TRACON(TCON) - 2019 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period Item 1. Financial Statements This section presents TRACON Pharmaceuticals, Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, and cash flows, along with detailed notes explaining the company's organization, accounting policies, debt, equity, collaborations, and commitments Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Item | June 30, 2019 | December 31, 2018 | | :---------------------------------- | :-------------- | :------------------ | | Cash and cash equivalents | $26,336 | $25,136 | | Short-term investments | — | $13,968 | | Total current assets | $26,930 | $40,603 | | Total assets | $27,951 | $40,648 | | Total current liabilities | $13,939 | $13,495 | | Long-term debt, less current portion | $4,057 | $5,343 | | Total stockholders' equity | $8,919 | $21,442 | | Total liabilities and stockholders' equity | $27,951 | $40,648 | - Total assets decreased from $40.6 million at December 31, 2018, to $27.9 million at June 30, 2019, primarily due to the absence of short-term investments in 2019[12] - Total stockholders' equity significantly decreased from $21.4 million at December 31, 2018, to $8.9 million at June 30, 2019, largely due to accumulated deficit[12] Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net loss over specific reporting periods Condensed Consolidated Statements of Operations (in thousands, except per share data) | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Collaboration revenue | $— | $— | $— | $3,000 | | Research and development expenses | $4,347 | $8,115 | $9,561 | $17,553 | | General and administrative expenses | $1,893 | $1,622 | $3,842 | $3,373 | | Net loss | $(6,326) | $(9,754) | $(13,539) | $(18,118) | | Net loss per share, basic and diluted | $(0.21) | $(0.33) | $(0.45) | $(0.76) | - Net loss decreased for both the three and six months ended June 30, 2019, primarily due to a significant reduction in research and development expenses[15] - Collaboration revenue was $0 for the three and six months ended June 30, 2019, compared to $3.0 million in the six months ended June 30, 2018[15] Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------- | :------------------------------- | :------------------------------- | | Net cash used in operating activities | $(12,824) | $(16,432) | | Net cash provided by (used in) investing activities | $14,020 | $(13,923) | | Net cash provided by financing activities | $4 | $35,322 | | Increase in cash and cash equivalents | $1,200 | $4,967 | | Cash and cash equivalents at end of period | $26,336 | $34,434 | - Net cash used in operating activities decreased by $3.6 million, from $16.4 million in H1 2018 to $12.8 million in H1 2019[18] - Investing activities shifted from using $13.9 million in H1 2018 to providing $14.0 million in H1 2019, primarily due to proceeds from maturity of short-term investments[18] Notes to Condensed Consolidated Financial Statements Offers detailed explanations of the company's accounting policies, financial instruments, and significant transactions 1. Organization and Summary of Significant Accounting Policies Describes the company's business and the key accounting principles applied in its financial reporting - TRACON Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on cancer and wet age-related macular degeneration (wet AMD)[21] - The company has incurred operating losses since inception, with an accumulated deficit of $153.2 million as of June 30, 2019, raising substantial doubt about its ability to continue as a going concern for one year[23] - Revenue recognition follows a five-step model, with milestone payments evaluated for probability and sales-based royalties recognized when sales occur[30][33][35] - Adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing ROU assets and lease liabilities, and ASU 2018-07 (Nonemployee Share-Based Payment Accounting) with no material impact[45][47] 2. Short-Term Investments, Cash Equivalents and Fair Value Measurements Details the company's liquid assets and how their fair values are determined - All investments are classified as available-for-sale securities and carried at amortized cost, approximating fair value[48] Cash Equivalents and Short-Term Investments (in thousands) | Item | June 30, 2019 Fair Value | December 31, 2018 Fair Value | | :----------------------- | :----------------------- | :------------------------- | | Money market funds | $5,001 | $5,832 | | U.S. treasury securities | — | $13,968 | | Total | $5,001 | $19,800 | - As of June 30, 2019, the company had no short-term investments, only money market funds classified as cash equivalents[49][54] 3. Long-Term Debt Outlines the company's long-term borrowing arrangements and related obligations Long-Term Debt Balances (in thousands) | Item | June 30, 2019 | December 31, 2018 | | :---------------------------------- | :-------------- | :------------------ | | Long-term debt | $7,000 | $7,000 | | Less debt discount, net of current portion | $(143) | $(257) | | Long-term debt, net of debt discount | $6,857 | $6,743 | | Less current portion of long-term debt | $(2,800) | $(1,400) | | Long-term debt, net of current portion | $4,057 | $5,343 | | Current portion of long-term debt, net | $2,536 | $1,084 | - The company has a $7.0 million 2018 Amended SVB Loan with a 9.0% annual interest rate, with principal payments starting after June 30, 2019, over 30 months[55][56] - The loan is collateralized by substantially all company assets (excluding intellectual property) and includes customary covenants, with the company in compliance as of June 30, 2019[58] Outstanding Warrants for Common Stock (June 30, 2019) | Expiration | 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 | | May 3, 2025 | 53,639 | $2.61 | | Total | 157,504 | | 4. Commitments and Contingencies Discloses the company's contractual obligations and potential future liabilities - The company terminated its long-term manufacturing agreement with Lonza Biologics Tuas Pte Ltd for TRC105 following the decision to discontinue TRC105 development in oncology, incurring costs for work completed prior to termination[61] - Potential future milestone payments under various license agreements totaled approximately $66.0 million as of June 30, 2019[63] 5. Stockholders' Equity Presents the changes in the company's equity accounts, including common stock and accumulated deficit Changes in Stockholders' Equity (in thousands, except share data) | Item | Balance at Dec 31, 2018 | Q1 2019 Activity | Q2 2019 Activity | Balance at June 30, 2019 | | :---------------------------------- | :---------------------- | :--------------- | :--------------- | :----------------------- | | Common Stock Shares | 29,871,327 | 27,371 | 38,759 | 29,937,457 | | Common Stock Amount | $30 | $— | $— | $30 | | Additional Paid-in Capital | $161,072 | $576 | $440 | $162,088 | | Accumulated Deficit | $(139,660) | $(7,213) | $(6,326) | $(153,199) | | Total Stockholders' Equity | $21,442 | $7,213 | $6,326 | $8,919 | - Total stockholders' equity decreased from $21.4 million at December 31, 2018, to $8.9 million at June 30, 2019, primarily due to net losses[64] - In March and April 2018, the company sold 11.9 million common shares and warrants for approximately $36.5 million net proceeds in a private placement[65] Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Research and development | $205 | $375 | $521 | $739 | | General and administrative | $211 | $289 | $491 | $631 | | Total | $416 | $664 | $1,012 | $1,370 | 6. Collaborations Describes the company's strategic partnerships for product development and commercialization I-Mab Details the collaboration agreement with I-Mab Biopharma for immuno-oncology product candidates - In November 2018, TRACON entered into strategic collaboration and clinical trial agreements with I-Mab Biopharma for the development of multiple immuno-oncology product candidates, including TJ004309 and up to five bispecific antibodies[72] TJ004309 Agreement Specifies the terms and responsibilities under the agreement for the TJ004309 product candidate - TRACON is responsible for IND filing and Phase 1 costs, shares Phase 2 costs equally, and bears 40% of pivotal clinical trial costs for TJ004309[74] - TRACON is entitled to escalating portions of royalties and non-royalty consideration if I-Mab out-licenses or commercializes TJ004309 outside Greater China[75] - I-Mab can terminate the agreement for various reasons, including after Phase 1 or Phase 2 completion, entitling TRACON to termination fees of $9.0 million or $15.0 million, respectively, plus potential additional payments[76] Bispecific Agreement Outlines the terms for developing and commercializing bispecific antibody candidates with I-Mab - TRACON and I-Mab may select up to five bispecific antibody candidates for development and commercialization in North America, with TRACON responsible for Phase 1 and 2 costs and sharing Phase 3 costs equally[77][78] - TRACON has an option to obtain an exclusive license to selected product candidates outside Greater China and Korea, with upfront and milestone payments and royalties to I-Mab escalating based on development stage (e.g., $10.0 million-$80.0 million upfront, up to $90.0 million-$420.0 million development/regulatory milestones, up to $250.0 million sales milestones, mid-single to high-teen royalties)[79][80] Santen Describes the exclusive license agreement with Santen for carotuximab in ophthalmology - TRACON granted Santen an exclusive worldwide license for carotuximab (DE-122) in ophthalmology indications[84] - Received a $10.0 million upfront fee and $10.0 million in development milestones; eligible for up to $155.0 million in additional