UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
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 |
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34-2037594 |
(State or other jurisdiction of |
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(IRS Employer |
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4350 La Jolla Village Drive, Suite 800, |
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92122 |
(Address of principal executive offices) |
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(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☒ |
Emerging growth company |
☒ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of the registrant’s common stock as of November 2, 2018 was 29,871,327.
FORM 10-Q
TABLE OF CONTENTS
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
Item 3. |
29 |
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Item 4. |
29 |
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Item 1. |
30 |
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Item 1A. |
30 |
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Item 2. |
56 |
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Item 3. |
56 |
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Item 4. |
56 |
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Item 5. |
56 |
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Item 6. |
57 |
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58 |
2
TRACON Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
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September 30, |
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December 31, |
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2018 |
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2017 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
28,193 |
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$ |
29,467 |
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Short-term investments |
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18,978 |
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4,999 |
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Prepaid and other assets |
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1,268 |
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1,591 |
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Total current assets |
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48,439 |
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36,057 |
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Property and equipment, net |
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52 |
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73 |
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Total assets |
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$ |
48,491 |
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$ |
36,130 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
12,062 |
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$ |
6,800 |
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Accrued compensation and related expenses |
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1,156 |
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1,494 |
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Current portion of deferred revenue |
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— |
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667 |
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Long-term debt, current portion |
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370 |
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2,837 |
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Total current liabilities |
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13,588 |
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11,798 |
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Deferred revenue |
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— |
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2,333 |
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Other long-term liabilities |
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371 |
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409 |
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Long-term debt, less current portion |
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5,973 |
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4,603 |
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Commitments and contingencies (Note 4) |
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Stockholders’ equity: |
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Preferred stock, $0.001 par value, authorized shares — 10,000,000 at September 30, 2018 and December 31, 2017; issued and outstanding shares — none |
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— |
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— |
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Common stock, $0.001 par value; authorized shares — 200,000,000 at September 30, 2018 and December 31, 2017; issued and outstanding shares — 29,840,844 and 17,711,928 at September 30, 2018 and December 31, 2017, respectively |
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30 |
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18 |
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Additional paid-in capital |
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160,433 |
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121,670 |
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Accumulated deficit |
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(131,904 |
) |
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(104,701 |
) |
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Total stockholders’ equity |
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28,559 |
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16,987 |
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Total liabilities and stockholders’ equity |
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$ |
48,491 |
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$ |
36,130 |
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See accompanying notes.
3
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Collaboration revenue |
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$ |
- |
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$ |
7,498 |
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$ |
3,000 |
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$ |
8,755 |
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Operating expenses: |
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Research and development |
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6,976 |
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4,257 |
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24,529 |
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14,732 |
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General and administrative |
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2,107 |
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1,847 |
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5,480 |
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5,879 |
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Total operating expenses |
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9,083 |
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6,104 |
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30,009 |
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20,611 |
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(Loss) income from operations |
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(9,083 |
) |
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1,394 |
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(27,009 |
) |
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(11,856 |
) |
Other income (expense): |
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Interest expense, net |
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(12 |
) |
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(223 |
) |
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(204 |
) |
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(681 |
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Other income (expense), net |
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10 |
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(1 |
) |
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10 |
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(6 |
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Total other expense |
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(2 |
) |
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(224 |
) |
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(194 |
) |
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(687 |
) |
Net (loss) income |
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$ |
(9,085 |
) |
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$ |
1,170 |
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$ |
(27,203 |
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$ |
(12,543 |
) |
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Net (loss) income per share, basic and diluted |
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$ |
(0.30 |
) |
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$ |
0.07 |
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$ |
(1.05 |
) |
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$ |
(0.76 |
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Weighted-average shares outstanding, basic |
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29,837,486 |
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16,828,801 |
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25,962,237 |
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16,550,730 |
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Weighted-average shares outstanding, diluted |
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29,837,486 |
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17,137,311 |
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25,962,237 |
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16,550,730 |
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See accompanying notes.
