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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 000-28386
CTI BIOPHARMA CORP.
(Exact name of registrant as specified in its charter)
Delaware 91-1533912
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
   
3101 Western Avenue  
Suite 800
Seattle
Washington 98121
(Address of principal executive offices) (Zip Code)
(206) 282-7100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareCTICThe Nasdaq Capital Market
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class Outstanding at November 3, 2020
Common Stock, par value $0.001 per share 73,751,756



CTI BIOPHARMA CORP.
TABLE OF CONTENTS
 
   PAGE
PART I - FINANCIAL INFORMATION   
   
ITEM 1: Financial Statements (unaudited)  
   
Condensed Consolidated Balance Sheets  
   
Condensed Consolidated Statements of Operations  
   
Condensed Consolidated Statements of Comprehensive Loss  
   
Condensed Consolidated Statements of Changes in Stockholders' Equity
Condensed Consolidated Statements of Cash Flows  
   
Notes to Condensed Consolidated Financial Statements  
   
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations  
   
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk 
   
ITEM 4: Controls and Procedures 
   
PART II - OTHER INFORMATION  
   
ITEM 1: Legal Proceedings 
   
ITEM 1A: Risk Factors 
   
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds 
   
ITEM 3: Defaults upon Senior Securities 
   
ITEM 4: Mine Safety Disclosures 
   
ITEM 5: Other Information 
   
ITEM 6: Exhibits 
   
Signatures 

3


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
 
September 30, 2020December 31, 2019
  
ASSETS  
Current assets:  
Cash and cash equivalents$45,301 $31,144 
Short-term investments12,111 2,522 
Prepaid expenses and other current assets1,276 1,914 
Total current assets58,688 35,580 
Property and equipment, net835 1,235 
Other assets3,568 9,465 
Total assets$63,091 $46,280 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$191 $ 
Accrued expenses4,994 11,606 
Current portion of long-term debt5,658 4,812 
Other current liabilities3,676 2,070 
Total current liabilities14,519 18,488 
Long-term debt, less current portion 4,455 
Other liabilities1,753 5,407 
Total liabilities16,272 28,350 
Commitments and contingencies
Stockholders' equity:  
Preferred stock, $0.001 par value per share:
Authorized shares - 33,333 as of September 30, 2020 and December 31, 2019
Series O Preferred Stock, 12,575 shares issued and outstanding as of September 30, 2020 and December 31, 2019 (Aggregate liquidation preference of $25,150 as of September 30, 2020 and December 31, 2019)
  
Series X Preferred Stock, 4,429 shares and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively (Aggregate liquidation preference of $44,290 and $0 as of September 30, 2020 and December 31, 2019, respectively)
  
Common stock, $0.001 par value per share:
  
Authorized shares - 166,500,000 and 131,500,000 as of September 30, 2020 and December 31, 2019, respectively
  
Issued and outstanding shares - 73,716,760 and 57,979,725 as of September 30, 2020 and December 31, 2019, respectively
74 58 
Additional paid-in capital 2,359,747 2,299,186 
Accumulated other comprehensive income3  
Accumulated deficit(2,313,005)(2,275,556)
Total CTI stockholders' equity46,819 23,688 
Noncontrolling interest (5,758)
Total stockholders' equity46,819 17,930 
Total liabilities and stockholders' equity$63,091 $46,280 
 See accompanying notes.
4


CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
  
License and contract revenues$ $2,289 $ $3,345 
Operating costs and expenses:  
Research and development6,994 7,598 16,457 19,126 
General and administrative4,052 4,403 12,316 14,662 
Restructuring expenses   794 
Other operating expenses  4,200  
Total operating costs and expenses11,046 12,001 32,973 34,582 
Loss from operations(11,046)(9,712)(32,973)(31,237)
Non-operating income (expense):  
Interest income25 276 187 1,003 
Interest expense(115)(240)(419)(803)
Amortization of debt discount and issuance costs(131)(131)(391)(391)
Foreign exchange gain (loss)4 (240)(79)(409)
Loss on dissolution of majority-owned subsidiary  (3,774) 
Total non-operating expense, net(217)(335)(4,476)(600)
Net loss before noncontrolling interest(11,263)(10,047)(37,449)(31,837)
Noncontrolling interest   5 
Net loss$(11,263)$(10,047)$(37,449)$(31,832)
Basic and diluted net loss per common share$(0.15)$(0.17)$(0.54)$(0.55)
Shares used in calculation of basic and diluted net loss per common share 73,712 57,974 69,966 57,973 
 
See accompanying notes.

5


CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net loss before noncontrolling interest$(11,263)$(10,047)$(37,449)$(31,837)
Other comprehensive income (loss):  
Foreign currency translation adjustments 1,332  1,570 
Unrealized foreign exchange loss on intercompany balance (1,359) (1,610)
Net unrealized gain (loss) on available-for-sale securities3 (14)3 20 
Other comprehensive income (loss)3 (41)3 (20)
Comprehensive loss(11,260)(10,088)(37,446)(31,857)
Comprehensive loss attributable to noncontrolling interest   5 
Comprehensive loss attributable to CTI$(11,260)$(10,088)$(37,446)$(31,852)
 
See accompanying notes.

6


CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
     AdditionalAccumulated Other  Total
 Preferred StockCommon StockPaid-inComprehensiveAccumulatedNoncontrollingStockholders'
 SharesAmountSharesAmountCapitalIncomeDeficitInterestEquity
Balance at January 1, 202013 $ 57,980 $58 $2,299,186 $ $(2,275,556)$(5,758)$17,930 
Issuance of common stock, net of issuance costs— — 15,699 16 15,454 — — — 15,470 
Conversion of Series X preferred stock to common stock — — 3 — 3 — — — 3 
Equity-based compensation— — — — 1,167 — — — 1,167 
Net loss— — — — — — (12,186)— (12,186)
Balance at March 31, 202013 $ 73,682 $74 $2,315,810 $ $(2,287,742)$(5,758)$22,384 
Reclassification of Series X preferred stock from mezzanine equity4 — — — 43,637 — — — 43,637 
Equity-based compensation— — — — 1,002 — — — 1,002 
Dissolution of majority-owned subsidiary— — — — (1,949)— — 5,758 3,809 
Other— — 35 — 31 — — — 31 
Net loss— — — — — — (14,000)— (14,000)
Balance at June 30, 202017 $ 73,717 $74 $2,358,531 $ $(2,301,742)$ $56,863 
Equity-based compensation— — — — 1,216 — — — 1,216 
Net loss— — — — — — (11,263)— (11,263)
Other comprehensive income— — — — — 3 — — 3 
Balance at September 30, 202017 $ 73,717 $74 $2,359,747 $3 $(2,313,005)$ $46,819 

7


     AdditionalAccumulated Other  Total
 Preferred StockCommon StockPaid-inComprehensiveAccumulatedNoncontrollingStockholders'
 SharesAmountSharesAmountCapitalIncomeDeficitInterestEquity
Balance at January 1, 201913 $ 57,986 $58 $2,294,025 $1,350 $(2,236,739)$(5,755)$52,939 
Cumulative effect adjustments— — — — (7)— 1,203 — 1,196 
Equity-based compensation— — (7)— 1,257 — — — 1,257 
Net loss— — — — — — (10,814)— (10,814)
Other comprehensive income — — — — — 9 — — 9 
Balance at March 31, 201913 $ 57,979 $58 $2,295,275 $1,359 $(2,246,350)$(5,755)$44,587 
Equity-based compensation— — — — 1,361 — — — 1,361 
Other — — — — 1 — — — 1 
Noncontrolling interest— — — — — — — (5)(5)
Net loss— — — — — — (10,971)— (10,971)
Other comprehensive income— — — — — 12 — — 12 
Balance at June 30, 201913 $ 57,979 $58 $2,296,637 $1,371 $(2,257,321)$(5,760)$34,985 
Equity-based compensation— — — — 1,294 — — — 1,294 
Net loss— — — — — — (10,047)— (10,047)
Other comprehensive loss— — — — — (41)— — (41)
Balance at September 30, 201913 $ 57,979 $58 $2,297,931 $1,330 $(2,267,368)$(5,760)$26,191 


See accompanying notes.

8


CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 Nine Months Ended September 30,
 20202019
Operating activities  
Net loss before noncontrolling interest$(37,449)$(31,837)
Adjustments to reconcile net loss to net cash used in operating activities:  
Loss on dissolution of majority-owned subsidiary3,774  
Equity-based compensation 3,385 3,911 
Depreciation and amortization399 412 
Provision for Italian VAT receivables and deposit4,200  
Other(122)177 
Changes in operating assets and liabilities:  
Receivables from license and development services arrangements 13,534 
Prepaid expenses and other assets2,267 1,935 
Accounts payable, accrued expenses and other liabilities(7,839)(4,468)
Net cash used in operating activities(31,385)(16,336)
Investing activities  
Purchases of short-term investments(12,100)(8,507)
Proceeds from maturities of short-term investments 2,500 27,400 
Net cash (used in) provided by investing activities(9,600)18,893 
Financing activities  
Proceeds from rights offering, net of issuance costs59,108  
Principal payments on debt(4,000)(4,000)
Proceeds from stock option exercises30  
Proceeds from sales of common stock under employee stock purchase plan 4 1 
Cash paid for at-the-market equity offering costs  (45)
Net cash provided by (used in) financing activities55,142 (4,044)
Effect of exchange rate changes on cash and cash equivalents (35)
Net increase (decrease) in cash and cash equivalents 14,157 (1,522)
Cash and cash equivalents at beginning of period31,144 36,439 
Cash and cash equivalents at end of period$45,301 $34,917 
Supplemental disclosure of cash flow information  
Cash paid during the period for interest$448 $834 
 
See accompanying notes.
9


CTI BIOPHARMA CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Description of Business and Summary of Significant Accounting Policies

CTI BioPharma Corp., together with its subsidiary, also referred to collectively in this Quarterly Report on Form 10-Q as “we,” “us,” “our,” the “Company” and “CTI,” is a biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies for blood-related cancers that offer a unique benefit to patients and their healthcare providers. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We concentrate our efforts on treatments that target blood-related cancers where there is an unmet medical need. In particular, we are focused on evaluating pacritinib, our sole product candidate currently in active development, for the treatment of adult patients with myelofibrosis. In addition, we have recently started developing pacritinib for use in hospitalized patients with severe COVID-19, in response to the COVID-19 pandemic.

We operate in a highly regulated and competitive environment. The manufacturing and marketing of pharmaceutical products requires approval from, and is subject to, ongoing oversight by the Food and Drug Administration, or the FDA, in the United States, the European Medicines Agency, or the EMA, in the European Union, or the EU, and comparable agencies in other countries. Obtaining approval for a new therapeutic product is never certain, may take many years and may involve the expenditure of substantial resources.

Basis of Presentation

The accompanying unaudited financial information as of and for the three and nine months ended September 30, 2020 and 2019 has been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the SEC on March 13, 2020.