milestones and tiered royalties on net sales[87] - All performance obligations related to the upfront payment and two development milestones were satisfied and recognized as revenue by December 31, 2017; no revenue recognized for this agreement in Q2 2019 or Q2 2018[89][90][91] Janssen Details the license agreement with Janssen for the TRC253 (AR Mutant Program) - TRACON licensed TRC253 (AR Mutant Program) from Janssen for prostate cancer; the NIK Program (TRC694) was terminated in February 2019[92] - Janssen has an option to regain rights to TRC253 for a $45.0 million fee, plus up to $137.5 million in regulatory/commercial milestones and low single-digit royalties[93][94] - If Janssen does not exercise, TRACON retains worldwide rights but owes Janssen up to $45.0 million in development/regulatory milestones and low single-digit royalties[94] Ambrx, Inc. Summarizes the terminated license agreement with Ambrx for TRC105 in Greater China - Ambrx terminated its license agreement for TRC105 in Greater China in February 2019, with all rights reverting to TRACON[99] - A $3.0 million upfront payment from Ambrx was recognized as revenue in Q1 2018, with no further revenue expected from this agreement[100] 7. Leases Provides information on the company's lease arrangements and related accounting under new standards - The company leases its office space under a non-cancelable operating lease expiring in April 2022[101] - Upon adoption of ASU 2016-02 on January 1, 2019, the company recognized a Right-of-Use (ROU) asset of $989 thousand and total operating lease liabilities of $1,083 thousand as of June 30, 2019[102][103] Maturities of Operating Lease Liabilities (in thousands) | Year | Amount | | :------------- | :----- | | Remaining 2019 | $215 | | 2020 | $442 | | 2021 | $461 | | 2022 | $156 | | Total lease payments | $1,274 | | Less imputed interest | $(191) | | Total operating lease liabilities | $1,083 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on TRACON Pharmaceuticals, Inc.'s financial condition and operational results for the quarter ended June 30, 2019. It covers the company's business overview, recent developments in its product pipeline, details of collaboration agreements, analysis of financial performance, and liquidity and capital resources, highlighting the ongoing need for additional funding Overview Introduces TRACON Pharmaceuticals, its focus, key product candidates, and financial position - TRACON Pharmaceuticals is a clinical-stage biopharmaceutical company focused on developing targeted therapeutics for cancer and wet age-related macular degeneration (wet AMD)[106] - The company terminated enrollment in oncology trials for TRC105 (carotuximab) in April 2019 due to a futility recommendation from the Independent Data Monitoring Committee (IDMC) for the Phase 3 TAPPAS trial[106] - Key product candidates include DE-122 (ophthalmic carotuximab) in Phase 2a for wet AMD (data expected H1 2020), TRC102 in Phase 1/2 for various cancers, TRC253 in Phase 1/2 for metastatic castration-resistant prostate cancer (data expected by end of 2020), and TJ004309 in Phase 1 for solid tumors (enrollment began July 2019, data expected H2 2020)[107][108][109][110][111][113] - The company had an accumulated deficit of $153.2 million as of June 30, 2019, and expects to incur significant expenses and operating losses for the foreseeable future, requiring substantial additional capital[115][116][117] 2019 Developments Highlights significant clinical and operational milestones achieved during 2019 - Initiated dosing in a Phase 1 clinical study of TJ004309 (CD73 antibody) in July 2019 for advanced solid tumors, with top-line data expected in the second half of 2020[118] - Phase 1 data for TRC253 in metastatic castrate-resistant prostate cancer was published, identifying 280 mg as the recommended Phase 2 dose and showing a partial response in one patient with a F877L AR point mutation[119] - Terminated enrollment in TRC105 oncology trials in April 2019 following an IDMC recommendation for futility in the Phase 3 TAPPAS trial[120] - Phase 2 trial of TRC102 and Temodar in relapsed metastatic colorectal cancer reported a 6% overall response rate, which did not meet the primary efficacy endpoint[121] Collaboration and License Agreements Summarizes the key terms and financial implications of the company's strategic partnerships Collaboration Agreements with I-Mab Biopharma Details the strategic partnership with I-Mab for developing TJ004309 and bispecific antibodies - TRACON entered into agreements with I-Mab in November 2018 for the development of TJ004309 (CD73 antibody) and up to five bispecific antibodies[122] - For TJ004309, TRACON covers IND filing and Phase 1 costs, shares Phase 2 costs equally, and bears 40% of pivotal trial costs, with I-Mab responsible for non-clinical activities and drug