10-Q 1 tcon-10q_20170630.htm 10-Q tcon-10q_20170630.htm

 

 

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 JUNE 30, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-36818

 

TRACON Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

34-2037594

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

4350 La Jolla Village Drive, Suite 800,
San Diego CA

 

92122

(Address of principal executive offices)

 

(Zip Code)

(858) 550-0780

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

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 7(a)(2)(B) of the Securities Act.

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).      Yes     No 

The number of outstanding shares of the registrant’s common stock as of August 4, 2017 was 16,655,917.

 

 

 

 


 

TRACON Pharmaceuticals, Inc.

FORM 10-Q

TABLE OF CONTENTS

 

 

2


 

PART I  FINANCIAL INFORMATION

Item 1.  Financial Statements

TRACON Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,001

 

 

$

35,710

 

Short-term investments

 

 

5,997

 

 

 

8,703

 

Prepaid and other assets

 

 

814

 

 

 

1,235

 

Total current assets

 

 

32,812

 

 

 

45,648

 

Property and equipment, net

 

 

78

 

 

 

82

 

Total assets

 

$

32,890

 

 

$

45,730

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

6,536

 

 

$

6,213

 

Accrued compensation and related expenses

 

 

1,096

 

 

 

1,588

 

Current portion of deferred revenue

 

 

386

 

 

 

1,259

 

Long-term debt, current portion

 

 

1,162

 

 

 

333

 

Final payment due bank

 

 

 

 

 

850

 

Total current liabilities

 

 

9,180

 

 

 

10,243

 

Other long-term liabilities

 

 

372

 

 

 

21

 

Long-term debt, less current portion

 

 

6,043

 

 

 

7,130

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, authorized shares — 10,000,000 at June 30, 2017

   and December 31, 2016; issued and outstanding shares—none

 

 

 

 

 

 

Common stock, $0.001 par value; authorized shares — 200,000,000 at June 30, 2017

   and December 31, 2016; issued and outstanding shares — 16,655,917 and   

   16,084,721 at June 30, 2017 and December 31, 2016, respectively

 

 

17

 

 

 

16

 

Additional paid-in capital

 

 

116,589

 

 

 

113,918

 

Accumulated deficit

 

 

(99,311

)

 

 

(85,598

)

Total stockholders’ equity

 

 

17,295

 

 

 

28,336

 

Total liabilities and stockholders’ equity

 

$

32,890

 

 

$

45,730

 

 

See accompanying notes.

 

 

3


 

TRACON Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Collaboration revenue

 

$

631

 

 

$

807

 

 

$

1,257

 

 

$

2,017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,893

 

 

 

6,773

 

 

 

10,475

 

 

 

12,268

 

General and administrative

 

 

2,068

 

 

 

2,044

 

 

 

4,032

 

 

 

4,053

 

Total operating expenses

 

 

6,961

 

 

 

8,817

 

 

 

14,507

 

 

 

16,321

 

Loss from operations

 

 

(6,330

)

 

 

(8,010

)

 

 

(13,250

)

 

 

(14,304

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(233

)

 

 

(291

)

 

 

(458

)

 

 

(584

)

Other income (expense), net

 

 

(3

)

 

 

4

 

 

 

(5

)

 

 

65

 

Total other income (expense)

 

 

(236

)

 

 

(287

)

 

 

(463

)

 

 

(519

)

Net loss

 

$

(6,566

)

 

$

(8,297

)

 

$

(13,713

)

 

$

(14,823

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.40

)

 

$

(0.68

)

 

$

(0.84

)

 

$

(1.22

)

Weighted-average shares outstanding, basic and diluted

 

 

16,610,124

 

 

 

12,195,070

 

 

 

16,409,389

 

 

 

12,187,256

 

 

See accompanying notes.

 

 

4


 

TRACON Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(13,713

)

 

$

(14,823

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,601

 

 

 

1,800

 

Common stock issued for services

 

 

23

 

 

 

 

Depreciation and amortization

 

 

34

 

 

 

48

 

Amortization of debt discount

 

 

56

 

 

 

52

 

Amortization of premium/discount on short-term investments

 

 

(4

)

 

 

3

 

Noncash interest

 

 

180

 

 

 

271

 

Deferred rent

 

 

16

 

 

 

(25

)

Deferred revenue

 

 

(873

)

 

 

(1,167

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

421

 

 

 

(420

)

Accounts payable and accrued expenses

 

 

478

 

 

 

(1,677

)

Accrued compensation and related expenses

 

 

(492

)

 

 

(184

)

Net cash used in operating activities

 

 

(12,273

)

 

 

(16,122

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(24

)

 

 

(3

)

Purchases of available-for-sale short-term investments

 

 

(8,994

)

 

 

(3,582

)

Proceeds from the maturity of available-for-sale short-term investments

 

 

11,705

 

 

 

12,226

 

Net cash provided by investing activities

 

 

2,687

 

 

 

8,641

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

8,000

 

 

 

 

Repayment of long-term debt

 

 

(8,850

)

 

 

 

Proceeds from sale of common stock

 

 

1,000

 

 

 

 

Costs paid in connection with sales of common stock

 

 

(259

)

 

 

 

Proceeds from issuance of common stock under equity plans

 

 

123

 

 

 

128

 

Payment of tax withholdings related to net share settlements of vested restricted stock

   awards

 

 

(137

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(123

)

 

 

128

 

Decrease in cash and cash equivalents

 

 

(9,709

)

 

 

(7,353

)

Cash and cash equivalents at beginning of period

 

 

35,710

 

 

 

41,373

 

Cash and cash equivalents at end of period

 

$

26,001

 

 

$

34,020

 

 

See accompanying notes.

 

 

5


 

TRACON Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

 

1.

Organization and Summary of Significant Accounting Policies

Organization and Business

TRACON Pharmaceuticals, Inc. (formerly Lexington Pharmaceuticals, Inc.) (TRACON or the Company) was incorporated in the state of Delaware on October 28, 2004. TRACON is a clinical stage biopharmaceutical company focused on the development and commercialization of novel targeted therapeutics for cancer, wet age-related macular degeneration and fibrotic diseases. The Company’s research focuses on antibodies that bind to the endoglin receptor, which is essential to angiogenesis (the process of new blood vessel formation) and a key contributor to fibrosis (tissue scarring).

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, TRACON Pharma Limited, which was formed in September 2015 and is currently inactive. All significant intercompany accounts and transactions have been eliminated.

Basis of Presentation and Going Concern

As of June 30, 2017, the Company has devoted substantially all of its efforts to product development, raising capital, and building infrastructure and has not realized revenues from its planned principal operations. The Company has incurred operating losses since inception. As of June 30, 2017, the Company had an accumulated deficit of $99.3 million. The Company anticipates that it will continue to incur net losses into the foreseeable future as it continues the development and commercialization of its product candidates and works to develop additional product candidates through research and development programs. At June 30, 2017, the Company had cash, cash equivalents and short-term investments of $32.0 million. Based on the Company’s current business plan, management believes that existing cash, cash equivalents and short-term investments will be sufficient to fund the Company’s obligations through mid-2018. The Company’s ability to execute its operating plan beyond mid-2018 depends on its ability to obtain additional funding through equity offerings, debt financings or potential licensing and collaboration arrangements. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. However, the Company’s current working capital, anticipated operating expenses and net losses and the uncertainties surrounding its ability to raise additional capital as needed, as discussed below, raise substantial doubt about its ability to continue as a going concern for a period of one year following the date that these financial statements are issued. The condensed consolidated financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company plans to continue to fund its losses from operations through cash, cash equivalents and investments on hand, as well as through future equity offerings, debt financings, other third party funding, and potential licensing or collaboration arrangements, including equity financing through the common stock purchase agreement the Company entered into with Aspire Capital Fund, LLC. in March 2017 for the purchase of up to $21.0 million of the Company’s stock over a 30 month period. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. Even if the Company raises additional capital, it may also be required to modify, delay or abandon some of its plans which could have a material adverse effect on the Company’s business, operating results and financial condition and the Company’s ability to achieve its intended business objectives. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements at June 30, 2017, and for the three and six months ended June 30, 2017 and 2016, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and with accounting principles generally accepted in the United States (GAAP) applicable to interim financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year or future periods. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016, included in its Annual Report on Form 10-K filed with the SEC on March 1, 2017.

