News Column

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

August 6, 2014

This Quarterly Report on Form 10-Q contains "forward-looking statements" about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as "assumes," "plans," "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," or "will," and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include

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those described under the caption "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, or the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview

We are a development stage biopharmaceutical company engaged in the discovery, acquisition, development and commercialization of proprietary drug therapeutics for addressing significant unmet medical needs in the U.S., Europe and additional international markets. Our primary therapeutic focus is oncology, including the treatment of chronic cancer pain, but we are also developing therapeutic products for other indications, including immunology and infectious diseases. We currently have two clinical development programs underway: (i) our lead oncology drug product candidate Cynviloq, is a micellar diblock copolymeric paclitaxel formulation, and (ii) RTX, a non-opiate, ultra potent and selective agonist of the TRPV-1 receptor for intractable pain in end-stage disease.

Our pipeline also includes preclinical fully human therapeutic antibodies, including our fully human anti-PD-L1 and anti-PD-1 monoclonal antibodies, or Abs, derived from our proprietary G-MAB® library platform, antibody drug conjugates, or ADCs, and recombinant intravenous immunoglobulin, or rIVIG. Our objective is to develop two classes of antibody drug products, therapeutic antibodies and ADCs: (i) First in Class, and/or (ii) Best in Class, which may offer greater efficacy and/or fewer adverse events or side effects as compared to existing drugs.

Through June 30, 2014, we identified and further developed a number of potential drug product candidates across various therapeutic areas, and intend to select several lead product candidates to further advance into preclinical development activities in 2014. It is too early to assess which of these candidates, if any, will merit further evaluation in clinical trials. Our libraries were designed to facilitate the rapid identification and isolation of highly specific, antibody therapeutic product candidates that are fully-human and that bind to disease targets appropriate for antibody therapy. We built our initial antibody expression and production capabilities to enable us to make sufficient product material to conduct preclinical safety and efficacy testing in animal models.

Although we intend to retain ownership and control of some product candidates by advancing the development, we will also consider partnerships with pharmaceutical or biopharmaceutical companies in order to balance the risks associated with drug discovery and development and maximize our stockholders' returns. Our partnering objectives include generating revenue through license fees, milestone-related development fees and royalties by licensing rights to our product candidates.

Recent Developments

Underwritten Public Offering. In May 2014, we closed an underwritten public offering of 4,765,000 shares of common stock, at $5.25 per share, and in June 2014, closed the full exercise of the over-allotment option granted to the representative of the underwriters to purchase an additional 714,750 shares of our common stock, with total gross proceeds of $28.8 million, before underwriting discounts and commissions and other offering expenses payable by us.

Related Party Agreements with Wholly-Owned Subsidiary Ark Animal Health, Inc.

License and Development Agreement. On June 18, 2014, we entered into a License and Development Agreement (LDA) with our wholly-owned subsidiary Ark Animal Health, Inc. (Ark) whereby we granted Ark a license to develop and commercialize RTX for animal use only, in exchange for the issuance to us 10,000,000 shares of Ark common stock valued at $13,100, representing 100% of the outstanding shares of Ark common stock. Such intercompany transactions have been eliminated in consolidation.

Transition Services Agreement. On June 18, 2014, we entered into a Transition Services Agreement (TSA) with Ark which became effective retroactively to April 1, 2014. Under the TSA, we have provided and/or have made available to Ark various administrative, financial, legal, insurance, facility, information technology, laboratory, real estate and other services to be provided by, or on our behalf, together with such other services as reasonably requested by Ark. In consideration for such services, Ark will pay fees to us for the services provided, and those fees will generally be in amounts intended to allow us to recover all of our direct and indirect costs incurred in providing such services. The personnel performing services under the TSA are employees and/or independent contractors of ours and are not under the direction or control of Ark. These personnel costs are based upon the actual percentages of time spent by our personnel performing services for Ark under the TSA. In addition, Ark will reimburse us for direct out-of-pocket costs incurred by us for third party services provided to Ark. As of June 30, 2014, we have recorded $507 of costs associated with activities contemplated under the TSA. Such intercompany transactions have been eliminated in consolidation. In order for us to be reimbursed by Ark for activities provided under the TSA, Ark must be successful in raising financing on a stand-alone basis. There can be no assurance that Ark will be successful in securing third party financing.