supply[123] - TRACON is eligible for escalating royalties and non-royalty consideration from I-Mab for out-licensing or commercialization of TJ004309 outside Greater China[124] - For bispecific antibodies, TRACON is responsible for IND filing and Phase 1/2 costs in North America, sharing Phase 3 costs equally with I-Mab, and will share profits/losses equally in North America[128] - TRACON has an option to obtain an exclusive license to bispecific candidates outside Greater China and Korea, with potential upfront payments ranging from $10.0 million to $80.0 million, and significant milestone and royalty obligations to I-Mab[129][130] License Agreement with Janssen Pharmaceutica N.V. Outlines the terms of the licensing agreement for TRC253 and the terminated NIK Program - TRACON licensed TRC253 (AR Mutant Program) from Janssen in September 2016; the NIK Program (TRC694) was terminated in February 2019[131] - Janssen holds an option to reacquire rights to TRC253 until 90 days after TRACON demonstrates clinical proof of concept, for a $45.0 million option exercise fee, up to $137.5 million in regulatory/commercial milestones, and low single-digit royalties[132][133] - If Janssen does not exercise, TRACON retains worldwide rights but is obligated to pay Janssen up to $45.0 million in development/regulatory milestones and low single-digit royalties[133] License Agreement with Santen Describes the exclusive worldwide license granted to Santen for carotuximab in ophthalmology - TRACON granted Santen an exclusive worldwide license for carotuximab (DE-122) in ophthalmology indications in March 2014[134] - TRACON received a $10.0 million upfront fee and $10.0 million in development milestones; eligible for up to $155.0 million in additional milestones and tiered royalties on net sales[136] - Santen is solely responsible for funding, developing, seeking regulatory approval, and commercializing carotuximab products in ophthalmology[135] Financial Operations Overview Provides an executive summary of the company's revenue, expenses, and other financial performance indicators Revenue Discusses the sources and expected fluctuations of the company's collaboration revenue - Revenue to date has been derived from collaborations with Santen and Ambrx; the Ambrx agreement was terminated in February 2019[137] - Future revenue is expected to fluctuate based on the timing of milestone achievements and new collaboration agreements[138] Research and Development Expenses Analyzes the trends and drivers of the company's research and development expenditures - Research and development expenses decreased by $3.8 million (46.6%) for the three months ended June 30, 2019, and by $8.0 million (45.5%) for the six months ended June 30, 2019, primarily due to lower drug manufacturing and direct clinical trial expenses following the termination of TRC105 oncology trials[140][141][152][156] Research and Development Expenses by Product Candidate (in thousands) | Product Candidate | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | TRC105 | $1,942 | $5,402 | $4,006 | $12,151 | | TRC253 | $863 | $929 | $2,082 | $1,863 | | TRC102 | $21 | $22 | $43 | $46 | | TRC694 | $10 | $122 | $141 | $197 | | TJ004309 | $50 | $— | $114 | $— | | Total third-party R&D | $2,886 | $6,475 | $6,386 | $14,257 | | Unallocated expenses | $1,461 | $1,640 | $3,175 | $3,296 | | Total R&D expenses | $4,347 | $8,115 | $9,561 | $17,553 | General and Administrative Expenses Examines the changes in the company's corporate and administrative overhead costs - General and administrative expenses increased by $0.3 million (18.5%) for the three months ended June 30, 2019, and by $0.5 million (14.8%) for the six months ended June 30, 2019, primarily due to corporate-related expenses, partially offset by lower stock-based compensation[153][157] Other Income (Expense) Reports on non-operating income and expenses, primarily interest-related items - Other expense was $0.1 million for the three months ended June 30, 2019, compared to $0 in the prior year, and $0.1 million for the six months ended June 30, 2019, compared to $0.2 million in the prior year[154][158] - These expenses primarily consist of interest related to loan agreements with SVB, partially offset by interest income from short-term investments and cash equivalents[147] Critical Accounting Policies and Significant Judgments and Estimates Identifies the accounting policies requiring significant management judgment and estimation - No material changes to critical accounting policies and estimates from the 2018 Annual Report on Form 10-K, except for the adoption of new lease accounting standards[148] - The company adopted ASU 2016-02 (Leases) on January 1, 2019, requiring recognition of operating lease right-of-use (ROU) assets and lease liabilities on the balance sheet[149][150] Results of Operations Compares the