6


 

Use of Estimates

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of the Company’s condensed consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to revenue recognition and the valuation of equity awards. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less at the date of purchase. The carrying amounts approximate fair value due to the short maturities of these investments. Cash and cash equivalents include cash in readily available checking and money market funds, as well as certificates of deposit.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Revenue Recognition

The Company’s revenue is derived from its license agreement with Santen Pharmaceutical Co., Ltd. (Santen) as described in Note 7. The Company recognizes revenue when all four of the following criteria are met: (1) there is persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue.

The Company evaluates multiple-element arrangements to determine: (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. Deliverables are considered separate units of accounting provided that: (a) the delivered items have value to the customer on a standalone basis and (b) if the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the Company’s control. In assessing whether an item has standalone value, the Company considers factors such as the research, manufacturing and commercialization capabilities of the partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the partner can use the other deliverables for their intended purpose without the receipt of the remaining elements, whether the value of the deliverable is dependent on the undelivered items and whether there are other vendors that can provide the undelivered elements.

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. The Company uses the following hierarchy of values to estimate the selling price of each deliverable: (1) vendor-specific objective evidence of fair value; (2) third-party evidence of selling price; and (3) best estimate of selling price (BESP). The BESP reflects the Company’s best estimate of what the selling price would be if the Company regularly sold the deliverable on a standalone basis. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that are contemplated in negotiating an arrangement and estimated costs. The Company validates the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.

The Company then applies the applicable revenue recognition criteria to each of the separate units of accounting in determining the appropriate period and pattern of recognition. If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then the Company recognizes revenue under the arrangement on a straight-line basis over the period the Company expects to complete its performance obligations.

With respect to revenue derived from reimbursement of direct, out-of-pocket expenses for research and development costs associated with collaborations, where the Company acts as a principal with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs

7


 

associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

Milestones

The Company uses the milestone method of accounting and revenue is recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved and the payment is non-refundable, provided that the milestone event is substantive. A milestone event is defined as an event: (1) that can only be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance; (2) for which there is substantive uncertainty at the inception of the arrangement that the event will be achieved; and (3) that would result in additional payments being due to the Company. Events for which the occurrence is either contingent solely upon the passage of time or the result of a counterparty’s performance are not considered to be milestone events. A milestone event is substantive if all of the following conditions are met: (a) the consideration is commensurate with either the Company’s performance to achieve the milestone, or the enhancement of the value to the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the consideration is reasonable relative to all the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

The Company assesses whether a milestone is substantive at the inception of each arrangement. If a milestone is deemed non-substantive, the Company will account for that milestone payment in accordance with the multiple element arrangements guidance and recognize it consistent with the related units of accounting for the arrangement over the related performance period.

Clinical Trial Expense Accruals

As part of the process of preparing the Company’s financial statements, the Company is required to estimate expenses resulting from its obligations under contracts with vendors, clinical sites, contract research organizations (CROs), and consultants in connection with conducting clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

The Company’s objective is to reflect the appropriate trial expenses in its financial statements by recording those expenses in the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the clinical trial as measured by patient progression and the timing of various aspects of the trial. The Company determines accrual estimates through discussion with the clinical sites and applicable personnel and outside service providers as to the progress or state of consummation of trials. During the course of a clinical trial, the Company adjusts the clinical expense recognition if actual results differ from its estimates. The Company makes estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. The Company’s clinical trial accruals are dependent upon accurate reporting by clinical sites, CROs and other third-party vendors. Although the Company does not expect its estimates to differ materially from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low for any particular period. For the three and six months ended June 30, 2017 and 2016, there were no material adjustments to the Company’s prior period estimates of accrued expenses for clinical trials.

Stock-Based Compensation

Stock-based compensation expense represents the grant date fair value of employee stock option grants, employee restricted stock unit grants (RSUs) and employee stock purchase plan (ESPP) rights recognized as expense over the requisite service period of the awards (usually the vesting period) on a straight-line basis. The Company estimates the fair value of stock option grants and ESPP rights using the Black-Scholes option pricing model. The fair value of RSUs is based on the stock price on the date of grant.

The Company accounts for stock options granted to non-employees using the fair value approach. These option grants, if any, are subject to periodic revaluation over their vesting terms.

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Net loss and comprehensive loss were the same for all periods presented.

8


 

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average shares of common stock outstanding for the period, without consideration for common stock equivalents and adjusted for the weighted-average number of common shares outstanding that are subject to repurchase. The Company has excluded 7,037 and 8,816 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the three and six months ended June 30, 2017, respectively, and 4,719 and 4,981 weighted-average shares subject to repurchase for the three and six months ended June 30, 2016, respectively. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Warrants to purchase common stock

 

 

103,865

 

 

 

57,173

 

Common stock options and restricted stock units

 

 

2,498,609

 

 

 

2,142,886

 

ESPP shares

 

 

7,307

 

 

 

4,619

 

 

 

 

2,609,781

 

 

 

2,204,678

 

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board standard on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. This guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2017. The Company plans on adopting the ASU using the modified retrospective approach and is continuing to evaluate the potential impact that this standard will have on its financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new accounting standard requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard must be adopted using the modified retrospective approach and is effective for public entities for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related disclosures.

 

Recently Adopted Accounting Standards

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 includes an update which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 was effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The Company adopted the standard in the first quarter of 2017, and has made an accounting policy change to record forfeitures as they occur which resulted in no change to its financial statements and related disclosures.

 

 

2.

Short-Term Investments, Cash Equivalents and Fair Value Measurements

At June 30, 2017, short-term investments consisted of U.S. treasury securities. The Company classifies all investments as available-for-sale, as the sale of such investments may be required prior to maturity to implement management strategies. These investments are carried at amortized cost which approximates fair value. A decline in the market value of any short-term investment below cost that is determined to be other-than-temporary will result in a revaluation of its carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. No such impairment charges were recorded for any period presented.

9


 

Realized gains and losses from the sale of short-term investments, if any, are determined on a specific identification basis. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense on the consolidated statements of operations. Realized and unrealized gains and losses during the periods presented were immaterial. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method and are included in interest income on the consolidated statements of operations. Interest and dividends on securities classified as available-for-sale are included in interest income on the consolidated statements of operations. At June 30, 2017, the remaining contractual maturities of all available-for-sale investments were less than one year.

 

The carrying amounts of cash and cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input, the Company believes that the fair value of long-term debt approximates its carrying value.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

   

Observable inputs such as quoted prices in active markets.

 

 

 

Level 2:

 

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

 

 

 

Level 3:

 

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements.