4
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
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Nine Months Ended |
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September 30, |
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2018 |
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2017 |
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Cash flows from operating activities |
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Net loss |
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$ |
(27,203 |
) |
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$ |
(12,543 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation |
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2,044 |
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2,398 |
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Common stock issued for services |
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— |
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29 |
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Depreciation and amortization |
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21 |
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41 |
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Amortization of debt discount |
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72 |
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86 |
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Amortization of premium/discount on short-term investments |
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(56 |
) |
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(6 |
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Noncash interest |
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209 |
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267 |
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Deferred rent |
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10 |
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54 |
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Deferred revenue |
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(3,000 |
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(1,259 |
) |
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Changes in assets and liabilities: |
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Prepaid expenses and other assets |
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323 |
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(206 |
) |
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Accounts payable and accrued expenses |
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5,261 |
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468 |
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Accrued compensation and related expenses |
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(338 |
) |
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(263 |
) |
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Net cash used in operating activities |
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(22,657 |
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(10,934 |
) |
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Cash flows from investing activities |
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Purchase of property and equipment |
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— |
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(30 |
) |
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Purchases of available-for-sale short-term investments |
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(18,923 |
) |
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(8,994 |
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Proceeds from the maturity of available-for-sale short-term investments |
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5,000 |
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14,705 |
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Net cash (used in) provided by investing activities |
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(13,923 |
) |
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5,681 |
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Cash flows from financing activities |
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Proceeds from long-term debt |
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7,000 |
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8,000 |
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Repayment of long-term debt |
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(8,320 |
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(8,850 |
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Proceeds from sale of common stock and warrants |
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38,674 |
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3,610 |
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Costs paid in connection with sales of common stock |
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(2,194 |
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(339 |
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Proceeds from issuance of common stock under equity plans |
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224 |
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123 |
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Payment of tax withholdings related to net share settlements of vested restricted stock awards |
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(78 |
) |
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(137 |
) |
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Net cash provided by financing activities |
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35,306 |
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2,407 |
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Decrease in cash and cash equivalents |
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(1,274 |
) |
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(2,846 |
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Cash and cash equivalents at beginning of period |
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29,467 |
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35,710 |
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Cash and cash equivalents at end of period |
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$ |
28,193 |
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$ |
32,864 |
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See accompanying notes.
5
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 and wet age-related macular degeneration. The Company’s lead product candidate is an antibody that binds to the endoglin receptor, which is essential to angiogenesis (the process of new blood vessel formation).
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
As of September 30, 2018, 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 September 30, 2018, the Company had an accumulated deficit of $131.9 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 September 30, 2018, the Company had cash, cash equivalents and short-term investments of $47.2 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 for at least 12 months after the release date of these condensed consolidated financial statements. The completion of the private placement of the Company’s common stock and warrants in March and April 2018, which generated net proceeds totaling $36.5 million, resolved the substantial doubt about the Company’s ability to continue as a going concern which existed at the reporting date of the December 31, 2017 consolidated financial statements.
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 common stock over a 30-month period and/or the Capital on DemandTM Sales Agreement (the Sales Agreement) the Company entered into with JonesTrading Institutional Services LLC (JonesTrading) in September 2018, pursuant to which the Company may sell, at its option, up to an aggregate of $11.6 million of the Company’s common stock, all of which remains available for sale. 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 September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, 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, 2017, included in its Annual Report on Form 10-K filed with the SEC on March 1, 2018.
6
The Company’s condensed consolidated financial statements are prepared in accordance with 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, expenses incurred for clinical trials 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 U.S. treasury securities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, and investments. 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
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes all existing revenue recognition requirements, using the modified retrospective approach. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. ASU 2014-09 was applied to all contracts on January 1, 2018, the date of adoption. The Company did not identify any accounting changes that impacted the amount of historically reported retained earnings therefore no adjustment to retained earnings was required upon adoption. The following is the total revenue that would have been recorded in the three and nine months ended September 30, 2018 under the superseded revenue recognition guidance, Accounting Standards Codification 605, Revenue Recognition (ASC 605), had ASU 2014-09 not been adopted (in thousands):
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For the Three Months Ended September 30, 2018 |
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For the Nine Months Ended September 30, 2018 |
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As Reported |
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Amount under ASC 605 |
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Effect of Change |
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As Reported |
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Amount under ASC 605 |
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Effect of Change |
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Statement of Operations |
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Revenue |
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$ |
- |
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$ |
166 |
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$ |
(166 |
) |
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$ |
3,000 |
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$ |
500 |
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$ |
2,500 |
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To date, substantially all of the Company’s revenue has been derived from its license agreements with Santen Pharmaceutical Co., Ltd. (Santen) and Ambrx Inc. (Ambrx) as described in Note 6. The terms of these arrangements include payments to the Company for the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products. In accordance with ASU 2014-09, the Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation.
Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
7
Milestone Payments: At the inception of each arrangement that includes milestone payments, the Company evaluates whether the achievement of the milestones is considered probable and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone payment is included in the transaction price. Achievement of milestones that are not within the control of the Company or the licensee, such as regulatory approvals, is not considered probable until the milestones are achieved. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achieving such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any additional payments are recorded in revenues when the customer obtains control of the goods, which is upon delivery.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its out-licensing arrangements.
The Company receives payments from its collaborators based on billing schedules established in each contract. Up-front payments and fees may require deferral of revenue recognition to a future period until the Company performs its obligations under its collaboration arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
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 nine months ended September 30, 2018 and 2017, 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.
8
Comprehensive income (loss) is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and comprehensive income (loss) were the same for all periods presented.
Net (Loss) Income Per Share
Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted-average shares of common stock outstanding for the period, as adjusted for the weighted-average number of common shares outstanding that are subject to repurchase. The Company has excluded 59 and 540 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the three and nine months ended September 30, 2018, respectively, and 3,368 and 6,980 weighted-average shares subject to repurchase for the three and nine months ended September 30, 2017, respectively. Diluted net (loss) income per share is calculated by dividing net (loss) income by the weighted-average number of common shares outstanding and the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method.
The following table sets forth a reconciliation of basic and diluted net (loss) income per share (in thousands, except share and per share amount):
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
$ |
(9,085 |
) |
|
$ |
1,170 |
|
|
$ |
(27,203 |
) |
|
$ |
(12,543 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic |
|
29,837,486 |
|
|
|
16,828,801 |
|
|
|
25,962,237 |
|
|
|
16,550,730 |
|
Dilutive potential common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
— |
|
|
|
308,510 |
|
|
|
— |
|
|
|
— |
|
Weighted average common shares outstanding for diluted |
|
29,837,486 |
|
|
|
17,137,311 |
|
|
|
25,962,237 |
|
|
|
16,550,730 |
|
Basic and diluted net (loss) income per share |
$ |
(0.30 |
) |
|
$ |
0.07 |
|
|
$ |
(1.05 |
) |
|
$ |
(0.76 |
) |
Potentially dilutive securities not included in the calculation of diluted net (loss) income per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Warrants to purchase common stock |
|
15,619,113 |
|
|
|
103,865 |
|
|
|
15,619,113 |
|
|
|
103,865 |
|
Common stock options and restricted stock units |
|
2,997,804 |
|
|
|
1,993,207 |
|
|
|
2,997,804 |
|
|
|
2,506,246 |
|
ESPP shares |
|
6,800 |
|
|
|
- |
|
|
|
5,126 |
|
|
|
4,871 |
|
|
|
18,623,717 |
|
|
|
2,097,072 |
|
|
|
18,622,043 |
|
|
|
2,614,982 |
|
Recent Accounting Pronouncements
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 does not expect the adoption of ASU 2016-02 to have a material impact on its financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Accounting Standards Codification 718, Compensation-Stock Compensation, to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. The new accounting standard is effective for public entities for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its financial statements and related disclosures.
9
At September 30, 2018, 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.