company's financial performance across different reporting periods Comparison of the Three Months Ended June 30, 2019 and 2018 Analyzes the financial performance for the three-month periods, highlighting key changes in revenue and expenses Summary of Results of Operations (Three Months Ended June 30, in thousands) | Item | 2019 | 2018 | Change | | :---------------------------------- | :--- | :--- | :----- | | Collaboration revenue | $— | $— | $— | | Research and development expenses | $4,347 | $8,115 | $(3,768) | | General and administrative expenses | $1,893 | $1,622 | $271 | | Other expense | $(86) | $(17) | $(69) | - Research and development expenses decreased by $3.8 million, primarily due to the termination of TRC105 oncology trials[152] Comparison of the Six Months Ended June 30, 2019 and 2018 Analyzes the financial performance for the six-month periods, detailing changes in collaboration revenue and operating expenses Summary of Results of Operations (Six Months Ended June 30, in thousands) | Item | 2019 | 2018 | Change | | :---------------------------------- | :--- | :--- | :----- | | Collaboration revenue | $— | $3,000 | $(3,000) | | Research and development expenses | $9,561 | $17,553 | $(7,992) | | General and administrative expenses | $3,842 | $3,373 | $469 | | Other expense | $(136) | $(192) | $56 | - Collaboration revenue decreased by $3.0 million due to revenue recognized under the Ambrx license agreement in H1 2018 with no corresponding revenue in H1 2019[155] - Research and development expenses decreased by $8.0 million, primarily due to lower drug manufacturing and direct clinical trial expenses following the termination of TRC105 oncology trials[156] Liquidity and Capital Resources Assesses the company's ability to generate and manage cash, and its need for future funding - The company has incurred losses and negative cash flows since inception, with an accumulated deficit of $153.2 million as of June 30, 2019[159] - Cash and cash equivalents totaled $26.3 million at June 30, 2019, believed to be sufficient to meet anticipated cash requirements into the third quarter of 2020[160][171] - The company will need additional capital to fund operations and complete product development, raising substantial doubt about its ability to continue as a going concern[159][171] Net Cash Flow Activity (Six Months Ended June 30, in thousands) | Activity | 2019 | 2018 | | :----------------------- | :--- | :--- | | Operating activities | $(12,824) | $(16,432) | | Investing activities | $14,020 | $(13,923) | | Financing activities | $4 | $35,322 | | Increase in cash and cash equivalents | $1,200 | $4,967 | Credit Facility with SVB Describes the terms and conditions of the company's loan agreement with Silicon Valley Bank - In May 2018, the company entered into a $7.0 million 2018 Amended SVB Loan at 9.0% interest, used to refinance existing debt[161][162] - The loan is collateralized by substantially all assets (excluding intellectual property) and contains customary covenants, with the company in compliance as of June 30, 2019[163] Private Placement of Common Shares and Warrants Details the capital raised through the private sale of equity securities - In March 2018, the company completed a private placement, selling approximately 11.9 million common shares and warrants for net proceeds of approximately $36.5 million[164] Common Stock Purchase Agreement with Aspire Capital Fund, LLC Explains the agreement for selling common stock to Aspire Capital - In March 2017, the company entered into a common stock purchase agreement with Aspire Capital for up to $21.0 million of common stock over 30 months (expiring September 2019)[165] - As of June 30, 2019, $0.9 million in net proceeds had been received under this agreement[165] ATM Facility Describes the at-the-market equity offering program for selling common stock - In September 2018, the company entered into a Sales Agreement with JonesTrading to sell up to $8.0 million of common stock, with no shares sold as of June 30, 2019[166] - The company terminated a similar at-the-market sales agreement with Stifel in September 2018, having sold approximately $3.5 million of common stock through it[167] Cash Flows Analyzes the sources and uses of cash from operating, investing, and financing activities - Net cash used in operating activities decreased to $12.8 million for H1 2019 from $16.4 million for H1 2018[168] - Net cash provided by investing activities was $14.0 million for H1 2019, a significant increase from net cash used of $13.9 million in H1 2018, due to maturities of short-term investments[169] - Net cash provided by financing activities was $4 thousand for H1 2019, a substantial decrease from $35.3 million in H1 2018, which included proceeds from common stock and warrants issuance[170] Funding Requirements Discusses the company's future capital