 

None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

Cash equivalents and short-term investments, all of which are classified as available-for-sale securities, consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

Cost

 

 

Unrealized Gain

 

 

Unrealized Loss

 

 

Estimated Fair Value

 

 

Cost

 

 

Unrealized Gain

 

 

Unrealized Loss

 

 

Estimated Fair Value

 

Money market funds

 

$

5,937

 

 

$

 

 

$

 

 

$

5,937

 

 

$

3,188

 

 

$

 

 

$

 

 

$

3,188

 

Certificates of deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,655

 

 

 

 

 

 

 

 

 

3,655

 

U.S. treasury securities

 

 

7,497

 

 

 

 

 

 

 

 

 

7,497

 

 

 

16,503

 

 

 

 

 

 

 

 

 

16,503

 

 

 

$

13,434

 

 

$

 

 

$

 

 

$

13,434

 

 

$

23,346

 

 

$

 

 

$

 

 

$

23,346

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,643

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,703

 

Total cash equivalents and

   short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

23,346

 

 

10


 

The fair values of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were determined using the following inputs (in thousands):

 

 

 

Fair Value Measurements at

 

 

 

Reporting Date Using

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

At June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities and money market funds, included

   in cash equivalents and short-term investments

 

$

13,434

 

 

$

 

 

$

13,434

 

 

$

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit, U.S. treasury securities and money

   market funds, included in cash equivalents and short-term

   investments

 

$

23,346

 

 

$

 

 

$

23,346

 

 

$

 

 

 

 

3.

Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Computer and office equipment

 

$

124

 

 

$

115

 

Furniture and fixtures

 

 

19

 

 

 

19

 

Leasehold improvements

 

 

21

 

 

 

124

 

 

 

 

164

 

 

 

258

 

Less accumulated depreciation and amortization

 

 

(86

)

 

 

(176

)

 

 

$

78

 

 

$

82

 

 

Depreciation expense related to property and equipment totaled approximately $11,000 and $24,000 for the three months ended June 30, 2017 and 2016, respectively, and $34,000 and $48,000 for the six months ended June 30, 2017 and 2016, respectively.

 

 

4.

Long-Term Debt

Long-term debt and unamortized debt discount balances were as follows (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Long-term debt

 

$

8,000

 

 

$

8,000

 

Less debt discount, net of current portion

 

 

(357

)

 

 

(537

)

Long-term debt, net of debt discount

 

 

7,643

 

 

 

7,463

 

Less current portion of long-term debt

 

 

(1,600

)

 

 

(333

)

Long-term debt, net of current portion

 

$

6,043

 

 

$

7,130

 

Current portion of long-term debt

 

$

1,600

 

 

$

333

 

Current portion of debt discount

 

 

(438

)

 

 

 

Current portion of long-term debt, net

 

$

1,162

 

 

$

333

 

 

In January 2017, the Company entered into a second amendment to its Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the 2017 Amended SVB Loan) under which the Company borrowed $8.0 million, all of which was immediately used to repay the Company’s existing loan with SVB (the 2015 Amended SVB Loan).  In accordance with the terms of the 2015 Amended SVB Loan, the Company paid a final payment of $0.9 million associated with the pay off of the 2015 Amended SVB Loan. The transaction was accounted for as a debt modification.

The 2017 Amended SVB Loan provides for interest to be paid at a rate of 8.55% per annum.  Interest-only payments are due monthly through December 2017, which will be extended through June 2018 in the event certain conditions are met. Thereafter, in addition to interest accrued during such period, the monthly payments will include an amount equal to the outstanding principal at

11


 

December 31, 2017 (or June 30, 2018, as applicable) divided by 30 months. At maturity (or earlier prepayment), the Company is also required to make a final payment equal to 4.0% of the original principal amount borrowed.

The 2017 Amended SVB Loan provides for prepayment fees of 3.0% of the outstanding balance of the loan if the loan is repaid prior to January 26, 2018, 2.0% of the amount prepaid if the prepayment occurs after January 25, 2018 but prior to January 25, 2019 and 1.0% of the amount prepaid if the prepayment occurs thereafter.

 

Except as described above, the 2017 Amended SVB Loan is subject to the same material terms set forth in the 2015 Amended SVB Loan Agreement. Consistent with the terms of the 2015 Amended SVB loan agreements, the 2017 Amended SVB Loan is collateralized by substantially all of the Company’s assets, other than the Company’s intellectual property, and contains customary conditions of borrowing, events of default and covenants, including covenants that restrict the Company’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of the Company’s capital stock. Should an event of default occur, including the occurrence of a material adverse change, the Company could be liable for immediate repayment of all obligations under the 2017 Amended SVB Loan.

In connection with the second amendment, the Company issued Silicon Valley Bank (SVB) a warrant to purchase 46,692 shares of its common stock at an exercise price of $5.14 per share. The warrant is fully exercisable and expires on January 25, 2024.  The fair value of the warrant and the final payment related to the 2017 Amended SVB Loan were recorded as debt discounts and are being amortized to interest expense using the effective interest method over the term of the debt, in addition to the remaining unamortized discounts related to the 2015 Amended SVB Loan.

At June 30, 2017, the Company had the following exercisable outstanding warrants for the purchase of common stock issued in connection with the Company’s loan agreements with SVB:

 

Expiration

 

Number of shares

 

 

Exercise price

November 14, 2023 through June 4, 2024

 

 

38,758

 

 

$

7.74

May 13, 2022

 

 

18,415

 

 

$

10.86

January 25, 2024

 

 

46,692

 

 

$

5.14

 

 

 

103,865

 

 

 

 

Future minimum principal and interest payments under the 2017 Amended SVB Loan, including the final payment, as of June 30, 2017 are as follows (in thousands):

 

Remaining 2017

 

$

347

 

2018

 

 

3,766

 

2019

 

 

3,489

 

2020

 

 

1,961

 

 

 

 

9,563

 

Less interest and final payment

 

 

(1,563

)

Long-term debt

 

$

8,000

 

 

 

5.

Commitments and Contingencies

 

Lonza Biologics Tuas Pte Ltd (Lonza)

 

On February 22, 2017, the Company entered into a long-term manufacturing agreement, or the Manufacturing Agreement, with Lonza for the long term manufacture and supply of registration and commercial batches of TRC105, the Company’s lead drug product candidate. Under the Manufacturing Agreement, Lonza has agreed to manufacture TRC105 pursuant to purchase orders and in accordance with the manufacturing specifications agreed upon between the Company and Lonza. The Company is required to purchase certain batches of TRC105 prior to regulatory approval with a total estimated cost of approximately $15.0 million. Following regulatory approval, the Company will be required to purchase a specified minimum number of batches annually with a total annual estimated cost of approximately $22.0 million. If the Company cancels any purchase orders, the Company may be obligated to pay certain cancellation fees. In addition, the Company will be obligated to pay a milestone fee to Lonza upon the earlier of the first approval of TRC105 by the U.S Food and Drug Administration (FDA) or European Medicines Agency (EMA) or the Company’s receipt of a complete response letter or non-approvability letter (or equivalent communication) indicating that the rejection of the marketing application was not due to a deficiency in Lonza’s facility, the manufacturing process or services performed by Lonza.

 

12


 

The Manufacturing Agreement has an initial term beginning on the effective date and ending on the seventh anniversary of the date of first regulatory approval of TRC105 by the FDA or EMA. The Manufacturing Agreement may be renewed for an additional three years upon the written agreement of both parties no later than the fifth anniversary of the date of first approval of TRC105 by the FDA or EMA.

 

Either party may terminate the Manufacturing Agreement due to a material breach of the Manufacturing Agreement by the other party, subject to prior written notice and a cure period, due to the insolvency or bankruptcy of the other party, or due to a force majeure event that prevents performance under the Manufacturing Agreement for at least six months. The Company may terminate the Manufacturing Agreement, subject to 60 days’ written notice, if the Company discontinues the TRC105 program, whether due to a notice of non-approval or withdrawal of marketing approval by a regulatory agency or otherwise.  In the event of a termination by the Company due to discontinuation of the TRC105 program or a termination by Lonza due to the Company’s material breach or insolvency or bankruptcy, the Company would be obligated to pay to Lonza certain batch cancellation and/or early termination fees.