The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements. As previously disclosed in our June 30, 2020 financial statements, we have adjusted for an immaterial error in prior periods by revising the historical financial statements presented herein by reducing accumulated other comprehensive loss and increasing accumulated deficit, each by $12.0 million, as of December 31, 2018. The correction did not have an impact on total assets, total stockholders’ equity, the condensed consolidated statements of operations, comprehensive loss, or cash flows.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of CTI and its wholly-owned subsidiary, CTI Life Sciences Limited, until its dissolution in November 2019, and our majority-owned subsidiary, Aequus Biopharma, Inc., or Aequus, until its dissolution in June 2020 as discussed in Note 5. Related Party Transactions. We had an approximately 60% interest in Aequus, and the remaining interest in Aequus not held by CTI was reported as noncontrolling interest in the condensed consolidated financial statements until its dissolution. All intercompany transactions and balances were eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles, or GAAP, requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of loss contingencies in the condensed consolidated financial statements and accompanying notes. Estimates are
10


used for, but not limited to, income taxes, useful lives of equipment, commitments and contingencies, equity-based compensation forfeiture rates, collectability of receivables, and impairment of investments. Given the global economic climate and additional or unforeseen effects from the COVID-19 pandemic, these estimates are becoming more challenging, and actual results could differ materially from those estimates.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the condensed consolidated financial statements are issued. Our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

Over the next year and in the normal course of business, we will need to continue to conduct research, development, testing and regulatory compliance activities with respect to pacritinib and in the course of such activities, we will incur general and administrative expenses. Additional business activities will include procuring manufacturing and drug supply services, the costs of which, together with our projected general and administrative expenses, are expected to result in operating losses for the foreseeable future. We have incurred a net operating loss every year since our formation. As of September 30, 2020, we had an accumulated deficit of $2.3 billion, and we expect to continue to incur net losses for the foreseeable future. Our available cash, cash equivalents and short-term investments were $57.4 million as of September 30, 2020, and we expect that our present financial resources will only be sufficient to meet our obligations as they come due and to fund our operations into the fourth quarter of 2021. Based on our evaluation completed pursuant to Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, these factors raise substantial doubt about our ability to continue as a going concern.

Accordingly, we will need to acquire additional funds in order to develop our business and continue the development of pacritinib. The amount of funds that we will ultimately require will depend, in part, upon: regulatory approval developments and the extent to which we are required to conduct additional clinical trials; competitive market developments which require us to alter our business practices; and other unplanned expenses or business developments. We may seek to raise such capital through public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, we have a limited number of authorized shares of common stock available for issuance and additional funding obtained through the sale of such shares or otherwise may not be sufficient, available on favorable terms or available at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If we fail to obtain additional capital when needed, our ability to operate as a going concern will be harmed, and we may be required to delay, scale back or eliminate some or all of our research and development programs, be required to reduce our general and administrative expenses, be unable to attract and retain highly-qualified personnel, be unable to obtain and maintain contracts necessary to continue our operations at affordable rates with competitive terms, have to refrain from making our contractually required payments when due (including debt payments) and/or may be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection. The amount of financing we require is dependent upon many factors relating to drug approval status and our commercialization plans, as well as our clinical trials. These factors include the number of clinical trial sites in a given clinical trial, the number of patients treated in a given clinical trial, the pace of patient enrollment and other matters that may impact clinical development, including changes to a clinical trial that we may initiate or that may be requested by the FDA or other regulators. There can be no assurance as to the amount of funding necessary to fund the development of pacritinib to completion or that we will be able to obtain this funding. In addition, our ability to comply with covenants under the loan and security agreement with Silicon Valley Bank, or SVB, may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants, including a material adverse change in our business, operations or condition (financial or otherwise) could result in an event of default under the loan and security agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable. See Long-term Debt below for further discussion. The accompanying condensed consolidated financial statements do not include adjustments, if any, that may result from the outcome of this uncertainty.

Cash, Cash Equivalents and Short-term Investments

As of September 30, 2020 and December 31, 2019, our cash, cash equivalents and short-term investments consisted of cash, money market funds, U.S. government and agency securities and corporate debt securities. Cash equivalents and short-term investments are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. There are three levels of inputs used to measure fair value, with Level 1 having the highest priority and Level 3 having the lowest:

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Level 1—Valuations based on unadjusted quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs that are supported by little or no market activity, reflecting our own assumptions. These valuations require significant judgment or estimation.

We measure the fair value of money market funds based on the closing price reported by the fund sponsor from an actively traded exchange. We value all other securities using broker quotes that utilize observable market inputs. We did not hold cash, cash equivalents and short-term investments categorized as Level 3 assets as of September 30, 2020 and December 31, 2019. The following table summarizes, by major security type, our cash, cash equivalents and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
September 30, 2020December 31, 2019
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesTotal Estimated Fair ValueTotal Estimated
Fair Value
Cash
$309 $— $— $309 $188 
Level 1 securities:
Money market funds
44,992 — — 44,992 28,957 
Level 2 securities:
U.S. government and agency securities
    2,522 
Corporate debt securities
12,108 3  12,111 1,999 
Total cash, cash equivalents and short-term investments$57,409 $3 $ $57,412 $33,666 

Italian Value Added Tax Receivable

We historically carried out research and development activities in Italy and incurred value added tax, or VAT, from Italian suppliers on the acquisition of goods and services in Italy. This VAT should be considered as an input VAT credit. We treated the majority of our sales made in Italy without output VAT (on the basis that the supplies should be considered outside the scope of Italian VAT). This resulted in the value of input VAT exceeding the value of output VAT, and accordingly we submitted a refund claim for the VAT. The Italian Tax Authority, or the ITA, has challenged the treatment of the sales transactions and claimed that the sales transactions made by us should have been subject to output VAT. Our Italian VAT receivable was approximately €3.9 million as of September 30, 2020 and December 31, 2019. While we believe that our refund claim is valid, we concluded that the ongoing COVID-19 global pandemic negatively impacted the collectability of our Italian VAT receivables and deposit. Accordingly, we recorded a full provision against our Italian VAT receivables and deposit in the amount of $4.2 million, which is included in Other operating expenses for the nine months ended September 30, 2020.

In addition, as disclosed in Note 6. Contingencies, the ITA assessed us for additional VAT payments for services we provided in Italy, which we do not believe we owe. We have not recorded an amount in the financial statements for this contingent liability as we do not believe the potential payment of up to €4.3 million (or approximately $5.0 million converted using the currency exchange rate as of September 30, 2020), to the ITA is probable at this time.

Leases

Under ASC 842 - Leases, we determine if an arrangement is a lease at inception. We recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as operating or finance at lease commencement, which will affect the pattern and classification of expense recognition in our condensed consolidated statements of operations.

Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide a readily determinable implicit rate of return, we use our incremental borrowing rate to derive the present value of lease payments, which is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
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An operating lease right-of-use asset is measured at the amount of the lease liability, adjusted for prepaid or accrued lease payments, lease incentives received, unamortized initial direct costs and the impairment of the right-of-use asset. A lease may include options to extend or terminate the lease. When it is reasonably certain that we will exercise such an option, it is considered in the lease term. Right-of-use assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as part of Research and development expenses and General and administrative expenses in our condensed consolidated statements of operations. Right-of-use assets are included in Other assets, and the current portion of lease liabilities and the non-current portion of lease liabilities are included in Other current liabilities and Other liabilities, respectively, in our condensed consolidated balance sheets.

Long-term Debt

All amounts due under the loan and security agreement with SVB have been classified as current liabilities as of September 30, 2020 due to the considerations discussed in Liquidity above and the assessment that the material adverse change clause under the loan and security agreement is not within our control. We have not been notified of an event of default by SVB as of the date of the filing of this Quarterly Report on Form 10-Q.

Equity-based Compensation

Equity-based compensation expense is recognized over the requisite service periods on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For performance-based stock options and restricted stock, we record compensation expense over the estimated service period once the achievement of the performance-based milestone is considered probable. We recorded equity-based compensation expense of $1.2 million and $1.3 million for the three months ended September 30, 2020 and 2019, respectively, and $3.4 million and $3.9 million for the nine months ended September 30, 2020 and 2019, respectively. Substantially all equity-based compensation expense was related to option awards and was included in General and administrative expenses for the periods presented.

Net Loss per Share

Basic net loss per common share is calculated based on the net loss attributable to common stockholders divided by the weighted average number of shares outstanding for the period. The calculation of diluted net loss per common share excludes the potential conversion of all dilutive convertible securities, such as convertible preferred stock, using the if-converted method, and the potential exercise or vesting of other dilutive securities, such as stock awards and warrants, using the treasury stock method, as their inclusion would have an anti-dilutive effect.

Common shares underlying stock awards, warrants and convertible preferred stock aggregating to 68.8 million shares and 53.0 million shares for the three and nine months ended September 30, 2020, respectively, and 19.8 million shares and 18.5 million shares for the comparable periods in 2019, respectively, were excluded from the calculation of diluted net loss per share because they were anti-dilutive.

Recently Adopted Accounting Standards

In August 2018, the FASB issued new accounting guidance which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this guidance on January 1, 2020. The adoption of this accounting guidance did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Standards

In June 2016, the FASB issued new accounting guidance which amends the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now
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requires allowances to be recorded instead of reducing the amortized cost of the investment. For smaller reporting companies, the guidance is effective for fiscal years beginning after December 15, 2022, including interim periods therein. Early adoption is permitted. We do not expect the adoption of this accounting guidance to have a material impact on our condensed consolidated financial statements.

In August 2020, the FASB issued new accounting guidance for convertible instruments which eliminates two of the three models in ASC 470-20 that require separate accounting for embedded conversion features. Separate accounting is still required in certain cases. For smaller reporting companies, the guidance is effective for fiscal years beginning after December 15, 2023, including interim periods therein. Early adoption is permitted in fiscal years beginning after December 15, 2020. We do not expect the adoption of this accounting guidance to have a material impact on our condensed consolidated financial statements.

Although there were several other new accounting pronouncements issued or proposed by the FASB, we do not believe any of these have had or will have a material impact on our condensed consolidated financial statements.

2. Other Assets

Other assets consisted of the following (in thousands):
 September 30, 2020December 31, 2019
Right-of-use assets$2,469 $3,379 
Italian VAT receivables, net (1) 4,390 
Italian VAT deposit, net (1) 483 
Clinical trial deposits770 720 
Refundable security deposit194 194 
Other 135 299 
Other assets $3,568 $9,465 

(1) During the nine months ended September 30, 2020, we recorded full allowances against our Italian VAT receivables and deposit. See Note 1. Description of Business and Summary of Significant Accounting Policies - Italian Value Added Tax Receivable for further details.

3. Other Liabilities

Other liabilities consisted of the following (in thousands):
 September 30, 2020December 31, 2019
Lease liabilities, non-current$1,379 $2,993 
End-of-facility lender fee (1) 1,440 
Other long-term obligations374 974 
Total other liabilities$1,753 $5,407 

(1) End-of-facility lender fee as of December 31, 2019 represents an amount payable to Silicon Valley Bank upon repayment of our secured term loan. See Part II, Item 8, “Notes to Consolidated Financial Statements, Note 7. Long-term Debt” of our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information. As of September 30, 2020, this balance has been reclassified to Other current liabilities. See Note 1. Description of Business and Summary of Significant Accounting Policies - Long-term Debt for further details regarding reclassification.