needs and going concern considerations - Existing cash and cash equivalents of $26.3 million are expected to fund operations into the third quarter of 2020[171] - The company requires substantial additional funding to complete product development and commercialization, raising substantial doubt about its ability to continue as a going concern[171] - Future capital requirements are uncertain and depend on factors like clinical trial progress, collaboration agreements, regulatory approvals, and commercialization costs[172] Contractual Obligations and Commitments Summarizes the company's significant contractual payment obligations and other commitments - The company terminated its long-term manufacturing agreement with Lonza for TRC105 due to the discontinuation of oncology development, incurring obligations for costs incurred prior to termination[174] - No other material changes from the contractual obligations and commitments previously disclosed in the 2018 Annual Report on Form 10-K[175] Off-Balance Sheet Arrangements Confirms the absence of any material off-balance sheet transactions or obligations - The company did not have any off-balance sheet arrangements during the periods presented[176] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk and foreign currency exchange risk, and the impact of inflation Interest Rate Risk Assesses the company's exposure to fluctuations in interest rates on its financial instruments - The company's cash and cash equivalents consist of cash and money market funds, making the fair value of its portfolio relatively insensitive to interest rate changes[177] - Long-term debt bears interest at a fixed rate, further limiting interest rate risk[177] Foreign Currency Exchange Risk Evaluates the company's exposure to changes in foreign currency exchange rates - The company incurs expenses in Pounds Sterling and Euros for clinical studies and manufacturing outside the U.S., exposing it to foreign currency exchange risk[178] - To date, exchange rate fluctuations have not been significant, and the company does not use hedging transactions[178] Effects of Inflation Discusses the potential impact of inflation on the company's financial performance - Inflation generally affects the company by increasing labor and clinical trial costs, but it has not had a material effect on results of operations or financial condition during the presented periods[179] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter Disclosure Controls and Procedures Assesses the effectiveness of the company's controls for ensuring timely and accurate public disclosures - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[181] Changes in Internal Control over Financial Reporting Reports on any material changes to the company's internal control system during the reporting period - There were no changes in internal control over financial reporting during the quarter ended June 30, 2019, that materially affected or are reasonably likely to materially affect internal control over financial reporting[182] PART II OTHER INFORMATION Contains additional non-financial information and disclosures required in the report Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings, though it acknowledges the potential adverse impact of litigation - The company is not currently a party to any material legal proceedings[184] - Litigation, regardless of outcome, can have an adverse impact due to defense and settlement costs, diversion of management resources, and other factors[184] Item 1A. Risk Factors This section details various risks that could materially and adversely affect TRACON Pharmaceuticals, Inc.'s business, financial condition, and results of operations. These risks span financial stability, clinical development, reliance on third parties, intellectual property, commercialization, general business operations, and common stock performance Risks Related to our Financial Position and Need for Additional Capital Highlights the company's history of losses, ongoing funding requirements, and potential impacts on its financial viability - The company has incurred losses since inception, with an accumulated deficit of $153.2 million as of June 30, 2019, and anticipates substantial operating losses for the foreseeable future[186] - Existing cash and cash equivalents are expected to fund operations only into the third quarter of 2020, necessitating substantial additional financing and raising substantial doubt about the company's ability to continue as a going concern[188][189] - Failure to obtain additional financing could force delays, reductions, or termination of drug development efforts, and raising capital may dilute existing stockholders or require relinquishing rights to product candidates[193][194] - The loan agreement with Silicon Valley Bank contains restrictive covenants and could require early