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 September 30, 2018, 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, which are classified as equity securities, and short-term investments, which are classified as available-for-sale securities, consisted of the following (in thousands):
|
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||||||||||||||||||||||||||
|
|
Cost |
|
|
Unrealized Gain |
|
|
Unrealized (Loss) |
|
|
Estimated Fair Value |
|
|
Cost |
|
|
Unrealized Gain |
|
|
Unrealized (Loss) |
|
|
Estimated Fair Value |
|
||||||||
Money market funds |
|
$ |
5,671 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,671 |
|
|
$ |
5,488 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,488 |
|
U.S. treasury securities |
|
|
18,978 |
|
|
|
— |
|
|
|
— |
|
|
|
18,978 |
|
|
|
4,999 |
|
|
|
— |
|
|
|
— |
|
|
|
4,999 |
|
|
|
$ |
24,649 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
24,649 |
|
|
$ |
10,487 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,487 |
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,488 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,999 |
|
Total Cash equivalents and Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and U.S. treasury securities, included in Cash equivalents and Short-term investments |
|
$ |
24,649 |
|
|
$ |
— |
|
|
$ |
24,649 |
|
|
$ |
— |
|
At December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and U.S. treasury securities, included in Cash equivalents and Short-term investments |
|
$ |
10,487 |
|
|
$ |
— |
|
|
$ |
10,487 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. |
Long-Term Debt |
Long-term debt and unamortized debt discount balances were as follows (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2018 |
|
|
2017 |
|
||
Long-term debt |
|
$ |
7,000 |
|
|
$ |
8,000 |
|
Less debt discount, net of current portion |
|
|
(327 |
) |
|
|
(197 |
) |
Long-term debt, net of debt discount |
|
|
6,673 |
|
|
|
7,803 |
|
Less current portion of long-term debt |
|
|
(700 |
) |
|
|
(3,200 |
) |
Long-term debt, net of current portion |
|
$ |
5,973 |
|
|
$ |
4,603 |
|
Current portion of long-term debt |
|
$ |
700 |
|
|
$ |
3,200 |
|
Current portion of debt discount |
|
|
(330 |
) |
|
|
(363 |
) |
Current portion of long-term debt, net |
|
$ |
370 |
|
|
$ |
2,837 |
|
|
|
|
|
|
|
|
|
|
In May 2018, the Company entered into a third amendment to its Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the 2018 Amended SVB Loan) under which the Company borrowed $7.0 million, all of which was immediately used to repay the Company’s existing loan with SVB (the 2017 Amended SVB Loan). In accordance with the terms of the 2017 Amended SVB Loan, the Company paid a final payment of $0.3 million associated with the payoff of the 2017 Amended SVB Loan. The transaction was accounted for as a debt modification.
The 2018 Amended SVB Loan provides for interest to be paid at a rate of 9.0% per annum. Interest-only payments are due monthly through June 30, 2019, which may be extended through November 30, 2019 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 June 30, 2019, or November 30, 2019, 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 2018 Amended SVB Loan provides for prepayment fees of 3.0% of the amount prepaid if the prepayment occurs on or prior to May 3, 2019, 2.0% of the amount prepaid if the prepayment occurs after May 3, 2019 but prior to May 3, 2020 and 1.0% of the amount prepaid if the prepayment occurs thereafter.
Except as described above, the 2018 Amended SVB Loan is subject to the same material terms set forth in the 2017 Amended SVB Loan agreement. Consistent with the terms of the 2017 Amended SVB Loan agreements, the 2018 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 2018 Amended SVB Loan.
11
In connection with the 2018 Amended SVB Loan, the Company issued SVB a warrant to purchase 53,639 shares of its common stock at an exercise price of $2.61 per share. The warrant is fully exercisable and expires on May 3, 2025. The fair value of the warrant and the final payment related to the 2018 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 2017 Amended SVB Loan.
Future minimum principal and interest payments under the 2018 Amended SVB Loans, including the final payment, are as follows (in thousands):
Remaining 2018 |
|
$ |
159 |
|
2019 |
|
|
2,012 |
|
2020 |
|
|
3,195 |
|
2021 |
|
|
3,218 |
|
|
|
|
8,584 |
|
Less interest and final payment |
|
|
(1,584 |
) |
Long-term debt |
|
$ |
7,000 |
|
|
|
|
|
|
4. |
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 $16.3 million at September 30, 2018. 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 $26.1 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. At September 30, 2018, the Company had non-cancelable purchase obligations totaling $4.8 million under this agreement.
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/or sublicensing fees. Each of the license agreements is generally cancelable by the Company, given appropriate prior written notice. At September 30, 2018, 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 certain assets as discussed in Note 6, totaled an aggregate of approximately $126.0 million.
12
Sales of Common Stock
In March and April 2018, the Company sold 11,930,525 shares of its common stock at a purchase price of $2.70 per share, warrants to purchase 1,765,542 shares of its common stock at a purchase price of $2.69 per share and an exercise price of $0.01 per share (the Pre-Funded Warrants) and warrants to purchase 13,696,067 shares of its common stock at a purchase price of $0.125 per share and an exercise price of $2.70 per share (the Common Warrants) for net proceeds of approximately $36.5 million in a private placement to new and certain existing accredited investors. In accordance with their terms, the Pre-Funded Warrants and the Common Warrants may not be exercised if the holder’s ownership of the Company’s common stock would exceed 9.99% or 19.99% of the Company’s total shares outstanding following such exercise, depending on the investor. Both the Pre-Funded Warrants and the Common Warrants were recorded as a component of stockholders’ equity within additional paid-in capital. In April 2018, in connection with this transaction, the Company paid Angel Pond Capital, an affiliate of a holder of more than 5% of the Company’s common stock and an affiliate of a member of the Company’s Board of the Directors, a fee totaling approximately $1.9 million as consideration for acting as a nonexclusive placement agent for this financing.