4. Equity Transactions

In March 2020, we completed a rights offering through the distribution of subscription rights to holders of our common stock and Series O Preferred Stock, or the Rights Offering. Under the Rights Offering, we issued a total of 15.7 million shares of our common stock and 4,429 shares of our Series X Preferred Stock, which shares of Series X Preferred Stock are convertible into 44.3 million shares of our common stock, for aggregate gross proceeds of approximately $60.0 million. Total offering costs were approximately $0.9 million. There was no beneficial conversion feature on our Series X Preferred Stock.
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Due to the revocable nature of the Rights Offering prior to closing, there was no separate accounting for the subscription rights and purchase guarantees made by certain of our stockholders prior to the closing date.

At the time of issuance of our Series X Preferred Stock, the carrying amount of our Series X Preferred Stock was initially classified as mezzanine equity in the condensed consolidated balance sheet since we did not have an adequate number of authorized common stock to satisfy the number of required shares under the conversion option of our Series X Preferred Stock. In June 2020, our stockholders approved an increase in the number of authorized common stock, and as such, the settlement of the conversion option's exercise can now be controlled. Accordingly, the carrying amount of our Series X Preferred Stock was reclassified to permanent equity as of June 2020.

During the first quarter of 2020, 0.2873 of a share of our Series X Preferred Stock converted into 2,873 shares of our common stock. There were 4,429 shares of our Series X Preferred Stock outstanding as of September 30, 2020.

Each share of our Series X Preferred Stock has a stated value of $10,000 per share and is convertible into 10,000 shares of our common stock at the option of the holder at any time except as described above. The Series X Preferred Stock is subject to certain limitations, including that the holder will be prohibited from converting Series X Preferred Stock into common stock, if, as a result of such conversion, the holder, together with its affiliates, would beneficially own a number of shares of common stock above a conversion blocker, which is initially set at 9.99% of the total common stock then issued and outstanding immediately following the conversion of such shares of Series X Preferred Stock. In the event of our liquidation, dissolution or winding up, holders of Series X Preferred Stock will participate pari passu with any distribution of proceeds to holders of our common stock and holders of our Series O Preferred Stock. Holders of our Series X Preferred Stock are also entitled to receive dividends on shares of Series X Preferred Stock equal (on an as-if-converted-to common stock basis) to and in the same form as dividends actually paid on our common stock or other junior securities of the Company. Shares of Series X Preferred Stock will generally have no voting rights, except as required by law and except that the consent of a majority of the holders of the outstanding Series X Preferred Stock will be required to amend the terms of the Series X Preferred Stock.

5. Related Party Transactions

In March 2017, we and Aequus entered into a License and Promissory Note Termination Agreement. We had the right to terminate the License and Promissory Note Termination Agreement and require Aequus to assign all ACTH Product related assets to us without further compensation to Aequus if Aequus did not file an Investigational New Drug Application, or IND, for an ACTH Product with the FDA by September 6, 2019. For further details, see Part II, Item 8, “Notes to Consolidated Financial Statements, Note 15. Related Party Transactions” of our Annual Report on Form 10-K for the year ended December 31, 2019.

Aequus did not file an IND by September 6, 2019. In June 2020, we terminated the License and Promissory Note Termination Agreement; however, we did not request Aequus to assign all ACTH Product related assets to us. In connection with such termination, we were also deemed to have relinquished all of our ownership interest in Aequus as it had been administratively dissolved at the time of termination. As discussed in Note 1. Description of Business and Summary of Significant Accounting Policies - Principles of Consolidation, Aequus was our majority-owned subsidiary until its dissolution in June 2020. Upon deconsolidation of Aequus, we recognized a loss of $3.8 million, which was recorded in Loss on dissolution of majority-owned subsidiary for the nine months ended September 30, 2020.

6. Contingencies

In April 2009, December 2009 and June 2010, the Italian Tax Authority, or the ITA, issued notices of assessment to CTI - Sede Secondaria, or CTI (Europe), based on the ITA’s audit of CTI (Europe)’s value added tax, or VAT, returns for the years 2003, 2005, 2006 and 2007, or, collectively, the VAT Assessments. The ITA audits concluded that CTI (Europe) did not collect and remit VAT on certain invoices issued to non-Italian clients for services performed by CTI (Europe). The assessments, including interest and penalties, for the years 2003, 2006 and 2007 are €0.6 million, €2.8 million and €0.9 million, respectively. We believe that the services invoiced were non-VAT taxable consultancy services and that the VAT returns are correct as originally filed. We have appealed all of the assessments and are defending ourselves against the assessments both on procedural grounds and on the merits of the cases, although we can make no assurances regarding the ultimate outcome of these cases. There have been no changes to the status of the legal proceedings surrounding each respective VAT year return at issue since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019. See Part II, Item 8, “Notes to Consolidated Financial Statements, Note 16. Commitments and Contingencies” of our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.

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If the final decision of the Italian Supreme Court is unfavorable to us, or if, in the interim, the ITA were to make a demand for payment and we were to be unsuccessful in suspending collection efforts, we may be requested to pay the ITA an amount up to €4.3 million, or approximately $5.0 million converted using the currency exchange rate as of September 30, 2020, including interest and penalties for the period lapsed between the date in which the assessments were issued and the date of effective payment. We have not recorded this contingent liability in the financial statements as we do not believe the potential payment to the ITA is probable at this time.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than statements of historical fact are forward-looking statements, including, without limitation:
our expectations regarding business disruptions and related risks resulting from the ongoing worldwide coronavirus pandemic known as COVID-19;
our expectations regarding sufficiency of cash resources, cash expenditures, sources of cash flows and other projections, product manufacturing and sales, research and development expenses, general and administrative expenses and additional losses;
our ability to obtain funding for our operations;
the timing of, and our ability to develop, commercialize, and obtain regulatory approval of pacritinib, including priority review and potential accelerated approval of pacritinib as a treatment for myelofibrosis patients with severe thrombocytopenia, and other development programs we may pursue in the future;
the design of our clinical trials and anticipated enrollment, and the progress and potential of pacritinib and other development programs we may pursue in the future;
the safety, effectiveness and potential benefits and indications of pacritinib and any other product candidates we may develop in the future;
the timing of and results from clinical trials and pre-clinical development activities, including those related to pacritinib and any other product candidates we may develop in the future;
our ability to advance product candidates, including pacritinib and any other product candidates we may develop in the future, into, and successfully completion of, clinical trials;
our ability to achieve profitability, including our ability to effectively implement cost reduction strategies and realize anticipated cost savings from those efforts;
our expectations regarding federal, state and foreign regulatory requirements;
the rate and degree of market acceptance and clinical utility of pacritinib or any other product candidates we may develop in the future;
our and our collaborators’ ability to obtain and maintain regulatory approvals for pacritinib or any other product candidates we may develop in the future, and the timing of such approvals;
our ability to maintain and establish collaborations;
our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
the impact of government laws and regulations;
our ability to negotiate, integrate, and implement collaborations, acquisitions and other strategic transactions;
our ability to engage and retain the employees required to advance our development activities and grow our business;
developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and
those risk factors identified in this Quarterly Report on Form 10-Q under the heading Risk Factors and in other filings we periodically make with the U.S. Securities and Exchange Commission, or the SEC.

In some cases, forward-looking statements can be identified by terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should” or “will” or the
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negative thereof, variations thereof and similar expressions. Such statements are based on management’s current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from those set forth in the forward-looking statements. There can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. We urge you to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q and those made under Part I, Item 1, “Business,” Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and any risk factors contained in our subsequent Quarterly Reports on Form 10-Q that we file with the SEC.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

We do not intend to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

In this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” the “Company” and “CTI” mean CTI BioPharma Corp. and our subsidiaries, except where it is otherwise made clear.

OVERVIEW

We are a biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies for blood-related cancers that offer a unique benefit to patients and their healthcare providers. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We concentrate our efforts on treatments that target blood-related cancers where there is an unmet medical need. In particular, we are focused on evaluating pacritinib, our sole product candidate currently in active development, for the treatment of adult patients with myelofibrosis. In addition, we have recently started developing pacritinib for use in hospitalized patients with severe COVID-19, in response to the COVID-19 pandemic.

Pacritinib is an investigational oral kinase inhibitor with specificity for JAK2, IRAK1 and CSF1R. The JAK family of enzymes is a central component in signal transduction pathways, which are critical to normal blood cell growth and development, as well as inflammatory cytokine expression and immune responses. Mutations in these kinases have been shown to be directly related to the development of a variety of blood-related cancers, including myeloproliferative neoplasms, leukemia and lymphoma. In addition to myelofibrosis, the kinase profile of pacritinib suggests its potential therapeutic utility in conditions such as acute myeloid leukemia, or AML, myelodysplastic syndrome, or MDS, chronic myelomonocytic leukemia, or CMML, and chronic lymphocytic leukemia, or CLL, due to its inhibition of JAK2, IRAK1, FLT3 and CSF1R. We believe pacritinib has the potential to be delivered as a single agent or in combination therapy regimens.

In September 2020, we reached an agreement with the U.S. Food and Drug Administration, or FDA, to submit a New Drug Application, or NDA, for the potential accelerated approval of pacritinib as a treatment for myelofibrosis patients with severe thrombocytopenia, and in October 2020 we commenced our rolling NDA submission. The NDA is based on the available data from our completed Phase 3 PERSIST-1 and PERSIST-2 trials and the Phase 2 PAC203 dose-ranging trial. Completion of the NDA submission is anticipated in the first quarter of 2021. The ongoing Phase 3 PACIFICA trial is expected to be completed as a post-marketing commitment.

In January 2020, we received the FDA's preliminary comments from a Type A meeting request and reached an agreement on the final design changes to our PACIFICA pivotal Phase 3 clinical trial, including changes to the statistical analysis plan that would allow for an accelerated approval pathway for pacritinib. We have amended our PACIFICA Phase 3 trial protocol, to allow for the primary analysis of Spleen Volume Reduction, or SVR, rate on the first 168 patients, with an end-of-study analysis of Total Symptom Score, or TSS, and Overall Survival, or OS, following the full enrollment of 348 patients. We previously anticipated reporting primary SVR data by the end of 2021 with final study efficacy data expected in 2023; however, as a result of the worldwide coronavirus pandemic known as COVID-19, we currently anticipate a lower enrollment rate than planned and at least a nine-month delay in the PACIFICA Phase 3 trial timeline.

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In April 2020, in response to the public health crisis due to the global COVID-19 pandemic, we initiated PRE-VENT, a Phase 3 trial evaluating pacritinib in hospitalized patients with severe COVID-19. PRE-VENT, a randomized, double-blind, placebo-controlled multicenter study will compare pacritinib plus Standard of Care, or SOC, versus placebo plus SOC in hospitalized patients with severe COVID-19, including those with a current or prior diagnosis of cancer. The primary endpoint of the trial will assess the proportion of patients who progress to invasive mechanical ventilation and/or extracorporeal membrane oxygenation or die by Day 28. We commenced enrollment of PRE-VENT in the second quarter of 2020 in the United States and currently anticipate the reporting of interim analysis from the PRE-VENT trial in the first half of 2021.

Patients enrolled in PRE-VENT will be randomized 1:1 to receive pacritinib (400 mg once on Day 1, then 200 mg twice daily from Day 2 to Day 14) plus SOC or placebo plus SOC. Assigned treatment will continue up to Day 14 or until the patient experiences intolerable adverse events, withdraws consent, initiates another investigational therapy or until the study is terminated. Assigned therapy may be given for an additional seven days (for a total of 21 days) at the discretion of the investigator and with medical monitor approval. In the event of hospital discharge, patients will complete treatment with the assigned therapy as an outpatient.