 

License Agreements

The Company has entered into various license agreements pursuant to which the Company acquired licenses to certain intellectual property. The agreements generally required an upfront license fee and, in some cases, reimbursement of patent costs. Additionally, under each agreement, the Company may be required to pay annual maintenance fees, royalties, milestone payments and sublicensing fees. Each of the license agreements is generally cancelable by the Company, given appropriate prior written notice. At June 30, 2017, potential future milestone payments under these agreements, including future milestone payments associated with assets acquired from Janssen Pharmaceutica N.V. should they not exercise their option to regain their rights to these assets as discussed in Note 7, totaled an aggregate of approximately $126.0 million.

 

6.

Stockholders’ Equity

Sales of Common Stock

In March 2017, the Company entered into a Common Stock Purchase Agreement (the Purchase Agreement) with Aspire Capital Fund, LLC (Aspire Capital) which provides that, upon the terms and subject to the conditions and limitations, Aspire Capital is committed to purchase up to an aggregate of $21.0 million of shares of the Company’s common stock. Under the terms of the Purchase Agreement, the Company sold 222,222 shares of the Company’s common stock to Aspire Capital at $4.50 per share for net proceeds of approximately $0.9 million upon execution of the Purchase Agreement and Aspire Capital is committed to purchase up to $20.0 million of additional shares of its common stock solely at TRACON’s request from time to time during a 30 month period beginning on May 1, 2017 and at prices based on the market price at the time of each sale, subject to certain conditions. In consideration for entering into the Purchase Agreement and concurrently with the execution of the Purchase Agreement, the Company issued 195,726 shares of its common stock to Aspire Capital.

 

During the six months ended June 30, 2017, the Company issued 53,756 shares of common stock upon the exercise of outstanding stock options and 74,044 shares of common stock upon the vesting of restricted stock units. The Company withheld  shares of common stock on the vesting date of certain restricted stock units to settle the employees’ minimum statutory tax obligations for income and other related employment taxes, the payment of which is reported as a financing activity in the unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2017.  During the year ended December 31, 2016, the Company issued 9,300 shares of common stock upon the exercise of outstanding stock options.

Stock-Based Compensation Expense

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Risk-free interest rate

 

 

1.8

%

 

 

1.6

%

 

 

2.1

%

 

 

1.6

%

Expected volatility

 

 

84

%

 

 

84

%

 

 

83

%

 

 

78

%

Expected term (in years)

 

 

5.5

 

 

 

6.3

 

 

 

6.2

 

 

 

6.3

 

Expected dividend yield

 

 

%

 

 

%

 

 

%

 

 

%

 

Stock compensation expense for the ESPP was immaterial for the three and six months ended June 30, 2017.

13


 

The allocation of stock-based compensation is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

357

 

 

$

357

 

 

$

725

 

 

$

710

 

General and administrative

 

 

438

 

 

 

586

 

 

 

876

 

 

 

1,090

 

 

 

$

795

 

 

$

943

 

 

$

1,601

 

 

$

1,800

 

 

 

7.

Collaborations

 

Santen

In March 2014, the Company entered into a license agreement with Santen, under which the Company granted Santen an exclusive, worldwide license to certain patents, information and know-how related to TRC105. Under the agreement, Santen is permitted to use, develop, manufacture and commercialize TRC105 products for ophthalmology indications, excluding systemic treatment of ocular tumors. Santen also has the right to grant sublicenses to affiliates and third party collaborators. In the event Santen sublicenses any of its rights under the agreement, Santen will be obligated to pay the Company a portion of any upfront and certain milestone payments received under such sublicense.

Santen has sole responsibility for funding, developing, seeking regulatory approval for and commercializing TRC105 products in the field of ophthalmology. In the event that Santen fails to meet certain commercial diligence obligations, the Company will have the option to co-promote TRC105 products in the field of ophthalmology in the United States with Santen. If the Company exercises this option, the Company will pay Santen a percentage of certain development expenses, and the Company will receive a percentage of profits from sales of the licensed products in the ophthalmology field in the United States, but will not also receive royalties on such sales.

In consideration of the rights granted to Santen under the agreement, the Company received a one-time upfront fee of $10.0 million. The license agreement provides for various types of payments, including the upfront payment, payment for various technical and regulatory support, payments for delivery of drug substance, reimbursement of certain development costs, milestone payments, and royalties on net product sales. The Company has identified multiple deliverables, which include at inception: (1) a license to patents, information and know-how related to TRC105, (2) technology transfer, (3) collaboration, including technical and regulatory support provided by the Company, (4) manufacturing and supply obligations, and (5) shared chemistry, manufacturing and controls (CMC) development activities. Deliverables 1 and 2 above were substantially delivered at the inception of the agreement, and deliverables 3 through 5 are expected to be delivered during the estimated 43-month period over which the Company will provide technical and regulatory support to Santen. At inception and through June 30, 2017, the Company has identified one single unit of accounting for all the deliverables under the agreement since the delivered elements do not have standalone value. The Company’s technical and regulatory expertise, including manufacturing and CMC activities, in the development of biologic therapeutics, specifically TRC105, is a significant component of Santen’s ability to utilize the license and know-how related to TRC105. Given the early stage of development of TRC105 for ophthalmology, the Company is the only party capable of performing the level and type of technical and regulatory collaboration services required by Santen under the agreement. As a result, the Company has determined that the license, including the ability to sublicense, and know-how related to TRC105 do not have standalone value to a licensee. As such, the Company is recognizing revenue for the fixed or determinable collaboration consideration on a straight-line basis over the estimated 43-month period over which it will deliver its technical and regulatory support.

In addition, the Company is eligible to receive up to a total of $155.0 million in milestone payments upon the achievement of certain milestones, of which $20.0 million relates to the initiation of certain development activities, $52.5 million relates to the submission of certain regulatory filings and receipt of certain regulatory approvals and $82.5 million relates to commercialization activities and the achievement of specified levels of product sales. The Company has determined that $10.0 million related to the initiation of certain clinical development activities will be based upon its efforts and meet the criteria of substantive milestones and therefore will be recognized as revenue upon achievement of the milestone in accordance with the milestone method of accounting. During the year ended December 31, 2015, a development milestone that was deemed a substantive milestone at the inception of the arrangement was achieved, and accordingly, the milestone payment of $3.0 million was recognized as revenue. The remaining $145.0 million of potential milestone payments are not substantive milestones as they do not require the efforts of the Company.

If TRC105 products are successfully commercialized in the field of ophthalmology, Santen will be required to pay the Company tiered royalties on net sales ranging from high single digits to low teens, depending on the volume of sales, subject to adjustments in certain circumstances. In addition, Santen will reimburse the Company for all royalties due by the Company under certain third party agreements with respect to the use, manufacture or commercialization of TRC105 products in the field of ophthalmology by Santen

14


 

and its affiliates and sublicensees. Royalties will continue on a country-by-country basis through the later of the expiration of the Company’s patent rights applicable to the TRC105 products in a given country or 12 years after the first commercial sale of the first TRC105 product commercially launched in such country.

Santen may unilaterally terminate this agreement in its entirety, or on a country-by-country basis, upon written notice to the Company. Either party may terminate the agreement in the event of the other party’s bankruptcy or dissolution or for the other party’s material breach of the agreement that remains uncured 90 days (or 30 days with respect to a payment breach) after receiving notice from the non-breaching party. Unless earlier terminated, the agreement continues in effect until the termination of Santen’s payment obligations.

In connection with the collaboration with Santen, the Company recognized revenue of $0.6 million and $0.8 million for the three months ended June 30, 2017 and 2016, respectively, and $1.3 million and $2.0 million for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017, deferred revenue totaled $0.4 million.

