to the commercialization of AGS-003 to lease, build out and equip the new commercial manufacturing facility that we plan to establish. We have initiated expenditures for this purpose and expect to initiate construction of this facility by the fourth quarter of 2014. We are actively exploring potential sites and financing arrangements in connection with the lease, build out and equipping of a commercial manufacturing facility and are in discussions with developers and governmental authorities regarding potential sites and financial support. We expect to enter into arrangements that include financial support, and we expect such arrangements will likely involve material obligations and debt liabilities. If we are unable to obtain additional financing when needed, in the required amounts or at all, we may not be able to complete the planned leasing, build-out and equipping of the new commercial facility or may be delayed in doing so. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.



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

• the progress and results of our ongoing pivotal phase 3 clinical trial of AGS-003 and other clinical trials of AGS-003 that we may conduct;



• the progress and results of our ongoing phase 2b clinical trial, our

ongoing phase 2 clinical trial for HIV eradication and other clinical

trials of AGS-004 that we may conduct and our ability to obtain additional funding under our NIH contract for our AGS-004 program;



• the scope, progress, results and costs of preclinical development,

laboratory testing and clinical trials for our other product candidates;



• the costs and timing of our planned leasing, build-out and equipping

of a new commercial manufacturing facility;



• the potential need to repay the $9.0 million loan under our license

agreement with Medinet;



• the costs, timing and outcome of regulatory review of our product candidates;

• the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval; • revenue, if any, received from sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;



• the costs of preparing, filing and prosecuting patent applications,

maintaining, enforcing our intellectual property rights and defending

intellectual property-related claims; • the extent to which we acquire or invest in businesses, products and technologies; • our ability to obtain government or other third party funding for the development of our product candidates; and • our ability to establish collaborations on favorable terms, if at all, particularly arrangements to develop, market and distribute AGS-003 outside North America and arrangements for the development and commercialization of our non-oncology product candidates, including AGS-004. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. 23 -------------------------------------------------------------------------------- We are seeking government or other third party funding for the continued development of AGS-004 following completion of the phase 2b clinical trial of AGS-004. In January 2014, CARE agreed that it would fund all patient clinical costs of our planned phase 2 adult eradication clinical trial of AGS-004, except for the associated manufacturing costs for which we will be responsible. In addition, we are discussing with the NIH the planned phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients and potential funding by the NIH of the costs of the trial. If we are unable to raise government or other third party funding when needed, we may be required to delay, limit, reduce or terminate our development of AGS-004 or to grant rights to develop and market AGS-004 that we would otherwise prefer to keep for ourselves.



Critical Accounting Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 2 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to our critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2013. Contractual Obligations



During the three months ended June 30, 2014, there were no material changes outside the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.


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Source: Edgar Glimpses


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