As a JAK2, IRAK1 and CSF1R inhibitor, pacritinib may ameliorate the effects of cytokine storm, a pathological immune reaction that can be triggered by viral infection and can lead to serious complications, including acute respiratory distress syndrome, or ARDS. Multiple inflammatory cytokines are upregulated in patients with severe COVID-19, including IL-1 and IL-6, and some patients have evidence of over-active macrophage activation. As a JAK2/IRAK1 inhibitor, pacritinib may ameliorate the effects of cytokine storm via inhibition of IL-6 and IL-1 signaling. Furthermore, as a CSF1R inhibitor, pacritinib may mitigate effects of macrophage activation syndrome.

We face numerous risks in connection with clinical development of pacritinib generally and with respect to the potentially expedited FDA regulatory approval process specifically. For more information, see Item 1A – Risk Factors – Risks Related to the Development, Clinical Testing and Regulatory Approval of Our Product Candidates.

We have historically funded our operations through the sale of equity securities, funding received from our licensees and collaborators and debt financing. We do not expect to achieve or sustain profitability for the foreseeable future. We had a net loss of $37.4 million for the nine months ended September 30, 2020 and an accumulated deficit of $2.3 billion as of September 30, 2020, primarily from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations. We believe that our cash, cash equivalents and short-term investments will only be sufficient to fund our projected operations into the fourth quarter of 2021. This raises substantial doubt about our ability to continue as a going concern. See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment.

We have incurred significant operating losses to date and expect to continue to incur significant expenses and operating losses for at least the next 12 to 24 months. We anticipate that our expenses will increase as we:

continue our research and clinical development of pacritinib;

seek regulatory and marketing approvals for pacritinib if we successfully complete the remainder of its anticipated clinical development paths; and

maintain, protect and expand our intellectual property portfolio.

Factors Affecting Performance

Research and Development Activities

We will need to commit significant time and resources to develop our current and any future product candidates. Our sole product candidate currently in active development, pacritinib, is currently in clinical development in two clinical trial pathways. Many drugs in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. We are unable to provide the nature, timing and estimated costs of the efforts necessary to complete the development of pacritinib because, among other reasons, we cannot predict with any certainty the pace of patient enrollment of our clinical trials, which is a function of many factors, including the availability and proximity of patients with the relevant condition and the availability of the compounds for use in the applicable trials. We rely on third parties to conduct clinical trials, which may result in delays or failure to complete trials if the third parties fail to perform or meet applicable standards.

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Additionally, we continue to evaluate and manage the impact of the COVID-19 global pandemic on our operations and the conduct of our clinical trials, including considerations of the vulnerable nature of the patient population participating in our trials, reduced or halted activities at our clinical trial sites, and an increase in fatalities or other adverse events due to medical problems related to the COVID-19 global pandemic and the benefits of continued patient access to pacritinib. Even after a clinical trial is enrolled, preclinical and clinical data can be interpreted in different ways, which could delay, limit or preclude regulatory approval and advancement of this compound through the development process.

Regulatory agencies, including the FDA and EMA, regulate many aspects of a product candidate’s life cycle, including research and development and preclinical and clinical testing. We or regulatory authorities may suspend clinical trials at any time on the basis that the participants are being exposed to unacceptable health risks. In addition, based on our interactions with regulatory authorities, we have sought, and may in the future seek, changes to the protocol of clinical trials if we believe such changes may enhance the probability of approval or are necessary to protect patient safety. Such changes, if any, would impact the size, timing and cost of clinical development. Even if a product candidate progresses successfully through initial human testing in clinical trials, it may fail in later stages of development, including as a result of a failure to adequately demonstrate safety or efficacy to the satisfaction of applicable regulatory authorities. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in advanced clinical trials, even after reporting promising results in earlier trials. For these reasons, among others, we cannot estimate the date on which clinical development of any product candidate will be completed, if ever, or when we will be able to begin commercializing pacritinib to generate material net cash inflows. In order to generate revenue from any of these compounds, any product candidate needs to be developed to a stage that will enable us to commercialize, sell or license related marketing rights to third parties.

We may also enter into collaboration agreements for the development and commercialization of our product candidates. We cannot control the amount and timing of resources our collaborators devote to product candidates, which may also result in delays in the development or marketing of products. Because of these risks and uncertainties, we cannot accurately predict when or whether we will successfully complete the development of any of our product candidates or the ultimate product development costs.

The risks and uncertainties associated with completing development on schedule and the consequences to operations, financial position and liquidity if the project is not timely completed are discussed in more detail in our risk factors, which can be found in Part II, Item 1A, “Risk Factors” of this report.

Financial Summary

Our license and contract revenues reflect the earned amount of upfront payments and milestone payments under our product collaborations. Total revenues were $2.3 million and $3.3 million for the three and nine months ended September 30, 2019 whereas there were no revenues for the comparable periods in 2020. Loss from operations was $11.0 million and $9.7 million for the three months ended September 30, 2020 and 2019, respectively, and $33.0 million and $31.2 million for the nine months ended September 30, 2020 and 2019, respectively. Results of operations may vary substantially from year to year and from quarter to quarter and, as a result, you should not rely on them as being indicative of our future performance.

As of September 30, 2020, our cash, cash equivalents and short-term investments were $57.4 million.

RESULTS OF OPERATIONS

Three and nine months ended September 30, 2020 and 2019

License and Contract Revenues

License and contract revenues are summarized as follows (in thousands):
  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2020201920202019
ServierDevelopment services revenue$— $— $— $99 
Royalty revenue— 104 — 446 
Other revenue— 2,185 — 2,800 
 Total $— $2,289 $— $3,345 

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Development services revenue for the nine months ended September 30, 2019 included $0.1 million of revenue relating to the reimbursement of certain regulatory agency costs. Other revenue for the three and nine months ended September 30, 2019 included $2.2 million of revenue recognized in connection with the Asset Purchase Agreement with Servier. In addition, other revenue for the nine months ended September 30, 2019 included $0.6 million of revenue related to transition period activities pursuant to the terms of the Termination and Transfer Agreement with Servier.

Operating costs and expenses

Research and development expenses. Our research and development expenses for compounds under development and preclinical development were as follows (in thousands):
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Compounds:  
Pacritinib$5,664 $5,912 $12,255 $13,330 
PIXUVRI— 288 — 1,227 
Unallocated operating expenses1,330 1,398 4,202 4,569 
Total research and development expenses$6,994 $7,598 $16,457 $19,126 
 
Costs for our compounds include external direct expenses such as principal investigator fees, charges from contract research organizations, or CROs, and contract manufacturing fees incurred for preclinical, clinical, manufacturing and regulatory activities associated with preparing the compounds for submissions of NDAs or similar regulatory filings to the FDA, the EMA or other regulatory agencies outside the United States and Europe, as well as upfront license fees for acquired technology. Operating expenses include our personnel costs and an allocation of occupancy, depreciation and amortization expenses associated with developing our compounds. We are not able to capture the total cost of each compound because we do not allocate operating expenses to all of our compounds. Cumulative to date external direct costs incurred by us as of September 30, 2020 were $175.2 million for pacritinib (excluding costs for pacritinib prior to our acquisition of certain assets from S*BIO in May 2012 and $29.1 million of in-process research and development expenses associated with the acquisition of certain assets from S*BIO). We do not anticipate incurring additional expenses related to PIXUVRI, as the Amended and Restated Exclusive License and Collaboration Agreement, or the Restated Agreement, with Servier was terminated in February 2019, and all of our rights and responsibilities for PIXUVRI were transferred and assigned globally to Servier pursuant to the Asset Purchase Agreement with Servier during the year ended December 31, 2019.

Research and development expenses decreased to $7.0 million and $16.5 million for the three and nine months ended September 30, 2020, respectively, compared to $7.6 million and $19.1 million for the same periods in 2019. The decrease between the three-month periods ended September 30, 2020 and 2019 was primarily attributable to a $2.5 million decrease in development costs from the completion of the PAC203 dosing clinical trial in 2019, a $0.5 million decrease in regulatory costs, a $0.3 million decrease in the PIX306 clinical trial close-out in 2019 as well as a $0.1 million decrease in unallocated operating expenses, offset by a $1.3 million increase and a $1.5 million increase in development costs related to the PACIFICA Phase 3 trial and the PRE-VENT Phase 3 trial, respectively. The decrease between the nine-month periods ended September 30, 2020 and 2019 was primarily attributable to a $7.7 million decrease in development costs from the completion of the PAC203 dosing clinical trial in 2019, a $1.8 million decrease in regulatory and consulting costs, a $1.2 million decrease in the PIX306 clinical trial close-out in 2019, as well as a $0.3 million decrease in unallocated operating expenses, offset by a $5.7 million increase and a $2.7 million increase in development costs related to the PACIFICA Phase 3 trial and the PRE-VENT Phase 3 trial, respectively.

General and administrative expenses. General and administrative expenses were $4.1 million and $12.3 million for the three and nine months ended September 30, 2020, respectively, compared to $4.4 million and $14.7 million for the same periods in 2019. The decrease between the three-month periods ended September 30, 2020 and 2019 was primarily attributable to a $0.2 million decrease in professional services and a $0.1 million decrease in travel expenses. The decrease between the nine-month periods ended September 30, 2020 and 2019 was primarily attributable to a $1.2 million decrease in professional services, a $0.5 million decrease in travel and other expenses and a $0.4 million decrease in tax expenses, as well as a $0.3 million decrease in personnel costs.

Restructuring expenses. In December 2018, we announced a plan to reduce our workforce in order to improve efficiencies, reduce costs within the organization and preserve capital for pacritinib development. For the nine months ended
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September 30, 2019, we recorded $0.8 million of restructuring expenses related to employee separation costs. There were no such restructuring expenses for the three months ended September 30, 2019 or the three and nine months ended September 30, 2020, as we fully recognized the restructuring expenses during the first quarter of 2019.

Other operating expenses. Other operating expense of $4.2 million for the nine months ended September 30, 2020 relates to provisions for our Italian VAT receivables and deposit. See Part 1, Item 1, Note 1. Description of Business and Summary of Significant Accounting Policies - Italian Value Added Tax Receivable for further details. There was no such expense for the three months ended September 30, 2020 or for the three and nine months ended September 30, 2019.

Non-operating income and expenses

Interest income. Interest income was $25,000 and $0.2 million for the three and nine months ended September 30, 2020, respectively, and $0.3 million and $1.0 million for the comparable periods in 2019. Interest income was primarily related to our short-term investments and cash equivalent securities. The change was primarily related to decreases in short-term investments and interest rates for the three and nine months ended September 30, 2020 as compared to the same periods in 2019.

Interest expense. Interest expense was $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.8 million for the comparable periods in 2019. Interest expense was related to our secured term loan. The change between periods primarily relates to a lower average loan principal balance outstanding as well as a lower average interest rate during the three and nine months ended September 30, 2020 as compared to the same periods in 2019.

Amortization of debt discount and issuance costs. Amortization of debt discount and issuance costs of $0.1 million and $0.4 million for each of the three and nine months ended September 30, 2020 and 2019, respectively, was related to our secured term loan.