Janssen Pharmaceutica N.V. (Janssen)

 

In September 2016,  the Company entered into a license and option agreement with Janssen (the License and Option Agreement) under which Janssen granted the Company a license to technology and intellectual property to develop, manufacture and commercialize two compounds: a small molecule inhibitor of androgen receptor and androgen receptor mutations (the AR Mutant Program or TRC253) which is intended for the treatment of men with prostate cancer, and an inhibitor of NF-kB inducing kinase (the NIK Program or TRC694, and, together with the AR Mutant Program, the Programs).

 

With respect to the AR Mutant Program, Janssen maintains an option, which is exercisable until 90 days after the Company demonstrates clinical proof of concept, to regain the rights to the licensed intellectual property and to obtain an exclusive license to commercialize the compounds and certain other specified intellectual property developed under the AR Mutant Program. If Janssen exercises the option, Janssen will be obligated to pay the Company (i) a one-time option exercise fee of $45.0 million; (ii) regulatory and commercial based milestone payments totaling up to $137.5 million upon achievement of specified events; and (iii) royalties in the low single digits on annual net sales of AR Mutant Program products. If Janssen does not exercise the option, the Company would then have the right to retain worldwide development and commercialization rights to the AR Mutant Program, in which case, the Company would be obligated to pay to Janssen (x) development and regulatory based milestone payments totaling up to $45.0 million upon achievement of specified events, and (y) royalties in the low single digits based on annual net sales of AR Mutant Program products, subject to certain specified reductions.

 

With respect to the NIK Program, Janssen maintains a right, which is exercisable within 90 days following the date on which the Company demonstrates clinical proof of concept with respect to the NIK Program, to negotiate exclusively for a period of six months for a reversion of the related rights in the licensed intellectual property and to obtain an exclusive license to commercialize the compounds and certain other specified intellectual property developed under the NIK Program. If Janssen does not exercise its right of first negotiation, or, if after exercise of such right, the Company and Janssen are unable to reach an agreement on the terms of a reversion and exclusive license, and, in either case, the Company continues the development of the NIK Program, then the Company would be obligated to pay Janssen (i) development and regulatory based milestone payments totaling up to $60.0 million upon achievement of specified events, and (ii) royalties in the low single digits based on annual net sales of NIK Program products, subject to certain specified reductions.

 

No consideration was exchanged for these assets on the acquisition date. Given the early preclinical stage of development of these assets and the low likelihood of success of development through regulatory approval on the acquisition date, no value was assigned to these assets in the accompanying consolidated balance sheet.

 

The Company is obligated to use diligent efforts to develop the Programs according to agreed upon development plans, timelines and budgets. For each Program that the Company retains, the Company is further obligated to use commercially reasonable efforts to develop, obtain marketing approval for, and commercialize licensed products.  Until the expiration or earlier termination of the development term of the AR Mutant Program or the NIK Program, as applicable, under the License and Option Agreement, subject to specified exceptions, the Company has agreed not to research, develop or commercialize any compounds or products related to the AR Mutant Program or the NIK Program, as applicable, other than pursuant to the collaboration with Janssen.

 

The License and Option Agreement may be terminated for uncured breach, bankruptcy, or the failure or inability to demonstrate clinical proof of concept with respect to a particular Program during specified timeframes.  In addition, the License and Option Agreement will automatically terminate (a) with respect to the AR Mutant Program, upon Janssen exercising its option in respect of the AR Mutant Program and making payment of the option exercise fee to the Company or, if Janssen does not exercise the option,

15


 

upon the expiration of all payment obligations of the Company to Janssen with respect of the AR Mutant Program, and (b) with respect to the NIK Program, upon the Company and Janssen entering into an exclusive license agreement following Janssen’s exercise of its right of first negotiation or, if Janssen’s right of first negotiation with respect to the NIK Program expires and the Company and Janssen have not entered into an exclusive license agreement, upon the expiration of all payment obligations of the Company to Janssen with respect of the NIK Program.  The Company may also terminate a Program or the Agreement in its entirety without cause, subject to specified conditions.

 

8. Subsequent Event

 

In July 2017, a development milestone that was deemed a substantive milestone at the inception of the arrangement with Santen (Note 7) was achieved, and accordingly, Santen became obligated to pay the Company a milestone payment of $7.0 million in accordance with the terms of the agreement which will be recognized as revenue in the third quarter of 2017.

16


 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, timing of future events and future financial performance, includes forward-looking statements that are based upon current beliefs, plans and expectations and involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this Quarterly Report for a discussion of important factors that could cause our actual results and the timing of selected events to differ materially from those described in or implied by the forward-looking statements contained in this Quarterly Report. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect actual outcomes.

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel targeted therapeutics for cancer, wet age-related macular degeneration, or wet AMD, and fibrotic diseases. We are a leader in the field of endoglin biology and are using our expertise to develop antibodies that bind to the endoglin receptor. Endoglin is essential to angiogenesis, the process of new blood vessel formation required for solid cancer growth and wet AMD, and a key contributor to the development of fibrosis, or tissue scarring. We are developing our lead product candidate, TRC105 (carotuximab), an endoglin antibody, for the treatment of multiple solid tumor types in combination with inhibitors of the vascular endothelial growth factor, or VEGF, pathway. The VEGF pathway regulates vascular development in the embryo, or vasculogenesis, and angiogenesis. We believe treatment with TRC105 in combination with VEGF inhibitors may improve survival in cancer patients when compared to treatment with a VEGF inhibitor alone.  TRC105 has been studied in eight completed Phase 2 clinical trials and three completed Phase 1 clinical trials, and is currently being dosed in one Phase 3 clinical trial, three Phase 2 clinical trials and three Phase 1 clinical trials. Our TRC105 oncology clinical development plan is broad and involves a tiered approach. We are initially focused on angiosarcoma which is a tumor that highly expresses endoglin, the target of TRC105, and therefore may be more responsive to treatment with TRC105. We have seen complete ongoing responses in this tumor type and have initiated dosing in an international multicenter Phase 3 trial in angiosarcoma. We obtained Special Protocol Assessment (SPA) agreement from the US Food and Drug Administration (FDA) on our clinical trial design for the Phase 3 trial in angiosarcoma and also incorporated scientific advice from the European Medicines Agency (EMA) regarding the adequacy of the trial design. We also received orphan drug designation from the FDA and the EMA for TRC105 for the treatment of soft tissue sarcoma, including angiosarcoma, in 2016.

Our other product candidates are TRC205, an endoglin antibody that is in preclinical development for the treatment of fibrotic diseases, TRC102, which is a small molecule that is in Phase 2 clinical development for the treatment of mesothelioma and glioblastoma, and two compounds that we licensed from Janssen Pharmaceutica N.V. (Janssen) in September 2016: TRC253, which is a small molecule for which we initiated a Phase 1/2 clinical trial for the treatment of metastatic castration-resistant prostate cancer in March 2017, and TRC694, a small molecule in pre-clinical development for the treatment of myeloma. In March 2014, Santen Pharmaceutical Co. Ltd. (Santen) licensed from us exclusive worldwide rights to develop and commercialize our endoglin antibodies for ophthalmology indications, and in July 2017 Santen initiated dosing in a Phase 2 clinical trial of DE-122 in wet AMD.