Loan and Security Agreement. On June 18, 2014, we entered into a Loan and Security Agreement (Loan Agreement) with Ark pursuant to which we agreed to lend Ark, as amended in August 2014, up to $1,000 for working capital purposes. Advances under the Loan Agreement bear interest at six percent (6%) per annum. Outstanding advances mature on the earlier of: (i) following the consummation of any public or private offering of securities in which Ark receives gross proceeds of at least $5,000, (ii) an event of default under the Loan Agreement, or (iii) June 18, 2015. In connection with the Loan Agreement, we have a security interest in all of Ark's assets, including Ark's intellectual property, until the loan is repaid in full. During the period from Ark's inception in February 2014 through June 30, 2014, we paid for certain general, administrative and research and development expenses totaling $507. The intercompany balances associated with these transactions have been eliminated in consolidation.

Bank Loan and Security Agreement. In March 2014, we entered into an amended and restated loan and security agreement, increasing the September 2013 facility to $12,500 from $5,000, with the same two banks. The amended and restated loan was funded in March 2014, is secured by a lien covering substantially all of our assets, excluding intellectual property, which is subject to a negative pledge, and bears interest at 7.95% per annum. We will make interest only payments on the outstanding amount of the loan on a monthly basis until October 1, 2014, after which equal monthly payments of principal and interest are due until the loan maturity date of September 30, 2017. In the event we raise $30 million of net equity or proceeds from a collaboration, if any, the interest only period will be extended by six months. The amended and restated loan provided the Lenders additional warrants to purchase an aggregate of 34,642 shares of our common stock at an exercise price of $12.99 per share, exercisable for seven years from the date of issuance. The value of the warrants, totaling $322, was recorded as debt discount and additional paid-in capital.

Agreement and Plan of Merger with IgDraSol. On March 7, 2013, we entered into various agreements with IgDraSol, a private company focused on the development of Cynviloq, as follows: (i) an exclusive option agreement, (ii) an asset purchase agreement pursuant to which we agreed to purchase all documentation, equipment, information and other know-how related to micellar nanoparticle technology encompassing Tocosol® and related technologies, and (iii) an initial services agreement, pursuant to which, IgDraSol provided certain product development and technology services related to our antibody platform. On September 9, 2013, we exercised our option to acquire IgDraSol and IgDraSol became a wholly-owned subsidiary.

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On July 29, 2013, we received official meeting minutes from an End-of-Phase II meeting held on July 23, 2013 for Cynviloq (or IG-001) with the U.S. Food and Drug Administration, or FDA. Cynviloq is initially under development for the treatment of MBC and NSCLC, in the U.S. The FDA Division of Oncology Products 1 agreed that the data available from: (i) the postmarketing surveillance studies conducted in ex-U.S. territories for MBC and NSCLC, (ii) Phase I-III studies for MBC, and (iii) Phase I-II studies in NSCLC, Ovarian, Bladder, and Pancreatic cancers are sufficient to support pursuing the 505(b)(2) Bioequivalence (BE) regulatory submission pathway approach using Abraxane® and Taxol® as the Reference Listed Drugs in a single bioequivalence study. Abraxane is an albumin-bound paclitaxel (nab-paclitaxel) product approved for MBC, NSCLC and pancreatic cancer indications. Taxol is a cremophor-based paclitaxel product approved for these indications as well as other cancer indications. We filed our BE protocol in 2013 and commenced the BE study in March 2014.

Agreement and Plan of Merger with Sherrington. On October 9, 2013, we acquired Sherrington for an aggregate of 200,000 shares of our common stock. Sherrington's sole asset was the license rights to resiniferatoxin. Upon acquisition, Sherrington became a wholly-owned subsidiary.

Underwritten Public Offering and Nasdaq Uplisting. In October 2013, we closed an underwritten public offering of 4,150,000 shares, at $7.25 per share, and closed the full exercise of the over-allotment option granted to the representative of the underwriters to purchase an additional 622,500 shares of its common stock, with total gross proceeds of $34.6 million, before underwriting discounts and commissions and other offering expenses payable by us. The common stock began trading on The NASDAQ Capital Market on October 25, 2013 under the symbol "SRNE".