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 the Company’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, the fair value of which was recorded as offering costs in connection with the transaction.
At-The-Market Issuance Sales Agreement
In September 2018, the Company entered into the Sales Agreement with JonesTrading, pursuant to which it may sell from time to time, at its option, up to an aggregate of $11.6 million of the Company’s shares of its common stock through JonesTrading, as sales agent. The Company is required to pay JonesTrading 2.5% of gross proceeds for the common stock sold through the Sales Agreement. During the three and nine months ended September 30, 2018, the Company sold no shares of common stock through the Sales Agreement with JonesTrading and $11.6 million of common stock remains available for sale under the Sales Agreement.
In September 2018, the Company terminated its At-the-Market Equity Offering Sales Agreement (Stifel Sales Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel). The Company had sold an aggregate of approximately $3.5 million of common stock through Stifel pursuant to the Stifel Sales Agreement prior to termination.
During the nine months ended September 30, 2018, the Company issued 136,720 shares of common stock upon the exercise of outstanding stock options and 38,019 shares of common stock upon the vesting of restricted stock units. The Company withheld 26,304 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 nine months ended September 30, 2018. During the year ended December 31, 2017, the Company issued 53,756 shares of common stock upon the exercise of outstanding stock options.
Common Stock Warrants
As of September 30, 2018, the Company had the following outstanding warrants for the purchase of common stock:
13
|
Number of shares |
|
|
Exercise price |
|
|||
May 13, 2022 |
|
|
18,415 |
|
|
$ |
10.86 |
|
November 14, 2023 through June 4, 2024 |
|
|
38,758 |
|
|
|
7.74 |
|
January 25, 2024 |
|
|
46,692 |
|
|
|
5.14 |
|
March 27, 2024 |
|
|
13,696,067 |
|
|
|
2.70 |
|
March 27, 2025 |
|
|
1,765,542 |
|
|
|
0.01 |
|
May 3, 2025 |
|
|
53,639 |
|
|
|
2.61 |
|
|
|
|
15,619,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2018 and 2017, no warrants were exercised.
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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Risk-free interest rate |
|
|
2.9 |
% |
|
|
0.0 |
% |
|
|
2.8 |
% |
|
|
2.1 |
% |
Expected volatility |
|
|
80 |
% |
|
|
0 |
% |
|
|
80 |
% |
|
|
83 |
% |
Expected term (in years) |
|
|
6.3 |
|
|
|
- |
|
|
|
6.2 |
|
|
|
6.2 |
|
Expected dividend yield |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
Stock compensation expense for the ESPP was immaterial for the three and nine months ended September 30, 2018.
The allocation of stock-based compensation expense was as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|||||||||||
|
|
September 30, |
|
|
September 30, |
|
|||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|||||
Research and development |
|
$ |
378 |
|
|
$ |
379 |
|
|
$ |
1,117 |
|
|
|
$ |
1,104 |
|
General and administrative |
|
|
296 |
|
|
|
418 |
|
|
|
927 |
|
|
|
|
1,294 |
|
|
|
$ |
674 |
|
|
$ |
797 |
|
|
$ |
2,044 |
|
|
|
$ |
2,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
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. 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
14
commercialization activities and the achievement of specified levels of product sales. As of September 30, 2018 and December 31, 2017, two development milestones had been received totaling $10.0 million. 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 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.
Upon the adoption of ASU 2014-09, the Company assessed this agreement and identified multiple promised goods and services, which include at inception: (1) a license to patents, information and know-how related to TRC105, (2) a technology transfer, and (3) a collaboration, including technical and regulatory support provided by the Company. In addition, customer options were identified that include manufacturing and supply obligations and shared chemistry, manufacturing and controls (CMC) development activities.
Upon the adoption of ASC 2014-09 and as of September 30, 2018, the transaction price includes the $10.0 million upfront payment and the two development milestones received totaling $10.0 million, all of which had been fully recognized as revenue at December 31, 2017. The remaining $62.5 million of potential development and regulatory milestone payments are fully constrained as the achievement of the milestones is not considered probable. In addition, in accordance with ASU 2014-09, any consideration related to the commercialization and sales-based milestones (including royalties) will be recognized when the related sales occur and have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
As of December 31, 2017, the Company had satisfied all of its performance obligations and recognized the full transaction price, and accordingly, no adjustment was required to retained earnings under the modified retrospective approach used upon the adoption of ASC 2014-09. Revenue recognized related to this agreement totaled $0 for the three and nine months ended September 30, 2018, and $7.5 million and $8.8 million for the three and nine months ended September 30, 2017, respectively.
