Organization and Basis of Presentation

Eleven Biotherapeutics, Inc. (the “Company”), formerly known as Denovo Therapeutics, Inc. and Newco LS14, Inc., a Delaware corporation formed on February 25, 2008, is a biopharmaceutical company with a proprietary protein engineering platform, called AMP-Rx, that it applies to the discovery and development of protein therapeutics to treat diseases of the eye. The Company’s most advanced product candidate, which is still in preclinical development, is EBI-031, which the Company designed, engineered and generated using its AMP-Rx platform and is developing as an intravitreal injection for diabetic macular edema ("DME") and uveitis. On June 10, 2016, the Company submitted an investigational new drug application ("IND") to the United States Food and Drug Administration ("FDA") to initiate a Phase I clinical trial of its product candidate EBI-031, and the FDA granted clearance of this IND on July 7, 2016 ("IND Clearance").

License Transaction

On June 10, 2016, the Company entered into a License Agreement (the “License Agreement”) with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively, “Roche”). Under the License Agreement, the Company has agreed to grant Roche an exclusive, worldwide license, including the right to sublicense, to its patent rights and know-how related to the Company’s monoclonal antibody EBI-031 or any other IL-6 antagonist anti-IL-6 monoclonal antibody, to make, have made, use, have used, register, have registered, sell, have sold, offer for sale, import and export any product containing such an antibody or any companion diagnostic used to predict or monitor response to treatment with such a product (collectively, the “Licensed Intellectual Property”).

Under the License Agreement, Roche will be required to continue developing EBI-031 and any other product made from the Licensed Intellectual Property that contains an IL-6 antagonist anti-IL-6 monoclonal antibody (a “Licensed Product”) at its cost, except that the Company will be responsible, at its cost, for any tissue cross-reactivity studies of EBI-031 that had been initiated before the achievement of IND Clearance.

Financial Terms

Roche has agreed to pay an up-front license fee of $7.5 million within 30 days after the effective date of the license under the License Agreement and receipt of an invoice from the Company, and up to an additional $262.5 million upon the achievement of specified regulatory, development and commercial milestones with respect to up to two unrelated indications. Specifically, an aggregate amount of up to $197.5 million is payable to the Company for the achievement of specified milestones with respect to the first indication: $72.5 million in development milestones, $50.0 million in regulatory milestones and $75.0 million in commercialization milestones.

The first development milestone payment will equal $22.5 million as a result of the IND application for EBI-031 becoming effective on or before September 15, 2016. Additional amounts of up to $65.0 million are payable upon the achievement of specified development and regulatory milestones in a second indication.

In addition, the Company will be entitled to receive royalty payments in accordance with a tiered royalty rate scale, with rates ranging from 7.5% to 15% for net sales of potential future products containing EBI-031 and at up to 50% of these rates for net sales of potential future products containing other IL-6 compounds, with each of the royalties subject to reduction under certain circumstances and to the buy-out options of Roche further described below.

Buy-Out Options

The License Agreement provides for two “option periods” during which Roche may elect to make a one-time payment to the Company and, in turn, terminate its diligence, milestone and royalty payment obligations under the License Agreement. Specifically, (i) Roche may exercise a buy-out option following the first dosing (“Initiation”) in the first Phase II study for a Licensed Product until the day before Initiation of the first Phase III study for a Licensed Product, in which case Roche is required to pay the Company $135 million within 30 days after Roche's exercise of such buy-out option and receipt of an invoice from the Company, or (ii) Roche may exercise a buy-out option following the day after Initiation of the first Phase III study for a Licensed Product until the day before the acceptance for review by the FDA or other regulatory authority of a biologics license application (“BLA”) or similar application for marketing approval for a Licensed Product in either the United States or in the European Union, in which case Roche is required to pay the Company, within 30 days after Roche’s exercise of such buy-out option and receipt of an invoice from the Company, $265 million, which amount would be reduced to $220 million if none of the Company’s patent rights containing a composition of matter claim covering any compound or Licensed Product has issued in the European Union.

Conditions to Effectiveness

The transactions contemplated by the License Agreement (the "License Transaction") may constitute the sale of all or substantially all of the property and assets of the Company within the meaning of Section 271 of the Delaware General Corporation Law (the “DGCL”). As a result, the Company is seeking approval of the License Transaction from the holders of a majority of its outstanding common stock entitled to vote thereon pursuant to the DGCL. The effectiveness of the license under the License Agreement and the receipt of any upfront payment or potential milestone or royalty payments are each conditioned on obtaining this stockholder approval. A special meeting of stockholders is to be held on August 15, 2016 for the purpose of obtaining stockholder approval.

If the License Transaction is approved by the Company’s stockholders, the License Agreement will automatically become effective on the following business day; provided that no governmental entity of competent jurisdiction shall have issued or entered any order, judgment or injunction or statute, rule or regulation which has the effect of prohibiting the consummation of the transactions contemplated by the License Agreement.