Agreement and Plan of Merger with Concortis. On December 19, 2013, we completed our previously announced merger with Concortis, which providing us with a comprehensive technology platform to create a new generation of homogenous ADC's with site-specific toxin conjugation and consistent drug-antibody ratios. We issued 1,331,978 shares of our common stock to Concortis shareholders which were valued at $8.48 per share, the closing price per share of our common stock as of December 18, 2013.

Agreement with Esai / Morphotek. On June 25, 2014, we entered into a collaboration agreement to generate novel antibody drug conjugates (ADCs) based on a Morphotek antibody linked to chemotherapeutic agents using proprietary ADC Technology. Under the terms of the agreement, we will receive research fees, an up-front payment, milestone payments and royalties on future net sales. Additionally, we have the potential to receive up to $50 million upon successful attainment of key milestones.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

During the quarter ended June 30, 2014, there were no significant changes to the items that we disclosed as our critical accounting policies and estimates in Note 2 to our consolidated financial statements for the year ended December 31, 2013 contained in our 2013 Form 10-K, as filed with the SEC.

Results of Operations

The following describes certain line items set forth in our statements of operations.

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Revenues. Revenues were $775 for the three months ended June 30, 2014, as compared to $142 for the three months ended June 30, 2013. The net increase of $633 is primarily due to sales and service revenues of $691 generated from the sale of customized reagents and providing professional services from the Concortis operation that was acquired in December 2013. Activities under the two active grants received from the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health, or NIH, for the three months ended June 30, 2014 were lower than in the corresponding period of 2013 due primarily to only one active grant in the quarter ending June 30, 2014 as compared to two active grants in quarter ending June 30, 2013.

In July 2011, we were awarded a second Advanced Technology Small Business Technology Transfer Research grant to support our program to generate and develop antibody therapeutics and vaccines to combat C. difficile infections, or the C. difficile Grant award. The project period for the C. difficile Grant award covers a two-year period which commenced in June 2011 and ended in June 2013, with a total grant award of $600. The C. difficile Grant award revenues for the three months ended June 30, 2014 and 2013 and for the period from Inception through June 30, 2014 were $0, $67 and $593, respectively.

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In June 2012, we were awarded a third Advanced Technology Small Business Technology Transfer Research grant to support our program to generate and develop novel human antibody therapeutics to combat Staph infections, including Methicillin-resistant Staph, or the Staph Grant II award. The project period for the phase I grant covers a two-year period which commenced in June 2012, with a total grant award of $600. The Staph Grant II award revenues for the three months ended June 30, 2014 and 2013, and for the period from Inception through June 30, 2014, were $52, $75 and $587, respectively.

In June 2014, the NIAID awarded us a Phase II Small Business Technology Transfer Research (STTR) grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat Staphylococcus aureus (S. aureus or Staph) infections, including methicillin-resistant S. aureus (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, with total funds available of approximately $1 million per year for up to 2 years. During the three and six months ended June 30, 2014 and for the period from Inception through June 30, 2014, we recorded $32 of revenue associated with the Staph Grant III award.

We had no other revenue during the three months ended June 30, 2014 and 2013 as we have not yet developed any product candidates for commercialization or earned any licensing or royalty payments.

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the unpredictability of the demand for products and services offered as well as the timing and amount of grant awards, research and development reimbursements and other payments received under any strategic collaborations, if any.

Cost of revenues. Cost of revenues for the three months ended June 30, 2014 were $510 and relate to the sale of customized reagents and providing professional services. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2014 and 2013 were $5,309 and $2,141, respectively. Research and development expenses include the costs to conduct our BE registration trial related to Cynviloq and prepare for our New Drug Application filing anticipated in 2015, costs to advance our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses. The increase of $3,168 is primarily attributable to salaries and compensation related expense, preclinical testing, depreciation, consulting and lab supply costs incurred in connection with our expanded research and development activities and our BE registration trial and activities to advance RTX into clinical trials and potentially pursue other human indications. We expect research and development expenses to increase in absolute dollars as we: (i) advance our Cynviloq BE registration trial and pursue other potential indications, including expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential drug candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates, (iv) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the three months ended June 30, 2014 and 2013 were $0 and $1,210, respectively. Acquired in-process research and development expenses for the three months ended June 30, 2013 include the costs of acquiring the Tocosol® and related technologies.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2014 and 2013 were $2,361 and $1,508, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $853 is primarily attributable to higher salaries and related compensation expenses, stock-based compensation, legal costs related to general corporate and IP matters, consulting and business development expenses and higher compliance costs associated with our public reporting obligations. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts and compliance with our public reporting obligations, and (ii) assume all of the ongoing operating costs associated with the mergers of IgDraSol, Sherrington and Concortis, and integrate their operations.