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
15
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, 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 License and Option Agreement in its entirety without cause, subject to specified conditions.
Ambrx Inc. (Ambrx)
In December 2017, the Company entered into a license agreement with Ambrx Inc. (Ambrx), for the development and commercialization of the Company’s endoglin antibodies, including TRC105, in China. The license grants Ambrx the exclusive rights to use, develop, manufacture and commercialize the Company’s endoglin antibodies in all indications (excluding ophthalmology which are held by Santen) in China (including Hong Kong and Macau) and Taiwan, or the Ambrx Territory. Ambrx also has the right to grant sublicenses to affiliates and third party collaborators, provided such sublicenses are consistent with the terms of the Company’s agreement and excluding the rights licensed to the Company under the license with Lonza.
Ambrx has sole responsibility for funding, developing, seeking regulatory approval for and commercializing TRC105 products in the Ambrx Territory. Ambrx has the option to either pursue a China only development strategy at its sole expense, or upon mutual agreement of the Company and Ambrx, participate in the Company’s ongoing global Phase 3 TAPPAS clinical trial in angiosarcoma by enrolling patients in this trial, and the Company may participate in an Ambrx-sponsored clinical trial in hepatocellular carcinoma, or any other indication Ambrx pursues in the Ambrx Territory.
In consideration of the rights granted to Ambrx under the agreement, the Company received a one-time upfront fee of $3.0 million. In addition, the Company is eligible to receive up to a total of $140.5 million in milestone payments upon the achievement of certain milestones, of which $10.5 million relates to the submission of certain regulatory filings and receipt of certain regulatory approvals and $130.0 million relates to the achievement of specified levels of product sales. If TRC105 products are successfully commercialized in the territory, Ambrx 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. 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.
Ambrx may unilaterally terminate this agreement in its entirety for any reason or for no reason upon at least 90 days’ 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 60 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 Ambrx’s payment obligations.
16
Upon the adoption of ASU 2014-09, the Company assessed this agreement and identified multiple promised goods and services, which include at inception: (1) a license to patents, information and know-how related to TRC105 and (2) a collaboration, including technical and regulatory support provided by the Company. In addition, customer options were identified that include manufacturing and supply obligations.
Upon the adoption of ASU 2014-09 and as of September 30, 2018, the transaction price consisted solely of the $3.0 million upfront payment. The remaining $10.5 million of potential regulatory milestone payments are fully constrained as the achievement of the milestones is not considered probable. In addition, in accordance with ASU 2014-09, any consideration related to the sales-based milestones (including royalties) will be recognized when the related sales occur and therefore, have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
At December 31, 2017, the $3.0 million upfront payment had been received and was recorded as deferred revenue in the accompanying condensed consolidated balance sheet. The license and know-how related to TRC105 was delivered to Ambrx in the first quarter of 2018. The Company recognized $0 and $3.0 million for the three and nine months ended September 30, 2018, respectively.
17
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 Quarterly Report or to reflect actual outcomes.
Overview
We are a biopharmaceutical company focused on the development and commercialization of novel targeted therapeutics for cancer and, through our license to Santen Pharmaceutical Co. Ltd. (Santen), wet age-related macular degeneration, or wet AMD. 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. 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 11 completed Phase 2 clinical trials and three completed Phase 1 clinical trials, and is currently being dosed in one Phase 3 clinical trial, four 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 durable responses in this tumor type and are currently enrolling the international multicenter Phase 3 TAPPAS trial in angiosarcoma. We obtained Special Protocol Assessment (SPA) agreement from the U.S. 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.