TRC102 is a small molecule in clinical development to reverse resistance to specific chemotherapeutics by inhibiting base‑excision repair, or BER. In initial clinical trials of more than 100 patients, TRC102 has shown good tolerability and promising anti-tumor activity, in combination with alkylating and antimetabolite chemotherapy in the treatment of lung cancer and glioblastoma.  TRC102 began Phase 2 testing in mesothelioma in combination with the approved chemotherapeutic Alimta in 2015 and began Phase 2 testing in glioblastoma in combination with the approved chemotherapeutic Temodar in 2016. TRC102 is also being studied in three Phase 1 or Phase 1/2 clinical trials: in combination with Alimta and cisplatin in mesothelioma patients, in combination with chemoradiation in lung cancer patients, and in combination with Temodar in ovarian, lung and colorectal cancer patients. All current TRC102 trials are sponsored and funded by the National Cancer Institute, or NCI. We retain global rights to develop and commercialize TRC102 in all indications.

We have collaborated with the NCI, which selected TRC105 and TRC102 for federal funding of clinical development, as well as Case Western Cancer Center (Case Western). Under these collaborations, NCI sponsored or is sponsoring ten completed or ongoing clinical trials of TRC105 and TRC102, and Case Western sponsored two clinical trials of TRC102.  All TRC105 NCI sponsored trials have been completed. We expect that Phase 2 clinical trials of TRC102 will be completed with NCI funding. If merited by Phase 2 data, we expect to fund additional Phase 3 clinical trials of TRC105 and TRC102 and, based on NCI’s past course of conduct with similarly situated pharmaceutical companies in which it has sponsored pivotal clinical trials following receipt of positive Phase 2 data, we anticipate that NCI will sponsor Phase 3 clinical trials in additional indications.

 

17


 

The following chart summarizes our pipeline of product candidates:

 

 

The following table summarizes key information regarding ongoing and planned development of our product candidates:

 

 

Phase

Data Expected

TRC105

 

 

Ongoing trials:

 

 

    Angiosarcoma

Phase 3

Interim analysis mid 2018

    Renal Cell Carcinoma

Randomized Phase 2

Second half 2017

    Soft Tissue Sarcoma (including angiosarcoma)

Phase 2

Second half 2017

    Gestational Trophoblastic Neoplasia (GTN)

Phase 2

2018

    Hepatocellular Carcinoma

Phase 1/2

2018

    Breast Cancer

Phase 1/2

2018

    Lung Cancer

Phase 1

2018

    Wet AMD (Santen) (DE-122)

Phase 1/2

Second half 2017

    Wet AMD (Santen) (DE-122)

Phase 2

2019

Planned trials:

 

 

    Lung Cancer (with Opdivo)

Phase 1

2018

TRC102

 

 

  Ongoing trials:

 

 

    Mesothelioma

Phase 2

2018

    Glioblastoma

Phase 2

2018

    Solid tumors

Phase 1

2018

    Solid tumors (Oral) and Lymphomas

Phase 1/2

2018

    Lung Cancer

Phase 1

2018

TRC253

 

 

Ongoing trials:

 

 

    Prostate Cancer

Phase 1/2

2018

 

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Since our inception in 2004, we have devoted substantially all of our resources to research and development efforts relating to our product candidates, including conducting clinical trials and developing manufacturing capabilities, in-licensing related intellectual property, providing general and administrative support for these operations and protecting our intellectual property. To date, we have not generated any revenue from product sales and instead, have funded our operations from the sales of capital stock, payments received in connection with our collaboration with Santen and commercial bank debt under our credit facilities with Silicon Valley Bank (SVB). At June 30, 2017, we had cash, cash equivalents and short-term investments totaling $32.0 million.

We have incurred losses from operations in each year since our inception. Our net losses were $27.0 million and $24.4 million for the years ended December 31, 2016 and 2015, respectively. At June 30, 2017, we had an accumulated deficit of $99.3 million.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses will increase substantially in connection with our ongoing activities as we:

 

continue to conduct clinical trials of our product candidates;

 

manufacture preclinical study and clinical trial materials and prepare for potential commercial manufacture of TRC105;

 

continue our research and development efforts;

 

maintain, expand and protect our intellectual property portfolio; and

 

seek regulatory approvals for our product candidates that successfully complete clinical trials.

We do not expect to generate any revenues from product sales until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to raise substantial additional capital. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts and the timing and nature of the regulatory approval process for our product candidates. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and ability to develop our product candidates.

2017 Developments

In July, Santen initiated a Phase 2a clinical study of DE-122, the ophthalmic formulation of our TRC105 antibody, for the treatment of patients with wet AMD. The Phase 2a study is a randomized controlled trial assessing the efficacy and safety of repeated intravitreal injections of DE-122 in combination with Lucentis® (ranibizumab) compared to Lucentis monotherapy in patients with wet AMD. The initiation of the Phase 2a study triggered Santen’s obligation to pay a $7.0 million milestone payment to us.  In addition, we expect that Santen will report data from the Phase 1/2 PAVE trial that assesses safety and bioactivity of DE-122 in refractory wet AMD patients at the American Academy of Ophthalmology annual meeting in November.

In June, we posted details of a Phase 1 trial of TRC105 in combination with Opdivo® (nivolumab) in patients with non-small cell lung cancer on clinicaltrials.gov. We expect to initiate dosing in this trial in 2017. Endoglin is expressed on activated myeloid derived suppressor cells, and we have observed encouraging activity of TRC105, or its preclinical surrogate antibody, in combination with programmed cell death protein 1 (PD-1) inhibitors in preclinical syngeneic mouse tumor models. We expect that this preclinical data will be presented at a scientific conference next year.

In June, we reported the following positive clinical results from multiple studies with TRC105 and TRC102 at the American Society of Clinical Oncology (ASCO) 2017 Annual Meeting in Chicago, Illinois:

 

In our Phase 1b trial of TRC105 with Votrient® (pazopanib) in patients with soft tissue sarcoma, it was observed that patients who had greater than a 10% reduction in tumor volume following treatment with TRC105 and Votrient were significantly more likely to have lower baseline levels of soluble intracellular adhesion molecule-1 (ICAM-1) (p=0.018) and thrombospondin-2 (p=0.041). We plan to separately assess these biomarkers as part of the completed 63 patient Phase 2 trial of TRC105 and Votrient in soft tissue sarcoma and in the ongoing randomized Phase 3 TAPPAS trial of TRC105 and Votrient in patients with angiosarcoma.

 

 

In our Phase 1b trial of TRC105 with Inlyta® (axitinib) in patients with renal cell carcinoma, it was observed that patients with a partial response by RECIST 1.1 following treatment with TRC105 and Inlyta were more likely to have lower levels

19


 

 

of soluble osteopontin (p=0.026) and higher levels of soluble transforming growth factor-β receptor III (p=0.0028). We plan to assess these biomarkers as part of the ongoing randomized Phase 2 TRAXAR study of TRC105 and Inlyta in patients with renal cell carcinoma.

 

 

The NCI reported data from a Phase 1 trial of TRC102 in combination with Temodar in patients with refractory solid tumors. Based on partial responses in patients with ovarian cancer, non-small cell lung cancer, and KRAS-positive colorectal cancer, the NCI decided to enroll expansion cohorts in each of these tumor types at the recommended Phase 2 oral dose of TRC102.  The authors concluded that the combination of Temodar and TRC102 is active, and DNA damage response markers (Rad51, ϒ-H2AX and/or pNbs1) were induced in four of five paired colonic biopsies, indicating DNA damage following treatment.

In May, we initiated dosing in our Phase 1/2 clinical trial of TRC253 in patients with metastatic castration-resistant prostate cancer. TRC253 is a novel, orally bioavailable small molecule high affinity competitive inhibitor of the androgen receptor (AR) and AR mutations.