Intangible Amortization. Intangible amortization for the three months ended June 30, 2014 and 2013 was $586 and $0, respectively. The increase resulted primarily from the acquisition and amortization of intangible license rights from IgDraSol and from acquired technology and customer relationships from Concortis, all acquired in the latter part of 2013.

Interest Expense. Interest expense for the three months ended June 30, 2014 and 2013 was $468 and $22, respectively. The increase in interest expense resulted primarily from borrowings under the amended loan and security agreement.

Interest Income. Interest income for the three months ended June 30, 2014 and 2013 was $5 and $2, respectively. The increase in interest income resulted from higher average cash balances in 2014 as compared to the same period in 2013. We expect that continued low interest rates will significantly limit our interest income in the near term.

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Net Loss. Net loss for the three months ended June 30, 2014 and 2013 was $8,454 and $4,737, respectively. The increase in net loss is mainly attributable to the expanded research and development, intangible amortization and general and administrative activities.

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

Revenues. Revenues were $1,751 for the six months ended June 30, 2014, as compared to $276 for the six months ended June 30, 2013. The net increase of $1,475 is primarily due to sales and service revenues of $1,569 generated from the sale of customized reagents and providing professional services from the Concortis operations that was acquired in December 2013. Activities under the two active grants received from the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health, or NIH, for the six months ended June 30, 2014 were lower than in the corresponding period of 2013 due primarily to only one active grant in the six months ending June 30, 2014 as compared to two active grants in same period of 2013.

Cost of revenues. Cost of revenues for the six months ended June 30, 2014 were $1,073 and relate to the sale of customized reagents and providing professional services. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2014 and 2013 were $11,416 and $3,540, respectively. Research and development expenses include the costs to conduct our BE registration trial related to Cynviloq and prepare for our New Drug Application filing anticipated in 2015, costs to advance our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses. The increase of $7,876 is primarily attributable to salaries and compensation related expense, preclinical testing, depreciation, consulting and lab supply costs incurred in connection with our expanded research and development activities and our BE registration trial and activities to advance RTX into clinical trials and potentially pursue other human indications. We expect research and development expenses to increase in absolute dollars as we: (i) advance our Cynviloq BE registration trial and pursue other potential indications, including expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential drug candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates, (iv) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the six months ended June 30, 2014 and 2013 were $209 and $1,210, respectively. Acquired in-process research and development expenses for the six months ended June 30, 2014 include the costs associated with a research agreement. Acquired in-process research and development expenses for the six months ended June 30, 2013 include the costs of acquiring the Tocosol® and related technologies.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2014 and 2013 were $5,746 and $2,757, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $2,989 is primarily attributable to higher salaries and related compensation expenses, stock-based compensation, legal costs related to general corporate and IP matters, consulting and business development expenses and higher compliance costs associated with our public reporting obligations. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, compliance with our public reporting obligations, and (ii) assume all of the ongoing operating costs associated with the mergers of IgDraSol, Sherrington and Concortis, and integrate their operations.

Intangible Amortization. Intangible amortization for the six months ended June 30, 2014 and 2013 was $1,172 and $0, respectively. The increase resulted primarily from the acquisition and amortization of intangible license rights from IgDraSol and from acquired technology and customer relationships from Concortis, all acquired in the latter part of 2013.

Interest Expense. Interest expense for the six months ended June 30, 2014 and 2013 was $691 and $32, respectively. The increase in interest expense resulted primarily from borrowings under the amended loan and security agreement amended in March 2014.