We utilize a product development platform that emphasizes capital efficiency. Our experienced clinical operations, data management, quality assurance, product development and regulatory affairs groups manage significant aspects of our clinical trials with internal resources. We use these internal resources to minimize the costs associated with utilizing contract research organizations, or CROs. In our experience, this model has resulted in capital efficiencies and improved communication with clinical trial sites, which expedites patient enrollment and allows direct access to patient data as compared to a CRO-managed model, and we have leveraged this capital efficient model in all of our ongoing clinical trials including our international Phase 3 TAPPAS trial in angiosarcoma. We have also leveraged our product development platform to diversify our product pipeline through a license agreement with Janssen Pharmaceutica N.V. (Janssen) and continue to evaluate potential value creating business opportunities with other companies utilizing our product development platform. For example, we are currently identifying ex-U.S. companies who are in need of a rapid and capital-efficient U.S. drug development solution. We believe we can become a preferred clinical developmental and U.S. commercialization partner through a cost- and risk-sharing partnership structure which may include U.S. commercialization.
In March 2014, 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 randomized Phase 2 clinical trial of DE-122 in wet AMD. In December 2017, Ambrx, Inc. (Ambrx) licensed from us exclusive rights to develop and commercialize our endoglin antibodies in China (including Hong Kong and Macau) and Taiwan.
Our other product candidates are 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 in September 2016: TRC253, which is a small molecule in a Phase 1/2 clinical trial for the treatment of metastatic castration-resistant prostate cancer, and TRC694, a small molecule in pre-clinical development for the treatment of hematologic malignancies, including myeloma.
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
18
being studied in three Phase 1 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 (NCI). We retain global rights to develop and commercialize TRC102 in all indications.
TRC253 is a competitive inhibitor of the wild type androgen receptor (AR) as well as mutations in the ligand binding domain of the AR that mediate resistance to Xtandi and Erleada. We initiated a Phase 1/2 clinical trial of TRC253 in March 2017 and the recommended Phase 2 dose was established in July 2018, allowing dosing to commence in the Phase 2 portion of the Phase 1/2 trial, which is currently enrolling.
TRC694 is an inhibitor of the Nuclear Factor Kappa B inducing kinase (NIK) that is dysregulated in myeloma, mantle cell lymphoma, diffuse large B cell lymphoma, and other malignancies.
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), the University of Alabama – Birmingham, and Cedars-Sinai Medical Center. Under these collaborations, NCI sponsored or is sponsoring ten completed or ongoing clinical trials of TRC105 and TRC102, Case Western sponsored two clinical trials of TRC102, the University of Alabama – Birmingham is sponsoring one clinical trial of TRC105 and Cedars-Sinai Medical Center is sponsoring one clinical trial of TRC105. All TRC105 NCI sponsored trials have been completed. 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.
The following table summarizes key information regarding ongoing development of our product candidates:
|
Phase |
Data Expected |
TRC105 |
|
|
Angiosarcoma |
Randomized Phase 3 |
Interim analysis first quarter 2019 |
Renal Cell Carcinoma |
Randomized Phase 2 |
2018 |
Hepatocellular Carcinoma |
Phase 1/2 |
2019 |
Lung Cancer (with Opdivo) |
Phase 1 |
2018 |
Breast Cancer |
Phase 1/2 |
2019 |
Prostate Cancer |
Phase 2 |
2019 |
DE-122 (ophthalmic formulation of TRC105) |
|
|
Wet AMD (Santen) |
Randomized Phase 2 |
2019 |
TRC102 |
|
|
Mesothelioma |
Phase 2 |
2019 |
Glioblastoma |
Phase 2 |
2018 |
Solid tumors |
Phase 1 |
2019 |
Solid tumors and Lymphomas |
Phase 1/2 |
2019 |
Lung Cancer |
Phase 1 |
2019 |
TRC253 |
|
|
Prostate Cancer |
Phase 1/2 |
2020 |
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 equity securities, payments received in connection with our collaboration agreements and commercial bank debt under our credit facilities with Silicon Valley Bank (SVB). At September 30, 2018, we had cash, cash equivalents and short-term investments totaling $47.2 million.
We do not own or operate, nor do we expect to own or operate, facilitates for product manufacturing, storage, distribution or testing. We contract with third parties for the manufacture of our product candidates, including with Lonza for the manufacture of TRC105 drug substance, and we intend to continue to do so in the future.
19
We have incurred losses from operations in each year since our inception. Our net losses were $19.1 million and $27.0 million for the years ended December 31, 2017 and 2016, respectively. At September 30, 2018, we had an accumulated deficit of $131.9 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 to remain relatively constant in connection with our ongoing activities as we:
|
• |
manufacture preclinical study and clinical trial materials and prepare for potential commercial manufacture of TRC105; |
|
• |
continue to conduct clinical trials of our product candidates; |
|
• |
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