Termination

The License Agreement will terminate automatically if the Company fails to obtain approval of the transactions contemplated by the License Agreement by the holders of a majority of its outstanding common stock entitled to vote thereon. The License Agreement may be terminated by Roche if the special meeting of stockholders at which such vote will be taken does not occur within 75 days following execution of the License Agreement. The License Agreement may also be terminated prior to effectiveness by either party if the Company’s board of directors has approved or recommended to the stockholders of the Company an alternative strategic transaction with respect to the Licensed Intellectual Property that the Company’s board of directors has determined in good faith is, or could reasonably be expected to lead to such an alternative strategic transaction which is, more favorable to the Company or its stockholders than the transactions contemplated by the License Agreement.

The Company or Roche may each terminate the License Agreement if the other party breaches any of its material obligations under the License Agreement and does not cure such breach within a specified cure period. Roche may terminate the License Agreement following effectiveness by providing advance written notice to the Company or by providing written notice if the Company is debarred, disqualified, suspended, excluded, or otherwise declared ineligible from certain federal or state agencies or programs. The Company may terminate the License Agreement if, prior to the first filing of a BLA for a Licensed Product, there is a period of 12 months where Roche is not conducting sufficient development activities with respect to the products made from the Licensed Intellectual Property.

Representations and Warranties and Certain Covenants

The License Agreement contains certain representations and warranties from both the Company and Roche. The License Agreement also contains certain covenants, including covenants requiring the Company to not solicit, initiate or knowingly facilitate or knowingly encourage the submission of any proposals or offers relating to alternative transactions in respect of the Licensed Intellectual Property, or, subject to certain exceptions, to engage in any discussions or negotiations with respect thereto.

Indemnification and Dispute Resolution

The License Agreement contains indemnification and dispute resolution provisions that are customary for agreements of its kind.

Liquidity

The Company has financed its operations to date primarily through private placements of its common stock and preferred stock and convertible bridge notes, venture debt borrowings and its initial public offering ("IPO"), and as of June 30, 2016, the Company had cash and cash equivalents totaling approximately $8.5 million, net working capital of $5.8 million and an accumulated deficit of $139.3 million. In January 2016, as a result of the outcome of the Company’s Phase 3 clinical trial of its lead product candidate, isunakinra (EBI-005), for the treatment of severe allergic conjunctivitis, the Company was required to fund a cash collateral account with Silicon Valley Bank ("SVB") in an amount equal to approximately $15.1 million, representing the outstanding obligations under the Loan and Security Agreement with SVB dated May 27, 2010, as amended on September 4, 2012, November 25, 2014 and December 4, 2015 (the “Loan Agreement”). In March 2016, the Company prepaid all outstanding amounts owed to SVB and terminated the Loan Agreement with existing cash on hand.

The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. The Company is subject to a number of risks similar to other early-stage life science companies, including, but not limited to, successful discovery and development of its product candidates, raising additional capital with favorable terms, development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company’s products. The successful discovery and development of product candidates requires substantial working capital which may not be available to the Company on favorable terms. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order for the Company to continue operations beyond 2016 and be able to discharge its liabilities and commitments in the normal course of business, the Company has taken or will take the following steps, not all of which are entirely within the Company’s control:


•	The Company entered into the License Agreement with Roche, which, subject to effectiveness, would provide meaningful cash resources to the Company.

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The Company is engaged in a review of strategic alternatives with a goal of maximizing stockholder value.The Company cannot provide any commitment regarding precisely when or if this strategic review process will result in any type of additional transaction and no assurance can be given that the Company will determine to pursue a potential sale, strategic partnership, business combination or other arrangement.


•	The Company does not see an immediate path forward for isunakinra and has implemented a plan to wind down the development activities associated with isunakinra.


•	The Company has conducted a review of its operations and implemented a plan to reduce operating expenses to align with current operating conditions, including the workforce reduction described in Note 8 below.


•	On March 1, 2016, the Company prepaid all outstanding amounts owed to SVB under the Loan Agreement. The Company continues to evaluate other financing alternatives to provide additional working capital on terms that are consistent with the Company’s business plans.

The Company believes that its cash and cash equivalents of $8.5 million as of June 30, 2016, together with the aggregate upfront and initial milestone payments of approximately $30 million that will be due and payable within 30 days after effectiveness of the License Agreement with Roche, will be sufficient to fund the Company’s current operating plan into 2017. If the Company is unable to obtain stockholder approval of the License Transaction and the License Agreement with Roche does not become effective or the Company is unable to obtain other adequate financing or engage in another strategic transaction on acceptable terms and when needed, the Company will be required to implement further cost reduction strategies. These factors and the factors described above continue to raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).