repayment if an event of default occurs, including a material adverse change[195][198] Risks Related to Clinical Development and Regulatory Approval of Product Candidates Addresses the inherent uncertainties, costs, and potential setbacks in the clinical trial and regulatory approval processes for drug candidates - Clinical development is a lengthy, expensive, and uncertain process, with earlier trial results not necessarily predictive of future success; TRC105 Phase 3 TAPPAS trial was terminated for futility in April 2019[199] - Delays in clinical trials are common due to various factors (e.g., enrollment, regulatory approvals, manufacturing), increasing costs and jeopardizing regulatory approval[203][204] - Product candidates may cause adverse events (e.g., TRC253's QTcF prolongation), which could delay or prevent regulatory approval or limit market acceptance[205][206] - The regulatory approval processes are lengthy, unpredictable, and may not result in approval for product candidates, potentially harming the business[210][211] - Obtaining regulatory approval in one jurisdiction does not guarantee approval in others, and foreign approval processes can be more complex and time-consuming[219][220] - Even if approved, products are subject to ongoing regulatory obligations and review, which may result in significant additional expense or penalties for non-compliance[221][222] Risks Related to Our Reliance on Third Parties Examines the risks associated with depending on external manufacturers, collaborators, and clinical research organizations for key business functions - The company relies on third-party manufacturers for product candidates, and any failure or capacity issues could delay clinical trials or commercialization; the Lonza manufacturing agreement for TRC105 was terminated[223][224] - Dependence on the National Cancer Institute (NCI) and other third-party sponsors to advance clinical development of TRC102, with limited control over their activities and potential for support withdrawal[229][230] - Reliance on the license agreement with Santen for DE-122 in ophthalmology, where the company's ability to generate revenue depends on Santen's development and commercialization efforts[231] - Realizing value from I-Mab collaborations depends on I-Mab's activities and funding for preclinical development and manufacturing, with limited control over their resource allocation[234] - Difficulty in establishing and maintaining additional collaborations could adversely affect the ability to develop and commercialize product candidates or leverage clinical development capabilities[235][236] - Reliance on third parties to conduct preclinical studies and clinical trials, with risks including non-compliance with regulations (cGCPs), recruitment delays, and potential for data unreliability[237][238] Risks Related to Our Intellectual Property Discusses the challenges and uncertainties in obtaining, protecting, and enforcing intellectual property rights for the company's product candidates - Inability to obtain or protect intellectual property rights (patents, trade secrets) related to product candidates could harm the business and competitive position[240] - The patent position of biotechnology companies is uncertain, and patents may be challenged, narrowed, or invalidated, or competitors may design around claims[241] - Dependence on licensors (Roswell Park, Case Western, Janssen) to prosecute and maintain patents and patent applications material to the business, with limited control over these activities[247][248] - Third-party claims of intellectual property infringement or misappropriation could prevent or delay development and commercialization efforts, leading to substantial expenses or damages[249][251][254] - Failure to comply with obligations under license agreements could result in loss of intellectual property rights or damages to the licensor[263] - Protecting intellectual property rights globally is challenging due to varying laws and enforcement, potentially allowing competitors to use technologies in other jurisdictions[264][265] Risks Related to Commercialization of Product Candidates Covers the challenges in achieving market acceptance, managing competition, securing reimbursement, and navigating healthcare regulations for approved products - Even with regulatory approval, product candidates may not gain market acceptance among physicians, patients, and payors due to factors like efficacy, side effects, cost, and reimbursement[271] - The company faces intense competition and rapid technological change from larger, better-resourced pharmaceutical and biotechnology companies, potentially leading to more advanced or effective therapies[272][273] - Competition from 'biosimilars' and generic products, facilitated by changing regulatory environments, could limit demand and pricing for