Loss on dissolution of majority-owned subsidiary. A loss of $3.8 million for the nine months ended September 30, 2020 was related to a loss recognized upon dissolution of our majority-owned subsidiary, Aequus Biopharma, Inc. in June 2020. There was no such expense for the three months ended September 30, 2020 or three and nine months ended September 30, 2019. See Part 1, Item 1, Note 5. Related Party Transactions for further details.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We have funded our operations from proceeds from the sales and the issuance of equity securities, payments pursuant to license and collaboration agreements and the incurrence of debt. As of September 30, 2020, we had $57.4 million in cash, cash equivalents and short-term investments.

Rights offering. In March 2020, we issued 15.7 million shares of our common stock at a $1.00 per share price and 4,429 shares of our Series X Preferred Stock at a $10,000 per share price, collecting net proceeds of $59.1 million upon completion of our rights offering.

Common Stock Offering. In February 2018, we offered and sold 23.0 million shares of common stock at a $3.00 per share price. The net proceeds from the offering, after deducting underwriting commissions and discounts and other offering costs were approximately $64.2 million.

Loan Agreement. In November 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which agreement was amended in May 2018, the proceeds of which were partially used to repay in full all outstanding indebtedness under our Loan and Security Agreement, dated March 26, 2013, as amended, with Hercules Technology Growth Capital, Inc., or Hercules (and certain of its affiliates). As of September 30, 2020, we had an outstanding principal balance under our secured term loan agreement of $6.2 million. We are required to pay interest plus principal payments in the approximate amount of $0.5 million per month until November 1, 2021, with the final principal plus interest payment totaling approximately $0.4 million as well as a back-end fee of $1.4 million. These borrowings are secured by a first priority security interest on substantially all of our personal property except our intellectual property and subject to certain other exceptions. In addition, the secured term loan agreement requires us to comply with restrictive covenants, including those that limit our operating flexibility and ability to borrow additional funds. A failure to make a required loan payment or an uncured covenant breach could lead to an event of default, and in such case, all amounts then outstanding may become due and payable immediately.
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Historical Cash Flows

Net cash used in operating activities. Net cash used in operating activities increased to $31.4 million during the nine months ended September 30, 2020 compared to $16.3 million for the same period in 2019. The increase was primarily due to revenue generated in 2019 and the 2019 collection of 2018 receivables from license and development services arrangements. During the nine months ended September 30, 2019, we received €3.0 million (or $3.3 million using the currency exchange rate as of the date of cash receipt) relating to the attainment of a regulatory milestone in November 2018 under the Restated Agreement with Servier and also collected $10.0 million from Teva relating to the December 2018 achievement of a worldwide net sales milestone of TRISENOX. These cash receipts in 2019 were partially offset by a decrease in payments for operating expenses in 2020 when compared to 2019.

Net cash (used in) provided by investing activities. Net cash used in investing activities was $9.6 million during the nine months ended September 30, 2020, and net cash provided by investing activities was $18.9 million during the nine months ended September 30, 2019. The change was primarily due to the amounts of short-term investments purchased and matured between periods.

Net cash provided by (used in) financing activities. Net cash provided by financing activities was $55.1 million during the nine months ended September 30, 2020, and net cash used in financing activities was $4.0 million during the nine months ended September 30, 2019. The change was primarily attributable to the net proceeds from the completion of our rights offering in March 2020.

In October 2016, we resumed primary responsibility for the development and commercialization of pacritinib as a result of the termination of the Pacritinib License Agreement. We currently have no commitments for additional financing to fund the development and commercial launch of pacritinib, and we may need to seek additional funding. The development and commercialization of a major product candidate like pacritinib without a collaborative partner will require a substantial amount of our time and financial resources, and as a result, we could experience a decrease in our liquidity and a new demand on our capital resources. For additional information relating to the Pacritinib License Agreement, see Part I, Item 1, “Business – License Agreements – Baxalta” of our Annual Report on Form 10-K for the year ended December 31, 2019.

Capital Resources

We have prepared our condensed consolidated financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, we believe that, as of the date of the filing of this Quarterly Report on Form 10-Q, our present financial resources will only be sufficient to fund our operations into the fourth quarter of 2021. This raises substantial doubt about our ability to continue as a going concern and we will need to raise substantial additional capital in the near term in order to fund our operations through and beyond the fourth quarter of 2021 and to continue as a going concern thereafter. See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment. Further, we have incurred net losses since inception and expect to generate losses for the foreseeable future, primarily due to research and development costs for pacritinib. Because of our reacquisition of worldwide rights for pacritinib, we are no longer eligible to receive cost sharing or milestone payments for pacritinib’s development from Baxalta, and losses related to research and development for pacritinib have increased. We have historically funded our operations through equity financings, borrowings and funds obtained under product collaborations, any or all of which may not be available to us in the future. As of September 30, 2020, our available cash, cash equivalents and short-term investments totaled $57.4 million, and we had an outstanding principal balance under our secured term loan agreement of $6.2 million.

Financial resource forecasts are subject to change as a result of a variety of risks and uncertainties. Changes in manufacturing, developments in and expenses associated with our clinical trials and the other factors identified under “Capital Requirements” below may consume capital resources earlier than planned. Additionally, following our and Servier’s mutual termination of our collaborative agreement, we are no longer eligible to receive additional revenues or payments from Servier relating to PIXUVRI. Although we received a $10.0 million milestone payment from Teva in February 2019, which was recognized as revenue in 2018 relating to the achievement of a worldwide net sales milestone of TRISENOX, the achievement of the remaining milestones is uncertain at this time. Due to these and other factors, the foregoing forecast for the period for which we will have sufficient resources to fund our operations may be inaccurate.

Capital Requirements

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We will need to acquire additional funds in order to develop our business and continue the development of pacritinib. We may seek to raise such capital through public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, we have a limited number of authorized shares of common stock available for issuance and additional funding may not be available on favorable terms or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If we fail to obtain additional capital when needed, our ability to operate as a going concern will be harmed, and we may be required to delay, scale back or eliminate some or all of our research and development programs and/or reduce our general and administrative expenses, be unable to attract and retain highly qualified personnel, be unable to obtain and maintain contracts necessary to continue our operations and at affordable rates with competitive terms, refrain from making our contractually required payments when due (including debt payments) and/or be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection. Our future capital requirements will depend on many factors, including:

disruptions or other delays to our business and clinical trials resulting from the ongoing worldwide COVID-19 pandemic;

developments in and expenses associated with our research and development activities;

changes in manufacturing;

our clinical development plans and any changes that we may initiate or that may be requested by the FDA or other regulators;

regulatory approval developments;

our ability to generate sales of any approved product;

our ability to execute appropriate collaborations for development and commercialization activities;

our ability to reach milestones triggering payments under certain of our contractual arrangements;

acquisitions of compounds or other assets;

litigation and other disputes;

competitive market developments; and

other unplanned business developments.

LICENSE AGREEMENTS AND MILESTONE ACTIVITIES

For information regarding our license agreements and milestone activities, please see Part I, Item 1, “Business – License Agreements” of our Annual Report on Form 10-K for the year ended December 31, 2019.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures in the preparation of our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that significantly impact our financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of this uncertainty, actual results may vary from these estimates. For a discussion of our critical accounting estimates, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to our critical accounting policies and estimates discussed therein.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305(e) of Regulation S-K.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting that occurred during the third fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 6. Contingencies of this report and Part I, Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2019 for information regarding material pending legal proceedings.

Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. The occurrence of any of the risks described below and elsewhere in this document, including the risk that our actual results may differ materially from those anticipated in these forward-looking statements, could materially adversely affect our business, financial condition, liquidity, operating results or prospects and the trading price of our securities. Additional risks and uncertainties that we do not presently know or that we currently deem immaterial may also harm our business, financial condition, operating results and prospects and the trading price of our securities.

Summary of Risk Factors


Risks Related to Our Business:

We expect to continue to incur net losses, and we may never achieve profitability.

Our prospects are dependent on the successful development, regulatory approval and commercialization of pacritinib and we may be unsuccessful in such efforts.

Our business could be adversely affected by the effects of health epidemics, including the recent COVID-19 global pandemic.

We face direct and intense competition from our competitors in the biotechnology and pharmaceutical industries, and we may not compete successfully against them.

Even if pacritinib or other compounds we may develop are successful in clinical trials and receive regulatory approvals, we or our collaboration partners may not be able to successfully commercialize them.

Pacritinib or other compounds we may develop may cause undesirable side effects or have other properties that could halt their development, prevent their regulatory approval, limit their commercial potential or result in significant negative consequences.

We will need to raise additional funds to operate our business, but additional funds may not be available on acceptable terms, or at all.

We are dependent on third-party service providers for a number of critical operational activities.


Risks Related to the Development, Clinical Testing and Regulatory Approval of Our Product Candidates

The regulatory approval process for pacritinib has been subject to delay and uncertainty associated with clinical holds. Registration of clinical trials for pacritinib could be subject to further delay or we could be prevented from further studying pacritinib or seeking its commercialization.

From time to time we may amend the clinical protocols for our product candidates, a process that requires review and approval by several bodies. These protocol amendments may not be accepted by the review bodies in the form submitted, or at all.
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If development and commercialization collaborations we enter into are not successful, or if we are unable to enter into additional collaborations, we may not be able to effectively develop and/or commercialize our compounds, which could have a material adverse effect on our business.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive, or the trials are not well-designed.

If we are unable to expedite the regulatory approval process for pacritinib in our clinical trials, we may be required to pursue strategic alternatives for the development of pacritinib and/or our company.

We or any collaboration partners we may work with may not obtain or maintain the regulatory approvals required to develop or commercialize pacritinib or any other compounds we may develop in the future, which could have a material adverse effect on our business.

The pharmaceutical business is subject to increasing government price controls and other restrictions on pricing, reimbursement and access to drugs, which could adversely affect our future revenues and profitability.


Risks Related to Our Intellectual Property

If any of our license agreements for intellectual property underlying our product candidates are terminated, we may lose the right to develop or market that product candidate.

We hold rights under numerous patents that we have acquired or licensed or that protect inventions originating from our research and development, and the expiration of any of these patents would enable our competitors to use the inventions that are the subject of such patents in competition with us.

We may be unable to obtain or protect our intellectual property rights and we may be liable for infringing upon the intellectual property rights of others, which may cause us to engage in costly litigation and, if unsuccessful, could cause us to pay substantial damages and prohibit us from selling our products.


Risks Related to Our Common Stock

The market price of shares of our common stock is extremely volatile, which may affect our ability to raise capital in the future and may subject the value of your investment in our securities to sudden decreases.

We may not be able to maintain our listing on the Nasdaq Capital Market, or the Nasdaq, or trading on the Nasdaq may otherwise be halted or suspended, which may make it more difficult for investors to sell shares of our common stock and consequently may negatively impact the price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could cause you to incur dilution and could cause the market price of our common stock to fall.

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Risks Related to Our Business

We expect to continue to incur net losses, and we may never achieve profitability.

We were incorporated in 1991 and have incurred a net operating loss every year since our formation. As of September 30, 2020, we had an accumulated deficit of $2.3 billion, and we expect to continue to incur net losses. As part of our business plan, we will need to continue to conduct research, development, testing and regulatory compliance activities with respect to our compounds and ensure the procurement of manufacturing and drug supply services, the costs of which, together with projected general and administrative expenses, is expected to result in operating losses for the foreseeable future. There can be no assurances that we will ever achieve profitability.