Interest Income. Interest income for the six months ended June 30, 2014 and 2013 was $9 and $4, respectively. The increase in interest income resulted from higher average cash balances in 2014 as compared to the same period in 2013. We expect that continued low interest rates will significantly limit our interest income in the near term

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Net Loss. Net loss for the six months ended June 30, 2014 and 2013 was $18,547 and $7,259, respectively. The increase in net loss is mainly attributable to the expanded research and development, intangible amortization and general and administrative activities.

Liquidity and Capital Resources

As of June 30, 2014, we had $50,155 in cash and cash equivalents primarily attributable to: (i) the closing of our underwritten public offering in October 2013 and May 2014 for aggregate net proceeds of $58,045, (ii) the issuance of $1,850 of convertible promissory notes, which automatically converted into 256,119 shares of our common stock upon the closing of the October 2013 underwritten public offering, and (iii) net borrowings under our $12,500 amended and restated loan and security agreement.

Cash Flows from Operating Activities. Net cash used for operating activities was $15,512 for 2014 and is primarily attributable to our net loss of $18,547 and our net reduction in working capital balances of $1,491, which were offset by $4,526 in non-cash activities relating to stock-based compensation, acquired in-process research and development, depreciation and amortization expense and other non-cash activities. Net cash used for operating activities was $6,297 for 2013 and primarily reflects a net loss of $7,259, which was partially offset by $775 in non-cash activities relating primarily to stock-based compensation and depreciation expense.

We expect to continue to incur substantial and increasing losses and have negative net cash flows from operating activities as we seek to expand and support our clinical and preclinical development and research activities.

Cash Flows from Investing Activities. Net cash used for investing activities was $198 for 2014 as compared to $228 for 2013. The net cash used related primarily to equipment acquired for research and development activities.

We expect to increase our investment in equipment as we seek to expand and progress our research and development capabilities.

Cash Flows from Financing Activities. Net cash provided by financing activities for 2014 and 2013 was $34,198 and $7,188, respectively, which were primarily derived from the closing of our underwritten public offerings, cash provided by increases in net borrowings under our amended and restated loan and security agreement.

Future Liquidity Needs. From inception through June 30, 2014, we have principally financed our operations through underwritten public offerings and private equity financings with aggregate net proceeds of $79,851, as we have not generated any product related revenue from operations to date, and do not expect to generate significant revenue for several years, if ever. We will need to raise additional capital before we exhaust our current cash resources in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings, or through corporate collaboration and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.

In March 2014, we entered into an amended and restated loan and security agreement, increasing the September 2013 facility from $5,000 to $12,500, with two banks. The amended and restated loan was funded in March 2014, and bears interest at 7.95% per annum. We will make interest only payments on the outstanding amount of the loan on a monthly basis until October 1, 2014, after which equal monthly payments of principal and interest are due until the loan maturity date of September 30, 2017. In the event we raise $30 million of net equity or proceeds from a collaboration, if any, the interest only period will be extended by six months.

We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) conduct our BE registration trial related to Cynviloq and prepare for our New Drug Application filing anticipated in 2015, (ii) advance RTX into clinical trials and potentially pursue other human indications, (iii) fund Ark activities in anticipation of Ark securing stand-alone financing, (iv) continue to identify and advance a number of potential mAb and ADC drug candidates into preclinical and clinical development activities, (v) continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, and (vi) expand our corporate infrastructure, including the costs associated with being a NASDAQ listed public company. We believe we have the ability to meet all obligations due over the course of the next twelve months.

We plan to continue to fund our losses from operations and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. We filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"), which was declared effective by the SEC in July 2013. The Shelf Registration Statement provides us with the ability to offer up to $100 million of securities, including equity and other securities as described in the registration statement. After the May 2014 underwritten offering, we now have the ability to offer up to $36.6 million of additional securities. Pursuant to the Shelf Registration Statement, we may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at

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the time of any offering. However, we cannot be sure that such additional funds will be available on reasonable terms, or at all. If we are unable to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. Any of these actions could materially harm our business, results of operations, and future prospects.

If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Off-Balance Sheet Arrangements

Since our inception through June 30, 2014, we have not engaged in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

New Accounting Pronouncements

Refer to Note 1, "Nature of Operations, Summary of Significant Accounting Polices and Business Activities," in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements.


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