 

In May, the NCI published the results of its completed Phase 1/2 trial of TRC105 and Nexavar® (sorafenib) in patients with hepatocellular cancer (HCC) online in the journal Clinical Cancer Research, which is also expected to be published in an upcoming hard copy edition. These data assessed the overall response rate (ORR) by the Response Evaluation Criteria in Solid Tumors (RECIST) across four dose groups.  All observed responses occurred in the two highest dose groups, in which 5 of 15 (33%) patients demonstrated a response. Four patients had confirmed stable disease, one of whom was treated for 22 months. Median progression free survival (PFS) was 3.8 months (95% CI: 3.2-5.6 months) and median overall survival (OS) was 15.5 months (95% CI: 8.5-26.3 months). Nexavar was approved for the treatment of patients with advanced HCC based on median OS of 10.7 months (95% CI: 9.4-13.3 months) versus 7.9 months (95% CI: 6.8-9.1 months) with placebo in the multicenter SHARP trial.  The ORR for Nexavar treatment by RECIST in the SHARP trial was 2%.

 

In April, Dr. Rita Perlingeiro, Professor of Medicine at the University of Minnesota, and colleagues published preclinical data  online in the journal Blood, that was subsequently published in the May 4, 2017 hard copy edition. These data demonstrated endoglin expression in the majority of blasts from patients with acute myeloid leukemia (AML) and B-cell acute lymphoblastic leukemia (B-cell ALL), and that endoglin expressing blasts had superior leukemogenic activity. The researchers further demonstrated that TRC105 prevented the engraftment of primary AML blasts and inhibited leukemic progression following disease establishment. In both AML and B-cell ALL, TRC105 showed synergy with reduced intensity myeloablative chemotherapy to inhibit leukemogenesis.

In April, preclinical data for TRC694, our small molecule inhibitor of NF-kB inducing kinase (NIK), were presented at the annual meeting of the American Association for Cancer Research. The data demonstrated that TRC694 potently inhibits NIK in vitro and potently inhibits human myeloma and lymphoma cell lines in vivo. We expect to file an Investigational New Drug application, or IND, for TRC694 in 2018.

 

In March, we entered into a Common Stock Purchase Agreement with Aspire Capital Fund, LLC (Aspire Capital) providing for the sale of up to $21.0 million of shares of our common stock. Under the terms of the Agreement, Aspire Capital made an initial purchase of $1.0 million of our common stock at $4.50 per share. In addition, Aspire Capital has committed to purchase up to $20.0 million of additional shares of our common stock at our request from time to time during a 30-month period beginning on May 1, 2017 and at prices based on the market price at the time of each sale.

 

In February, we initiated dosing in our Phase 3 TAPPAS trial (a randomized Phase 3 trial of TRC105 And Pazopanib versus Pazopanib alone in patients with advanced AngioSarcoma). In January 2017, we announced that it received a Special Protocol Assessment (SPA) agreement from the U.S. Food and Drug Administration (FDA). The SPA covers the protocol design, clinical endpoints and statistical analysis approach used for the TAPPAS trial. The TAPPAS trial was recently awarded “Most Innovative Trial Design” for Phase 3 at the 2017 Clinical and Research Excellence Awards.  The trial is designed to enroll 124 patients to provide greater than 80% power to determine an improvement in median progression free survival, or PFS, from 4.0 to 7.3 months using a two-tailed alpha of 0.05, and includes an adaptive design, whereby the conditional power determined at the time of interim analysis may dictate an increase in the sample size to a total of 200 patients or the enrollment of 100 additional patients with cutaneous disease only. Specifically, we expect to conduct an interim analysis when 40 events have occurred in approximately 70 patients. At that time, the result will be categorized as belonging to either favorable, promising, enrichment or unfavorable zones, based on conditional power. The sample size and PFS events needed to complete the trial will be left unchanged in the favorable and unfavorable zones, but will be increased to a total of 200 patients in the promising zone. This will allow more than 80% power to detect a less robust, but still clinically meaningful improvement in PFS between the two arms. In the enrichment zone, the trial would enroll an additional 100 patients with cutaneous disease only, resulting in a total of 170 patients, which would preserve the power to detect the original treatment effect between the two arms in patients with cutaneous disease. We expect the interim analysis to be completed in mid-2018.

 

20


 

We expect to report PFS data in the second half of 2017 in the Phase 2 randomized TRAXAR (TRC105 and Axitinib in Advanced Renal cell carcinoma) trial that compares treatment with TRC105 and Inlyta to treatment with single agent Inlyta in patients with clear cell renal cell cancer. A planned futility analysis was cancelled by the Independent Data Monitoring Committee given we are nearing the completion of enrollment. Our current tracking of total combined events across both treatment arms indicates we may not achieve the projected 115 events of progression or death by central radiographic review, which would decrease the statistical power of the trial. We will continue to monitor total events confirmed by central review in order to continue assessing the expected timing of the data release.

 

With respect to our international multicenter Phase 2 trial in GTN, given the limited commercial opportunity in this very rare indication that is cured with chemotherapy in the majority of cases, we have reduced planned enrollment in the trial from 30 patients to five patients and will no longer pursue a registration path in GTN at this time. We will continue to enroll patients in separate compassionate use investigator sponsored protocols. We expect to present data from these patients in 2018.

 

Collaboration and License Agreements

Janssen Pharmaceutica N.V.

 

During September 2016, we entered into a strategic licensing collaboration with Janssen for two novel oncology assets from Janssen’s early oncology development portfolio. The agreement grants us the rights to develop TRC253 (formerly JNJ-63576253), a novel small molecule high affinity competitive inhibitor of wild type androgen receptor (AR Mutant Program) and multiple AR mutant receptors which display drug resistance to approved treatments, which is intended for the treatment of men with prostate cancer, and TRC694 (formerly JNJ-6420694), a novel, potent, orally bioavailable inhibitor of NF-kB inducing kinase (the NIK Program and, together with the AR Mutant Program, the Programs), which is intended for the treatment of patients with hematologic malignancies, including myeloma.

 

Janssen maintains an option, which is exercisable until 90 days after we demonstrate clinical proof of concept with respect to the AR Mutant Program, to regain the rights to the licensed intellectual property and to obtain an exclusive license to commercialize the compounds and certain other specified intellectual property developed under the AR Mutant Program. If Janssen exercises the option, Janssen will be obligated to pay us (i) a one-time option exercise fee of $45.0 million; (ii) regulatory and commercial based milestone payments totaling up to $137.5 million upon achievement of specified events; and (iii) royalties in the low single digits on annual net sales of AR Mutant Program products. If Janssen does not exercise the option, we would then have the right to retain worldwide development and commercialization rights to the AR Mutant Program, in which case, we would be obligated to pay to Janssen (x) development and regulatory based milestone payments totaling up to $45.0 million upon achievement of specified events, and (y) royalties in the low single digits based on annual net sales of AR Mutant Program products, subject to certain specified reductions.

With respect to the NIK Program, Janssen maintains a right, which is exercisable within 90 days following the date on which we demonstrate clinical proof of concept with respect to the NIK Program, to negotiate for a period of six months for a reversion of the related rights in the licensed intellectual property and to obtain an exclusive license to commercialize the compounds and certain other specified intellectual property developed under the NIK Program. If Janssen does not exercise its right of first negotiation, or, if after exercise of such right, Janssen and we are unable to reach an agreement on the terms of a reversion and exclusive license, and, in either case, we continue the development of the NIK Program, then we would be obligated to pay Janssen (i) development and regulatory based milestone payments totaling up to $60.0 million upon achievement of specified events, and (ii) royalties in the low single digits based on annual net sales of NIK Program products, subject to certain specified reductions.

 

Santen Pharmaceutical Co., Ltd.