Our prospects are dependent on the successful development, regulatory approval and commercialization of pacritinib and we may be unsuccessful in such efforts.

Our business and future success depends on our ability to successfully develop, obtain regulatory approval for and commercialize pacritinib. Pacritinib, our sole product candidate in active development through our PACIFICA Phase 3 trial and our PRE-VENT Phase 3 trial, has not yet received regulatory approval. Our ability to develop drug candidates and to commercialize additional drug products will depend on our ability to:

hire and retain key employees;

identify high quality therapeutic targets;

identify potential drug candidates;

develop products internally or license drug candidates from others;

identify and enroll suitable human subjects, either in the United States or abroad, for our clinical trials;

complete laboratory testing;

commence, conduct and complete safe and effective clinical trials on humans;

obtain and maintain necessary intellectual property rights to our product candidates;

obtain and maintain necessary regulatory approvals for our products, both in the United States and abroad;

enter into arrangements with third parties to provide services or to manufacture our product candidates on our behalf;

deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these functions in compliance with all applicable laws; and

obtain appropriate coverage and reimbursement levels for the cost of our products from governmental authorities, private health insurers and other third-party payors.

We have limited experience with many of the activities listed above and may not be successful in developing or commercializing product candidates. Development of drug candidates is expensive, uncertain and time-consuming, and we do not know if our efforts will lead to any drug candidates that can be successfully developed and marketed. Of the compounds that we identify as potential drug products or that we may in-license from other companies, only a few, if any, are likely to lead to successful drug development programs and commercialized drug products.

In addition, obtaining regulatory approval requires substantial time, effort and financial resources, and without additional financing, we lack sufficient resources to pursue the development of pacritinib. We currently have no commitments or arrangements for any additional financing to fund the development and commercial launch of pacritinib, and we will need to seek additional funding, which may not be available or may not be available on favorable terms. The amount of financing we require is dependent on many factors, such as the number of clinical trial sites, the number of patients in the trial, the pace of patient enrollment and other matters that may impact clinical development, including changes to the trial that we may initiate or
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that may be requested by the FDA or other regulators, and there can be no assurance as to the amount of funding necessary to fund the development of pacritinib to completion. We could also seek another collaborative partnership for the development and commercialization of pacritinib, which may not be available on reasonable terms or at all. If we partner pacritinib, we may have to relinquish valuable economic rights and would potentially forgo additional economic benefits that could be realized if we continued the development and commercialization activities alone. Even if pacritinib receives approval from the FDA, EMA or other regulatory authorities for one or more indications, we would need to incur significant expenses to support the commercialization and launch of pacritinib, which investment may never be realized if sales are insufficient. As our sole product candidate in active development, our prospects are dependent upon the successful development, approval and commercialization of pacritinib. If we fail to obtain regulatory approval and successfully commercialize pacritinib, our business would be materially and adversely impacted as we have no other product candidates in active clinical development.

Our business could be adversely affected by the effects of health epidemics, including the recent COVID-19 global pandemic, in regions where third parties for which we rely, as in Clinical Research Organizations, or CROs, have clinical trial sites or other business operations and may result in significant disruptions to our clinical trials, which could have a material adverse effect on our business.

Our business has been adversely affected and may continue to be adversely affected by the effects of health epidemics, including the ongoing worldwide COVID-19 pandemic, in regions where we have clinical trial sites or other business operations and has resulted in and may continue to result in significant disruptions to our clinical trials. On January 30, 2020, the World Health Organization (WHO) announced a global health emergency because of a new strain of novel coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO declared the coronavirus outbreak a pandemic, which virus has spread throughout the world, including to geographies where we are conducting the PACIFICA Phase 3 trial and the PRE-VENT Phase 3 trial. Further, the President of the United States declared the COVID-19 pandemic a national emergency. Similarly, numerous states have declared a state of emergency related to the spread of COVID-19 and/or issued executive orders directing all individuals living in their respective states to stay at their place of residence for an indefinite period of time (subject to certain exceptions to facilitate authorized necessary activities) to mitigate the impact of the COVID-19 pandemic. These states and others have repeated and may continue to repeat these mitigation steps in the future. The spread of this pandemic has caused significant volatility and uncertainty in U.S. and international markets. This has resulted in an economic downturn and may disrupt our business and delay our clinical trials and timelines.

Quarantines, shelter-in-place and similar government orders have been enacted in each of the geographies in which we are conducting our clinical trials and such orders, shutdowns or other restrictions on the conduct of business operations could continue to remain in place for extended periods of time or subsequently reinstated, thereby further affecting our clinical trials. The patient populations that are eligible for our clinical trials are immune-compromised and are at higher risk for becoming infected with COVID-19. As COVID-19 affects the parts of the world where we are conducting our clinical trials, and the patients involved with these clinical trials become infected with COVID-19, we may have more adverse events and deaths in our clinical trials as a result.

We have faced and may continue to face difficulties enrolling patients in our clinical trials as the patient populations that are eligible for our clinical trials are impacted by COVID-19. Patient enrollment may be further delayed due to the diversion of healthcare resources, such as hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials, away from the conduct of clinical trials, toward the COVID-19 pandemic.

Additionally, if our clinical trial patients are unable to travel to our clinical trial sites as a result of quarantines or other restrictions resulting from COVID-19, we may experience higher drop-out rates or delays in our clinical trials. Similarly, we may struggle to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19. Any such delays in enrollment hinder our ability to obtain clinical data on the schedule we currently predict.

Travel restrictions continue to be implemented throughout the world in an effort to contain COVID-19, and several countries have expanded screenings of travelers.

We may experience additional disruptions due to the COVID-19 pandemic that could severely impact our business and clinical trials, including:

evidence from the PRE-VENT Phase 3 trial showing increased adverse events in trial participants, which could affect the safety profile and/or acceptability of our application to the FDA;

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delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;

changes in local regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;

interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others, or interruption of clinical trial subject visits and study procedures, the occurrence of which could affect the integrity of clinical trial data;

delays in necessary interactions with local regulators, ethics committees, and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;

limitations in employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

refusal of the FDA to accept data from clinical trials in affected geographies; and

interruption or delays to our sourced discovery and clinical activities.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.

The global pandemic of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole. However, any one or a combination of these events could have an adverse effect on the operation of and results from our clinical trials, which could prevent or delay us from obtaining approval for pacritinib.

We face direct and intense competition from our competitors in the biotechnology and pharmaceutical industries, and we may not compete successfully against them.

Competition in the oncology market is intense and is accentuated by the rapid pace of technological and product development. We anticipate that we will face increased competition in the future as new companies enter the market. Our competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical companies, specialized biotechnology companies and universities and other research institutions. Specifically, if we are successful in bringing pacritinib to market for indications such as MF, AML, MDS, CMML, or CLL, pacritinib may face competition from the currently approved JAK1/JAK2 inhibitors, Jakafi® / Jakavi® (ruxolitinib) and Inrebic® (fedratinib). In August 2019, Celgene (which was subsequently acquired by Bristol-Myers Squibb) announced FDA approval of Inrebic® for the treatment of adult patients with intermediate-2 or high-risk primary or secondary (post-polycythemia vera or post-essential thrombocythemia) myelofibrosis. Pacritinib may also face competition from momelotinib, which Sierra Oncology acquired from Gilead. In June 2019, Sierra Oncology announced that momelotinib was granted fast track designation by the FDA and launched a Phase 3 clinical trial in November 2019. In addition, if we are successful in bringing pacritinib to market as a treatment to prevent progression to acute respiratory distress syndrome, or ARDS, and medical ventilation, we expect to face competition from numerous other companies that are currently pursuing clinical development programs for COVID-19 and related conditions.

In addition to the specific competitive factors discussed above, new anti-cancer drugs or drugs for the treatment of COVID-19 that may be under development or developed and marketed in the future could compete with our various compounds.

Many of our competitors, particularly multinational pharmaceutical companies, either alone or together with their collaborators, have substantially greater financial and technical resources and substantially larger development and marketing teams than us, as well as significantly greater experience than we do in developing, commercializing,
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manufacturing, marketing and selling products. As a result, products of our competitors might come to market sooner or might prove to be more effective, less expensive, have fewer side effects or be easier to administer than ours. In any such case, sales of any potential future product would likely suffer and we might never recoup the significant investments we have made and will continue to make to develop and market these compounds.

Even if pacritinib or other compounds we may develop are successful in clinical trials and receive regulatory approvals, we or our collaboration partners may not be able to successfully commercialize them.

The development and ongoing clinical trials for pacritinib and other compounds we may develop may not be successful and, even if they are, the resulting products may never be successfully developed into commercial products or gain market acceptance among physicians, patients, healthcare payors or the medical community. Even if we are successful in our clinical trials and in obtaining other regulatory approvals, our products may not reach or remain in the market for a number of reasons including:

they may be found ineffective or cause harmful side effects;

they may be difficult to manufacture on a scale necessary for commercialization;

they may experience excessive product loss due to contamination, equipment failure, inadequate transportation or storage, improper installation or operation of equipment, vendor or operator error, natural disasters or other catastrophic events, inconsistency in yields or variability in product characteristics;

they may be uneconomical to produce;

the timing of market introduction of pacritinib and other compounds we may develop and competitive products may be inopportune;

political and legislative changes may make the commercialization of pacritinib, or any other product candidates we may develop in the future, more difficult;

we may fail to obtain reimbursement approvals or pricing that is cost effective for patients as compared to other available forms of treatment or that covers the cost of production and other expenses;

they may not compete effectively with existing or future alternatives;

we may be unable to develop commercial operations and to sell marketing rights;

they may fail to achieve market acceptance; or

we may be precluded from commercialization of a product due to proprietary rights of third parties.

Uncertainty and speculation continue regarding the possible repeal of all or a portion of the Patient Protection and Affordable Care Act through legislative action or court ruling, as well as possible changes to the regulations implemented under the Patient Protection and Affordable Care Act by the Department of Health and Human Services. The 5th Circuit of Appeals recently upheld a federal district court ruling that the individual mandate provisions of the Patient Protection and Affordable Care Act are unconstitutional, and the U.S. Supreme Court is expected to review the constitutionality of the remaining provisions of the Patient Protection and Affordable Care Act in the Fall. The uncertainty this causes for the healthcare industry could also adversely affect the commercialization of our products. If we fail to commercialize products or if our future products do not achieve significant market acceptance, we will not likely generate significant revenues or become profitable.

If we are unable to adequately prepare the market for the potential future commercialization of a product, we may not be able to generate product revenue once marketing authorization is obtained. We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and sales capabilities, enter into agreements with third parties to market and sell our product candidates or secure adequate payer reimbursement and coverage, we may not be able to generate product revenue.

We currently have limited commercialization expertise, including sales, marketing or distribution capabilities. Advancing pacritinib through Phase 3 development and regulatory approval will require us to begin commercialization
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preparation activities and incur related expenses before we obtain final trial results and know whether PACIFICA or PRE-VENT will support regulatory approval. These activities will include, among other things, the development of an in-house marketing organization and sales force, a market access and payor reimbursement strategy and a distribution function, which will require significant capital expenditures, management resources and time. We will have to compete with other companies to recruit, hire, train and retain qualified marketing and sales personnel. If we are unable to adequately prepare the market for the potential future commercialization of pacritinib, we may not be able to generate product revenue once marketing authorization is obtained.

Additionally, if we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements on commercially reasonable terms, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.

Pacritinib or other compounds we may develop may cause undesirable side effects or have other properties that could halt their development, prevent their regulatory approval, limit their commercial potential or result in significant negative consequences.

It is possible that the FDA or foreign regulatory authorities may not agree with our assessment of the safety profile of pacritinib or other compounds we may develop in the future. Undesirable side effects caused by pacritinib could cause us, institutional review boards, our CROs, the FDA or foreign regulatory authorities to interrupt, delay or discontinue development and could result in a clinical hold on any clinical trial, or the denial of regulatory approval by the FDA or foreign regulatory authorities for any or all targeted indications. This, in turn, could prevent us from commercializing pacritinib and generating revenues from its sale. In addition, if pacritinib or other compounds we may develop in the future cause serious or unexpected side effects or are associated with other safety risks after receiving marketing approval, a number of potential significant negative consequences could result, including, but not limited to:

regulatory authorities may withdraw their approval of this product;

we may be required to recall the product, change the way it is administered, conduct additional clinical trials or change the labeling of the product;

the product may be rendered less competitive and sales may decrease;

our reputation may suffer generally both among clinicians and patients;

we may be exposed to potential lawsuits and associated legal expenses, including costs of resolving claims;

regulatory authorities may require certain labeling statements, such as warnings or contraindications or limitations on the indications for use, or impose restrictions on distribution in the form of a Risk Evaluation and Mitigation Strategy in connection with approval, if any;

we may be required to change the way the product is administered or conduct additional preclinical studies or clinical trials; or

we may be required to change or stop other ongoing clinical studies that may negatively impact the development of the agent for other indications.

If preliminary data demonstrate that any of our product candidates has an unfavorable safety profile and is unlikely to receive regulatory approval or be successfully commercialized, we may voluntarily suspend or terminate future development of such product candidate.

Any one or a combination of these events could prevent us from obtaining approval and achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from the sale of the product.

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We will need to raise additional funds to operate our business, but additional funds may not be available on acceptable terms, or at all. Any inability to raise required capital when needed could harm our liquidity, financial condition, business, operating results and prospects.

We have substantial operating expenses associated with the development of pacritinib, and we have significant contractual payment obligations. We have incurred net operating losses every year since our formation. As of September 30, 2020, we had an accumulated deficit of $2.3 billion, and we expect to continue to incur net losses for the foreseeable future. Our available cash, cash equivalents and short-term investments were $57.4 million as of September 30, 2020. In March 2020, we received approximately $59.1 million in net proceeds from our rights offering. However, we believe that our present financial resources will only be sufficient to fund our operations into the fourth quarter of 2021. This raises substantial doubt about our ability to continue as a going concern and we will need to raise substantial additional capital in the near term in order to fund our operations through and beyond the fourth quarter of 2021 and to continue as a going concern thereafter. See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock, which could negatively impact our ability to raise sufficient funds to continue development of pacritinib and continue as a going concern. In addition, cash forecasts and capital requirements are subject to change as a result of a variety of risks and uncertainties. Developments in and expenses associated with our clinical trials and other research and development activities, including regulatory approval developments, our ability to consummate appropriate collaborations for development and commercialization activities, our ability to reach milestones triggering payments under applicable contractual arrangements, receive the associated payments, litigation and other disputes, competitive market developments and other unplanned expenses or business developments such as our new PRE-VENT clinical trial may consume capital resources earlier than planned. Due to these and other factors, any forecast for the period for which we will have sufficient resources to fund our operations, as well as any other operational or business projection we have disclosed, or may, from time to time, disclose, may fail.

We will need to acquire additional funds in order to develop our business and continue the development of pacritinib. We may seek to raise such capital through public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, our ability to raise capital is subject to a number of risks, uncertainties, constraints and consequences, including, but not limited to, the following:

our ability to raise capital through the issuance of additional shares of our common stock or convertible securities is restricted by the limited number of our authorized shares available for issuance, the potential difficulty of obtaining stockholder approval to increase authorized shares and the restrictive covenants under our secured term loan agreement;

issuance of equity-based securities will dilute the proportionate ownership of existing stockholders;

our ability to obtain further funds from any potential loan arrangements is limited by our existing loan and security agreement;

certain financing arrangements may require us to relinquish rights to various assets and/or impose more restrictive terms than any of our existing or past arrangements;

we may be required to meet additional regulatory requirements, and we may be subject to certain contractual limitations, which may increase our costs and harm our ability to obtain funding;

for so long as our non-affiliate public float does not exceed $75 million, our ability to file or use shelf registration statements on Form S-3 to raise capital will be limited; and

if we are not listed on the Nasdaq or any stock exchange, whether due to a failure to regain compliance with the minimum bid price requirement (as discussed below) or otherwise, our ability to raise capital will be adversely impacted.

For these and other reasons, additional funding may not be available on favorable terms or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. If we fail to obtain additional capital when needed, we may be required to delay, scale back or eliminate some or all of our research and development programs, reduce our general and administrative expenses, be unable to attract and retain highly qualified personnel, refrain from making our contractually required payments when due (including debt payments) and/or be forced to
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cease operations, liquidate our assets and possibly seek bankruptcy protection. Any of these consequences could harm our business, financial condition, operating results and prospects.

We may never be able to generate significant product revenues.

We anticipate that, for at least the next several years, our ability to generate significant revenues and become profitable will be dependent on our ability to obtain regulatory approval for and successfully commercialize pacritinib. If we are unable to successfully commercialize our development stage or approved products as planned, our business, financial condition, operating results and prospects could be harmed.

We are dependent on third-party service providers for a number of critical operational activities including, in particular, for the manufacture, testing and distribution of our compounds and associated supply chain operations, as well as for clinical trial activities. Any failure or delay in these undertakings by third parties could harm our business.

Our business is dependent on the performance by third parties of their responsibilities under contractual relationships. In particular, we rely heavily on third parties for the manufacture and testing of our compounds. We do not have internal analytical laboratory or manufacturing facilities to allow the testing or production of our compounds in compliance with Good Laboratory Practices, or GLP, and current Good Manufacturing Practices, or cGMP. As a result, we rely on third parties to supply us in a timely manner with manufactured products or product candidates. We may not be able to adequately manage and oversee the manufacturers we choose, they may not perform as agreed or they may terminate their agreements with us. In particular, we depend on third-party manufacturers to conduct their operations in compliance with GLP and cGMP or similar standards imposed by U.S. and/or applicable foreign regulatory authorities, including the FDA and EMA. Any of these regulatory authorities may take action against a contract manufacturer who violates GLP and cGMP. Failure of our manufacturers to comply with FDA, EMA or other applicable regulations may cause us to curtail or stop the manufacture of such products until we obtain regulatory compliance, and could subject us to penalties.

We may not be able to obtain sufficient quantities of our compounds if we are unable to secure manufacturers when needed, or if our designated manufacturers do not have the capacity or otherwise fail to manufacture compounds according to our schedule and specifications or fail to comply with cGMP regulations. In particular, in connection with the transition of the manufacturing of drug supply to successor vendors, we could face logistical, scaling or other challenges that may adversely affect supply. Furthermore, in order to ultimately obtain and maintain applicable regulatory approvals, any manufacturers we utilize are required to consistently produce the respective compounds in commercial quantities and of specified quality or execute fill-finish services on a repeated basis and document their ability to do so, which is referred to as process validation. In order to obtain and maintain regulatory approval of a compound, the applicable regulatory authority must consider the result of the applicable process validation to be satisfactory and must otherwise approve of the manufacturing process. Even if our compound manufacturing processes obtain regulatory approval and sufficient supply is available to complete clinical trials necessary for regulatory approval, there are no guarantees we will be able to supply the quantities necessary to effect a commercial launch of the applicable drug, or once launched, to satisfy ongoing demand. Any shortage could also impair our ability to deliver contractually required supply quantities to applicable collaborators, as well as to complete any additional planned clinical trials.

We also rely on third-party service providers for certain warehousing, transportation, sales, order processing, distribution and cash collection services. With regard to the distribution of our compounds, we depend on third-party distributors to act in accordance with Good Distribution Practices, or GDP, and the distribution process and facilities are subject to continuing regulation by applicable regulatory authorities with respect to the distribution and storage of products.

In addition, we depend on medical institutions and CROs (together with their respective agents) to conduct clinical trials and associated activities in compliance with Good Clinical Practices, or GCP, and in accordance with our timelines, expectations and requirements. To the extent any such third parties are delayed in achieving or fail to meet our clinical trial enrollment expectations, fail to conduct our trials in accordance with GCP or study protocol or otherwise take actions outside of our control or without our consent, our business may be harmed. Furthermore, we conduct clinical trials in foreign countries, subjecting us to additional risks and challenges, including, in particular, as a result of the engagement of foreign medical institutions and foreign CROs, who may be less experienced with regard to regulatory matters applicable to us and may have different standards of medical care.

With regard to certain of the foregoing clinical trial operations and stages in the manufacturing and distribution chain of our compounds, we rely on single vendors. In addition, in the event pacritinib is approved, we will initially have only one commercial supplier for pacritinib. We may in the future seek to qualify an additional manufacturer of pacritinib, but the process for qualifying a manufacturer, and seeking prior regulatory approval for a new manufacturer, can be lengthy and
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expensive and may not occur on a timely basis or at all. The use of single vendors for core operational activities, such as clinical trial operations, manufacturing and distribution, and the resulting lack of diversification, exposes us to the risk of a material interruption in service related to these single, outside vendors. As a result, our exposure to this concentration risk could harm our business.

    Although we monitor the compliance of our third-party service providers performing the aforementioned services, we cannot be certain that such service providers will consistently comply with applicable regulatory requirements or that they will otherwise timely satisfy their obligations to us. Any such failure and/or any failure by us to monitor their services and to plan for and manage our short and long term requirements underlying such services could result in shortage of the compound, delays in or cessation of clinical trials, failure to obtain or revocation of product approvals or authorizations, product recalls, withdrawal or seizure of products, suspension of an applicable wholesale distribution authorization and/or distribution of products, operating restrictions, injunctions, suspension of licenses, other administrative or judicial sanctions (including civil penalties and/or criminal prosecution) and/or unanticipated related expenditures to resolve shortcomings. Such consequences could have a significant impact on our business, financial condition, operating results or prospects.

We are party to a loan and security agreement that contains operating and financial covenants that may restrict our business and financing activities and we may be required to repay the outstanding indebtedness in an event of default, which could have a material adverse effect on our business.

In November 2017, we entered into a loan and security agreement with Silicon Valley Bank, which was amended in May 2018, the proceeds of which were partially used to repay in full all outstanding indebtedness under a prior loan and security agreement.

Borrowings under this loan and security agreement are secured by substantially all of our assets except intellectual property and subject to certain other exceptions. The loan and security agreement restricts our ability, among other things, to:

sell, transfer or otherwise dispose of any of our business assets or property, subject to limited exceptions;

make material changes to our business or management;

enter into transactions resulting in significant changes to the voting control of our stock;

make certain changes to our organizational structure;

consolidate or merge with other entities or acquire other entities;

incur additional indebtedness or create encumbrances on our assets;

pay dividends, other than dividends paid solely in our common shares, or make distributions on and, in certain cases, repurchase our capital stock;

enter into certain transactions with our affiliates;

repay subordinated indebtedness; or

make certain investments.

In addition, we are required under our loan agreement and security agreement to comply with various affirmative covenants. The covenants and restrictions and obligations in our loan and security agreement, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants, including a material adverse change in our business, operations or condition (financial or otherwise) could result in a default under the loan and security agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable.

If we are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either when they mature, or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our business operations and financial condition.

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If we are unable to recruit, retain, integrate and motivate senior management, other key personnel and directors, or if such persons are unable to perform effectively, our business could suffer.

Our future success depends, in part, on our ability to continue to attract and retain senior management, other key personnel and directors to enable the execution of our business plan and to identify and pursue new opportunities. Additionally, our productivity and the quality of our operations are dependent on our ability to integrate and train our new personnel quickly and effectively.

Directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well as governmental, creditor and other claims that may be made against them. Due to these and other reasons, such persons are also becoming increasingly concerned with the availability of directors and officers liability insurance to pay on a timely basis the costs incurred in defending such claims. We currently carry directors and officers liability insurance. However, directors and officers liability insurance is expensive and can be difficult to obtain, particularly for companies like ours that have had a history of litigation. In addition, the cost of obtaining directors and officers liability insurance recently has been increasing while applicable coverage has been decreasing and self-insured retention levels have been increasing, which requires us to pay higher premiums and reserve for higher self-insurance retention levels. If we are unable to continue to provide directors and officers sufficient liability insurance at affordable rates or at all, or if directors and officers perceive our ability to do so in the future to be limited, it may become increasingly more difficult to attract and retain management and qualified directors to serve on our Board of Directors.

The loss of the services of senior management, other key personnel or directors and/or the inability to timely attract or integrate such persons could significantly delay or prevent the achievement of our development and strategic objectives and may adversely affect our business, financial condition and operating results.

We may encounter difficulties in managing our expected growth and in expanding our operations successfully.

Advancing our lead product candidate, pacritinib, through the product development and, if approved, commercialization process will require us to develop or expand our development, regulatory, manufacturing, medical affairs, marketing and sales capabilities or contract with third parties to provide these capabilities for us. We must also successfully integrate the employees and operations related to the development of pacritinib. Maintaining additional relationships and managing our future growth will impose significant added responsibilities on members of our management. We must be able to manage our development efforts and clinical trials effectively, hire, train and integrate additional management, development, medical affairs, administrative and sales and marketing personnel, improve our managerial, development, operational and finance systems, and expand our facilities, all of which may impose a strain on our administrative and operational infrastructure. Our future financial performance will depend, in part, on our ability to manage this growth effectively. We may not be able to accomplish these tasks; which failure could prevent us from successfully developing and commercializing pacritinib.

If we are unable to in-license or acquire additional product candidates, our future product portfolio and potential profitability could be harmed.

One component of our business strategy is the in-licensing and acquisition of drug compounds developed by other pharmaceutical and biotechnology companies or academic research laboratories, such as pacritinib. Competition for new promising compounds and commercial products can be intense. If we are not able to identify future in-licensing or acquisition opportunities and enter into arrangements on acceptable terms, our future product portfolio and potential profitability could be harmed.

We may owe additional amounts for VAT related to our operations in Europe.

Our European operations are subject to the VAT which is usually applied to all goods and services purchased and sold throughout Europe. We historically carried out research and development activities in Italy and incurred value added tax, or VAT, from Italian suppliers on the acquisition of goods and services in Italy. This VAT should be considered as an input VAT credit. We treated the majority of our sales made in Italy without output VAT (on the basis that the supplies should be considered outside the scope of Italian VAT). This resulted in the value of input VAT exceeding the value of output VAT, and accordingly we submitted a refund claim for the VAT. The Italian Tax Authority, or the ITA, has challenged the treatment of the sales transactions and claimed that the sales transactions made by us should have been subject to output VAT.

On April 14, 2009, December 21, 2009 and June 25, 2010, the ITA issued notices of assessment to CTI (Europe) based on the ITA’s audit of CTI (Europe)’s VAT returns for the years 2003, 2005, 2006 and 2007. The ITA audits concluded that CTI (Europe) did not collect and remit VAT on certain invoices issued to non-Italian clients for services performed by CTI
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(Europe). The assessments, including interest and penalties, for the years 2003, 2006 and 2007 are €0.6 million, €2.8 million and €0.9 million, respectively. While we are defending ourselves against the assessments both on procedural grounds and on the merits of the case, there can be no assurances that we will be successful in such defense. The 2005 VAT assessment was decided in favor of the Company by the Italian Supreme Court, with no further potential liabilities for the Company. Further information pertaining to these cases can be found in Part I, Item 1, "Notes to Condensed Consolidated Financial Statements, Note 6. Contingencies" and is incorporated by reference herein. If the final decision of the Italian Supreme Court is unfavorable to us, or if, in the interim, the ITA were to make a demand for payment and we were to be unsuccessful in suspending collection efforts, we may be requested to pay to the ITA an amount up to €4.3 million, or approximately $5.0 million converted using the currency exchange rate as of September 30, 2020, including interest and penalties for the period lapsed between the date in which the assessments were issued and the date of effective payment.

We are currently subject to certain regulatory and legal proceedings, and may in the future be subject to additional proceedings and/or allegations of wrong-doing, which could harm our financial condition and operating results.

We are currently, and may in the future be, subject to regulatory matters and legal claims, including possible securities, derivative, consumer protection and other types of proceedings pursued by individuals, entities or regulatory bodies. See Part I, Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 6. Contingencies" regarding the regulatory matters and legal claims in which we are currently involved. Additionally, we were previously required to supply documents in response to a subpoena from the SEC in connection with an investigation into potential federal securities law violations; however, in August 2018, the SEC staff sent a letter stating that it had concluded its investigation of us, and, based on information it had as of that date, it did not intend to recommend an enforcement action against us. Litigation and regulatory proceedings are subject to inherent uncertainties, and we have had and may in the future have unfavorable rulings and settlements. Adverse outcomes may result in significant monetary damages and penalties or injunctive relief against us. It is possible that our financial condition and operating results could be harmed in any period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable. If an unfavorable ruling were to occur in any of the legal proceedings we are or may be subject to, our business, financial condition, operating results and prospects could be harmed. The ultimate outcome of litigation and other claims is subject to inherent uncertainties, and our view of these matters may change in the future.

We cannot predict with certainty the eventual outcome of any litigation or regulatory proceedings we are or may be party to in the future. In addition, negative publicity resulting from any allegations of wrong-doing could harm our business, regardless of whether the allegations are valid or whether there is a finding of liability. Furthermore, we may have to incur substantial time and expense in connection with such lawsuits and management’s attention and resources could be diverted from operating our business as we respond to the litigation. Our insurance is subject to high deductibles and there is no guarantee that the insurance will cover any specific claim that we currently face or may face in the future, or that it will be adequate to cover all potential liabilities and damages. In the event of negative publicity resulting from allegations of wrong-doing and/or an adverse outcome under any currently pending or future lawsuit, our business could be materially harmed.

A variety of risks associated with international operations could materially adversely affect our business.

If we engage in significant cross-border activities, we will be subject to risks related to international operations, including:

different regulatory requirements for initiating clinical trials and maintaining approval of drugs in foreign countries and multiple, differing and changing tax laws and regulations;

reduced protection for intellectual property rights in certain countries;

unexpected changes in tariffs, trade barriers and regulatory requirements;

economic weakness, including inflation, political instability or open conflict in particular foreign economies and markets;

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations of doing business in another country;

workforce uncertainty in countries where labor unrest is more common than in North America;

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likelihood of potential or actual violations of domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, or FCPA, and the U.K. Bribery Act, or of U.S. and international export control and sanctions regulations, which likelihood may increase with an increase of operations in foreign jurisdictions;

tighter restrictions on privacy, data protection, and the collection and use of data, including genetic material, may apply in jurisdictions outside of North America; and

business interruptions resulting from global health epidemics, including the COVID-19 pandemic, geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

If any of these issues were to occur, our business could be materially harmed.

Our net operating losses may not be available to reduce future income tax liability.

We have substantial tax loss carryforwards for U.S. federal income tax purposes, but our ability to use such carryforwards to offset future income or tax liability is limited under section 382 of the Internal Revenue Code of 1986, as amended, as a result of prior changes in the stock ownership of our company. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to limitations. Moreover, future changes in the ownership of our stock, including those resulting from issuance of shares of our common stock upon exercise of outstanding warrants, may further limit our ability to use our net operating losses.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us.

We could be subject to additional income tax liabilities.

We are subject to income taxes in the United States and certain foreign jurisdictions. We use significant judgment in evaluating our worldwide income-tax provision. During the ordinary course of business, we conduct many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income-tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.

We are subject to risk regarding currency exchange rate fluctuations associated with the translation of monetary amounts in foreign currencies into U.S. dollars.

We are exposed to risks associated with the translation of euro-denominated financial results and accounts into U.S. dollars for financial reporting purposes. The carrying value of the assets and liabilities, as well as the reported amounts of revenues and expenses, will be affected by fluctuations in the value of the U.S. dollar as compared to the euro. Certain of our transactions denote monetary amounts in foreign currencies, and consequently, the ultimate financial impact to us from a U.S. dollar perspective is subject to significant uncertainty. Furthermore, the referendum in the United Kingdom in June 2016, in which the majority of voters voted in favor of an exit from the European Union has resulted in increased volatility in the global financial markets and caused severe volatility in global currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against the euro. Changes in the value of the U.S. dollar as compared to foreign currencies (in particular, the euro) might have an adverse effect on our reported operating results and financial condition.

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Because there is a risk of product liability associated with developing and commercializing pharmaceuticals, we face potential difficulties in obtaining insurance, and if product liability lawsuits were to be successfully brought against us, our business may be harmed.

Our business exposes us to potential product liability risks inherent in the testing, manufacturing, marketing and sale of human pharmaceutical products. If our insurance covering a compound is not maintained on acceptable terms or at all, we might not have adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop. A successful product liability claim could also exceed our insurance coverage and could harm our financial condition and operating results.

The illegal distribution and sale by third parties of counterfeit versions of a product or stolen product could have a negative impact on our reputation and business.

Third parties might illegally distribute and sell counterfeit or unfit versions of a product that do not meet our rigorous manufacturing and testing standards. A patient who receives a counterfeit or unfit product may be at risk for a number of dangerous health consequences. Our reputation and business could suffer harm as a result of counterfeit or unfit product sold under our brand name. In addition, thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels, could adversely impact patient safety, our reputation and our business.

We may be subject to claims relating to improper handling, storage or disposal of hazardous materials.

Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations, both internationally and domestically, governing the use, manufacture, storage, handlings, treatment, transportation and disposal of such materials and certain waste products and employee safety and health matters. Although we believe that our safety procedures for handling and disposing of such materials comply with applicable law and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of such an accident, we could be held liable for any damages that result and any such liability not covered by insurance could exceed our resources. Compliance with environmental, safety and health laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts.

We depend on sophisticated information technology systems to operate our business and a cyber-attack or other breach of these systems could have a material adverse effect on our business.

We and third parties on which we rely, including o