the company's products[275][276] - Successful sales depend on coverage and adequate reimbursement from third-party payors, which is a time-consuming and costly process with no assurance of favorable rates[277][278][280] - Healthcare legislative reforms (e.g., Affordable Care Act, drug pricing scrutiny) in the U.S. and abroad may adversely affect the business by impacting demand, pricing, and profitability[282][284][286] - Commercializing approved products outside the United States involves additional risks, including differing regulatory requirements, reimbursement regimes, intellectual property protection, and economic instability[289][290] Risks Related to Our Business and Industry Addresses broader operational, regulatory, and external risks inherent to the biopharmaceutical industry and the company's specific business model - Lack of internal new drug discovery capabilities means the company's business and prospects are limited if it fails to acquire or in-license other product candidates or products[292] - High dependence on senior management and key clinical operations/regulatory personnel; loss of these individuals could impede development and strategy execution[293][294] - Exposure to risks of misconduct or illegal activities by employees and third parties, including non-compliance with regulatory standards and fraud and abuse laws, which could lead to significant penalties[295][297] - Potential difficulties in managing growth and expanding operations successfully, requiring effective management of development efforts and hiring/training personnel[298] - Subject to extensive federal and state healthcare regulations (e.g., anti-kickback, false claims, data privacy); non-compliance could result in penalties and harm the business[299][302][303] - Potential for product liability claims from clinical trials or commercial sales, which could result in substantial liability, costs, and reputational harm, potentially exceeding insurance coverage[304][305][306] - Ability to use net operating loss carryforwards and other tax attributes may be limited due to past or future ownership changes, potentially impacting future profitability[308] - Internal computer systems or those of contractors may fail or suffer security breaches, risking sensitive data exposure, regulatory sanctions, and business disruption[310] - Business disruptions from natural disasters, power shortages, or government shutdowns could seriously harm future revenue and financial condition[311] Risks Related to Our Common Stock Outlines factors that could affect the market price, liquidity, and ownership structure of the company's common stock - The market price of the common stock may be highly volatile due to various factors, and stockholders may not be able to resell shares at a desired price, potentially losing all or part of their investment[312][313][314] - Failure to meet Nasdaq listing requirements (e.g., $1.00 bid price) could lead to delisting, adversely impacting liquidity and market price[315][316] - Principal stockholders and management own a significant percentage of voting stock (over 45% as of June 30, 2019), enabling them to exert significant control over matters subject to stockholder approval[317][318] - Future sales and issuances of common stock or rights to purchase common stock could result in additional dilution of existing stockholders' ownership and cause the stock price to fall[323] - The company does not intend to pay dividends on its common stock, so any returns will be limited to the appreciation of the stock's value[325] - Provisions in the company's charter documents and Delaware law could make it more difficult or costly for a third party to acquire the company, even if beneficial to stockholders[326][327] Item 2. Unregistered Sales of Equity Securities There were no unregistered sales of equity securities during the period covered by this report - None[328] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period covered by this report - None[329] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[330] Item 5. Other Information There is no other information to report under this item - None[331] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including organizational documents, various agreements, and certifications - Includes Amended and Restated Certificate of Incorporation, Bylaws, Form of Common Stock Certificate, Investors' Rights Agreement, Investor Agreement, Registration Rights Agreement, Common Stock Purchase Agreement, Securities Purchase Agreement, and various certifications[333] Signatures The report is duly signed on behalf of TRACON Pharmaceuticals, Inc. by its President and Chief Executive Officer - The report was signed by Charles P. Theuer, M.D., Ph.D., President and Chief Executive Officer (principal executive officer and principal financial officer) on August 7, 2019[339]