In March 2014, we entered into a license agreement with Santen, under which we granted Santen an exclusive, worldwide license to certain patents, information and know-how related to TRC105, or the TRC105 Technology. Under the agreement, Santen is permitted to use, develop, manufacture and commercialize TRC105 products for ophthalmology indications, excluding systemic treatment of ocular tumors. Santen also has the right to grant sublicenses to affiliates and third party collaborators, provided such sublicenses are consistent with the terms of our agreement. Santen has sole responsibility for funding, developing, seeking regulatory approval for and commercializing TRC105 products in the field of ophthalmology.

 

In consideration of the rights granted to Santen under the agreement, we received a one-time upfront fee of $10.0 million. In addition, we are eligible to receive up to a total of $155.0 million in milestone payments upon the achievement of certain milestones, of which $20.0 million relates to the initiation of certain development activities, $52.5 million relates to the submission of certain regulatory filings and receipt of certain regulatory approvals and $82.5 million relates to commercialization activities and the achievement of specified levels of product sales. As of June 30, 2017, we had received $3.0 million in milestones related to

21


 

development activities, and in July 2017, an additional $7.0 million milestone payment was earned in accordance with the agreement. If TRC105 products are successfully commercialized in the field of ophthalmology, Santen will be required to pay us tiered royalties on net sales ranging from high single digits to low teens, depending on the volume of sales, subject to adjustments in certain circumstances. In addition, Santen will reimburse us for all royalties due by us under certain third party agreements with respect to the use, manufacture or commercialization of TRC105 products in the field of ophthalmology by Santen and its affiliates and sublicensees. Royalties will continue on a country-by-country basis through the later of the expiration of our patent rights applicable to the TRC105 products in a given country or 12 years after the first commercial sale of the first TRC105 product commercially launched in such country.

Financial Operations Overview

Revenue

Our revenue to date has been derived solely from our March 2014 collaboration with Santen. The terms of this arrangement contain multiple deliverables, which include at inception: (1) a license to patents, information and know-how related to TRC105; (2) technology transfer; (3) collaboration, including technical and regulatory support provided by us; (4) manufacturing and supply obligations; and (5) shared CMC development activities. The license agreement provides that we may receive various types of payments, including an upfront payment, payment for various technical and regulatory support, payments for delivery of drug substance, reimbursement of certain development costs, milestone payments, and royalties on net product sales. In accordance with our revenue recognition policy described in detail below, we have identified one single unit of accounting for all the deliverables under the agreement and are recognizing revenue for the fixed or determinable collaboration consideration on a straight-line basis over the estimated development period.

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing of any future achievement of milestones, whether and when Janssen reacquires rights to the AR Mutant Program and/or NIK Program and the extent to which any of our products are approved and successfully commercialized by us or Santen. If we or Santen fail to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenues, our results of operations and our financial position could be adversely affected.

 

Research and Development Expenses

Research and development expenses consist of costs associated with the preclinical and clinical development of our product candidates. These costs consist primarily of:

 

salaries and employee-related expenses, including stock-based compensation and benefits for personnel in research and development functions;

 

costs incurred under clinical trial agreements with investigative sites;

 

costs to acquire, develop and manufacture preclinical study and clinical trial materials;

 

costs associated with conducting our preclinical, development and regulatory activities, including fees paid to third party professional consultants, service providers and our scientific advisory board;

 

payments related to licensed products and technologies; and

 

facilities, depreciation and other expenses, including allocated expenses for rent and maintenance of facilities.

Research and development costs, including third party costs reimbursed by Santen as part of our collaboration, are expensed as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

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The following table summarizes our research and development expenses by product candidate for the periods indicated:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Third-party research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TRC105

 

$

2,704

 

 

$

4,991

 

 

$

6,033

 

 

$

8,543

 

TRC253

 

 

231

 

 

 

 

 

 

445

 

 

 

 

TRC102

 

 

21

 

 

 

71

 

 

 

43

 

 

 

298

 

TRC694

 

 

177

 

 

 

 

 

 

294

 

 

 

 

TRC205

 

 

 

 

 

19

 

 

 

15

 

 

 

42

 

Total third-party research and development expenses

 

 

3,133

 

 

 

5,081

 

 

 

6,830

 

 

 

8,883

 

Unallocated expenses

 

 

1,760

 

 

 

1,692

 

 

 

3,645

 

 

 

3,385

 

Total research and development expenses

 

$

4,893

 

 

$

6,773

 

 

$

10,475

 

 

$

12,268

 

 

Unallocated expenses consist primarily of our internal personnel related and facility costs.

We expect our current level of research and development expenses to continue to increase for the foreseeable future as we continue development of TRC105, including our Phase 3 clinical trial in angiosarcoma, continue development activities for our licensed compounds, TRC253 and TRC694, including our Phase 1/2 clinical trial in TRC253 castration-resistant prostate cancer, and initiate manufacturing activities required for regulatory approval for TRC105.

We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

The costs of clinical trials to us may vary significantly based on factors such as:

 

the extent to which costs are borne by third parties such as NCI;

 

the extent to which costs for comparator drug are borne by third parties;

 

per patient trial costs;

 

the number of sites included in the trials;

 

the countries in which the trials are conducted;

 

the length of time required to enroll eligible patients;

 

the number of patients that participate in the trials;

 

the number of doses that patients receive;

 

the drop-out or discontinuation rates of patients;

 

potential additional safety monitoring or other studies requested by regulatory agencies;

 

the duration of patient follow-up;

 

the phase of development of the product candidate; and

 

the efficacy and safety profile of the product candidate.

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General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance and administration, corporate development and administrative support functions, including stock-based compensation expenses and benefits. Other significant general and administrative expenses include legal services, including those associated with obtaining and maintaining patents, insurance, occupancy costs, accounting services, and the cost of various consultants.

We anticipate that our general and administrative expenses will remain relatively constant in the near term.

Other Income (Expense)

Other income (expense) primarily consists of interest related to our loan agreements with SVB offset by interest income from our short-term investments and cash equivalents.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board standard on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. This guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2017. We plan on adopting the ASU using the modified retrospective approach and are continuing to evaluate the potential impact that this standard will have on our financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new accounting standard requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard must be adopted using the modified retrospective approach and is effective for public entities for annual reporting periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial statements and related disclosures.

 

Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 includes an update which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. We adopted ASU 2016-09 in the first quarter of 2017 and made an accounting policy change to record forfeitures as they occur, which resulted in no change to our financial statements and related disclosures.

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Results of Operations

Comparison of the Three Months Ended June 30, 2017 and 2016

The following table summarizes our results of operations for the three months ended June 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

 

(in thousands)

 

Collaboration revenue

 

$

631

 

 

$

807

 

 

$

(176

)

Research and development expenses

 

 

4,893

 

 

 

6,773

 

 

 

(1,880

)

General and administrative expenses

 

 

2,068

 

 

 

2,044

 

 

 

24

 

Other income (expense)

 

 

(236

)

 

 

(287

)

 

 

51

 

 

Collaboration revenue.  Collaboration revenue was $0.6 million and $0.8 million for the three months ended June 30, 2017 and 2016, respectively. The decrease of $0.2 million was due to a change reported in 2016 in the expected term over which we will provide technical and regulatory support to Santen.

Research and development expenses.  Research and development expenses were $4.9 million and $6.8 million for the three months ended June 30, 2017 and 2016, respectively. The decrease of $1.9 million was due primarily to decreased TRC105 drug manufacturing expenses in 2017.

General and administrative expenses.  General and administrative expenses were $2.1 and $2.0 million for the three months ended June 30, 2017 and 2016, respectively.

Other income (expense).  Other expense was $0.2 million and $0.3 million for the three months ended June 30, 2017 and 2016, respectively.

Comparison of the Six Months Ended June 30, 2017 and 2016

The following table summarizes our results of operations for the six months ended June 30, 2017 and 2016: