TRACON(TCON) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents TRACON Pharmaceuticals' unaudited condensed consolidated financial statements and detailed notes on accounting policies, debt, equity, and collaborations Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets ($k) | Metric | June 30, 2020 ($k) | December 31, 2019 ($k) | | :-------------------------- | :------------------- | :--------------------- | | Cash and cash equivalents | 14,453 | 16,412 | | Total current assets | 14,956 | 17,260 | | Total assets | 15,650 | 18,121 | | Total current liabilities | 9,235 | 11,834 | | Total stockholders' equity | 3,003 | 2,698 | Condensed Consolidated Statements of Operations Three Months Ended June 30 ($k) | Metric | 2020 ($k) | 2019 ($k) | Change ($k) | | :-------------------------- | :-------- | :-------- | :---------- | | Research and development | 2,218 | 4,347 | (2,129) | | General and administrative | 2,096 | 1,893 | 203 | | Total operating expenses | 4,314 | 6,240 | (1,926) | | Net loss | (4,451) | (6,326) | 1,875 | | Net loss per share (basic & diluted) | (0.70) | (2.11) | 1.41 | Six Months Ended June 30 ($k) | Metric | 2020 ($k) | 2019 ($k) | Change ($k) | | :-------------------------- | :-------- | :-------- | :---------- | | Research and development | 4,216 | 9,561 | (5,345) | | General and administrative | 3,982 | 3,842 | 140 | | Total operating expenses | 8,198 | 13,403 | (5,205) | | Net loss | (8,472) | (13,539) | 5,067 | | Net loss per share (basic & diluted) | (1.47) | (4.53) | 3.06 | Condensed Consolidated Statements of Stockholders' Equity - Total Stockholders' Equity increased from $2,698k at December 31, 2019, to $3,003k at June 30, 2020[18] - Issuances of common stock, net of offering costs, contributed $8,122k to additional paid-in capital during the six months ended June 30, 2020[18] - The company recorded a net loss of $(8,472)k for the six months ended June 30, 2020[18] Condensed Consolidated Statements of Cash Flows Cash Flow Activity (Six Months Ended June 30) ($k) | Cash Flow Activity (Six Months Ended June 30) | 2020 ($k) | 2019 ($k) | | :------------------------------------ | :-------- | :-------- | | Net cash used in operating activities | (9,147) | (12,824) | | Net cash provided by investing activities | — | 14,020 | | Net cash provided by financing activities | 7,188 | 4 | | Change in cash and cash equivalents | (1,959) | 1,200 | | Cash and cash equivalents at end of period | 14,453 | 26,336 | Notes to Condensed Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies - TRACON Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on developing and commercializing novel targeted therapeutics for cancer, and offers a U.S. drug development solution to ex-U.S. companies[24] - As of June 30, 2020, the company had an accumulated deficit of $170.8 million and cash and cash equivalents of $14.5 million, raising substantial doubt about its ability to continue as a going concern for one year[26] - The company plans to fund operations through existing cash, future equity offerings, debt financings, and potential licensing/collaboration arrangements, including $11.7 million remaining from Aspire Capital and $4.2 million from JonesTrading[27] - A 1-for-10 reverse stock split was effected on November 7, 2019, reducing authorized common shares from 200,000,000 to 20,000,000[30] - The COVID-19 pandemic has caused extreme volatility and disruptions in financial markets, potentially making additional debt or equity financing more difficult, costly, and dilutive[27] Potentially Dilutive Securities (Common Stock Equivalent Shares) | Security Type | June 30, 2020 | June 30, 2019 | | :-------------------------------- | :------------ | :------------ | | Warrants to purchase common stock | 1,561,903 | 1,561,903 | | Common stock options and restricted stock units | 658,404 | 436,845 | | ESPP shares | 809 | 383 | | Total | 2,221,116 | 1,999,131 | 2. Short-Term Investments, Cash Equivalents and Fair Value Measurements - The company had no short-term investments at June 30, 2020, and December 31, 2019[48] - The fair value of long-term debt approximates its carrying value, considered a Level 2 input in the fair value hierarchy[51] 3. Long-Term Debt Long-Term Debt Balances (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Long-term debt | $4,667 | $5,600 | | Less debt discount, net of current portion | (39) | (61) | | Long-term debt, net of debt discount | 4,628 | 5,539 | | Less current portion of long-term debt | (1,867) | (2,800) | | Long-term debt, net of current portion | $2,761 | $2,739 | | Current portion of long-term debt, net | $1,746 | $2,604 | - The 2018 Amended SVB Loan of $7.0 million bears interest at 9.0% per annum[54][55] - A deferral agreement in April 2020 extended the interest-only payment period by 6 months and the maturity date to June 2022[55] - The loan is collateralized by substantially all company assets, excluding intellectual property, and includes customary covenants[57] Future Minimum Principal and Interest Payments (in thousands) | Period | Amount ($k) | | :------------- | :---------- | | Remaining 2020 | 678 | | 2021 | 3,066 | | 2022 | 1,717 | | Total | 5,461 | | Less interest and final payment | (794) | | Long-term debt | $4,667 | 4. Commitments and Contingencies - Potential future milestone payments under license agreements totaled approximately $66.0 million as of June 30, 2020, including for TRC253[60] 5. Stockholders' Equity - Under the 2019 Purchase Agreement with Aspire Capital, the company sold 1.5 million shares for gross proceeds of $3.3 million as of June 30, 2020, with $11.7 million remaining available[61][62] - Through the Sales Agreement with JonesTrading, the company sold 3.0 million shares for gross proceeds of $7.3 million as of June 30, 2020, with $4.2 million remaining available[63] Stock-Based Compensation Expense (in thousands) | Period | Research and development | General and administrative | Total | | :-------------------------------- | :----------------------- | :------------------------- | :---- | | Three Months Ended June 30, 2020 | $105 | $158 | $263 | | Three Months Ended June 30, 2019 | $205 | $211 | $416 | | Six Months Ended June 30, 2020 | $212 | $318 | $530 | | Six Months Ended June 30, 2019 | $521 | $491 | $1,012 | 6. Collaborations - The Envafolimab Collaboration Agreement grants TRACON an exclusive license to develop and commercialize envafolimab for soft tissue sarcoma in North America, with TRACON bearing clinical trial costs and 3D Medicines/Alphamab handling IND-enabling studies and manufacturing[68][69] - Under the TJ004309 Agreement, TRACON funds IND filing and Phase 1 trials, shares Phase 2 costs equally, and bears 40% of pivotal trial costs, while I-Mab is responsible for non-clinical activities and drug supply[77] - TRACON issued a notice of dispute to I-Mab regarding potential payment entitlement under the TJ004309 agreement following I-Mab's partnership with Kalbe Genexine Biologics[78] - The Bispecific Agreement allows for mutual selection of up to five bispecific antibody candidates for North America development, with TRACON funding early-stage clinical trials and sharing Phase 3 costs equally[80][81] - TRACON issued a notice of dispute regarding possible breach of the Bispecific Agreement due to I-Mab's prior license agreements with ABL Bio, which may limit TRACON's licensing ability[87][88] - Santen discontinued development of DE-122 and terminated its license agreement for carotuximab in June 2020, meaning no further revenue will be recognized from this agreement[94] - Janssen did not exercise its option to regain rights to TRC253 in April 2020, so TRACON retains worldwide development and commercialization rights, with obligations to pay Janssen up to $45.0 million in milestones and low single-digit royalties[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, capital resources, product candidates, collaborations, and the COVID-19 pandemic's impact Overview - TRACON is a biopharmaceutical company focused on cancer therapeutics and partnering with ex-U.S. companies for U.S. drug development[102][114] - The company plans to initiate the ENVASARC pivotal study for envafolimab in soft tissue sarcoma in H2 2020, with FDA agreement on design and ORR primary endpoint for potential accelerated approval[103] - Positive Phase 2 clinical data for envafolimab in MSI-H/dMMR colorectal, gastric, and other advanced solid tumors were presented at ASCO 2020, showing comparable ORR to Opdivo and Keytruda with lower immune-related adverse events[104] - TRC102 is in Phase 1 and 2 clinical development for mesothelioma, lung cancer, and solid tumors, with all current trials sponsored and funded by the National Cancer Institute (NCI)[105][106] - TRACON retained worldwide rights to TRC253 for metastatic castration-resistant prostate cancer after Janssen did not exercise its option, but commercialization in the U.S. is deemed untenable; seeking a partner for China[108][109] - The company has incurred losses since inception, with an accumulated deficit of $170.8 million at June 30, 2020, and expects significant expenses and operating losses for several years[115][117][118] - Existing cash and cash equivalents of $14.5 million at June 30, 2020, are believed to be sufficient only into the second quarter of 2021, necessitating substantial additional capital[115][118] Collaboration and License Agreements - The Envafolimab Collaboration Agreement grants TRACON an exclusive license for envafolimab in soft tissue sarcoma in North America, with TRACON responsible for clinical trial costs and 3D Medicines/Alphamab for IND-enabling studies, CMC, and supply[119][120] - TRACON will owe tiered double-digit royalties on net sales of envafolimab if it commercializes, or receive escalating double-digit royalties or a 50% royalty if 3D Medicines/Alphamab commercialize[122][123] - Under the TJ004309 Agreement, TRACON funds IND filing and Phase 1 trials, shares Phase 2 costs equally, and bears 40% of pivotal trial costs, with I-Mab responsible for non-clinical activities and drug supply[128] - TRACON is entitled to escalating portions of royalty and non-royalty consideration from I-Mab's third-party licenses or royalties on I-Mab's net sales, depending on development phase completed by TRACON[129] - TRACON has ongoing disputes with I-Mab regarding potential breaches of the TJ004309 and Bispecific Agreements due to I-Mab's other licensing activities, which may impact TRACON's payment entitlements and ability to license bispecific candidates[129][135] - TRACON retained worldwide development and commercialization rights to TRC253 after Janssen did not exercise its option, incurring obligations to pay Janssen up to $45.0 million in milestones and low single-digit royalties[136][137] - Santen terminated its license agreement for carotuximab in June 2020 following the discontinuation of DE-122 development, with no further revenue expected from this agreement[139] Financial Operations Overview - Revenue to date has been derived from prior collaborations with Santen and Ambrx, both of which have been terminated. Future revenue is expected to fluctuate based on new collaboration agreements and product approvals[140][141] Research and Development Expenses (in thousands) | Product Candidate | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | TRC105 | $122 | $1,942 | $198 | $4,006 | | TRC253 | $183 | $863 | $592 | $2,082 | | TRC102 | $35 | $21 | $56 | $43 | | TRC694 | — | $10 | $2 | $141 | | Envafolimab | $163 | — | $236 | — | | TJ004309 | $387 | $50 | $674 | $114 | | Total Third-Party R&D | $890 | $2,886 | $1,758 | $6,386 | | Unallocated expenses | $1,328 | $1,461 | $2,458 | $3,175 | | Total R&D Expenses | $2,218 | $4,347 | $4,216 | $9,561 | - Research and development expenses are expected to remain relatively constant for the remainder of 2020 and increase in 2021 due to the enrollment of the ENVASARC trial[145] - General and administrative expenses are anticipated to remain relatively constant in the near term[150] Results of Operations - Research and development expenses decreased by $2.1 million for the three months ended June 30, 2020, and by $5.3 million for the six months ended June 30, 2020, primarily due to the termination of carotuximab development and lower TRC253 manufacturing expenses[153][156] - General and administrative expenses increased slightly by $0.2 million for the three months and $0.1 million for the six months ended June 30, 2020[154][157] Liquidity and Capital Resources - The company had an accumulated deficit of $170.8 million and cash and cash equivalents of $14.5 million as of June 30, 2020[159][160] - Existing cash and cash equivalents are projected to be sufficient only into the second quarter of 2021, raising substantial doubt about the company's ability to continue as a going concern[160][173] - Net cash used in operating activities was $9.1 million for the six months ended June 30, 2020, while net cash provided by financing activities was $7.2 million, primarily from common stock sales[170][172] - The company has access to additional capital through its ATM facility with JonesTrading ($7.3 million sold, $4.2 million remaining) and the 2019 Purchase Agreement with Aspire Capital ($3.3 million sold, $11.7 million remaining)[160][166][168] - The 2018 Amended SVB Loan, with a principal of $7.0 million and 9.0% interest, had its maturity extended to June 2022 via a deferral agreement in April 2020[161][162] - Future capital requirements are uncertain and depend on clinical trial progress, collaboration outcomes, regulatory approvals, and intellectual property costs[174] Contractual Obligations and Commitments - There have been no material changes to the company's contractual obligations and commitments since the Annual Report on Form 10-K for the year ended December 31, 2019[176] Off-Balance Sheet Arrangements - The company did not have any off-balance sheet arrangements during the periods presented[177] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses the company's exposure to market risks, including interest rate, foreign currency, and inflation, concluding no material impact - The company's exposure to interest rate risk is relatively low due to cash and cash equivalents being in money market funds and long-term debt bearing a fixed interest rate[178] - Foreign currency exchange risk arises from expenses in Pounds Sterling and Euros for clinical trials and manufacturing, but fluctuations have not been significant, and a 1% movement would not materially affect fiscal year 2020 results[179] - Inflation has not had a material effect on the company's results of operations or financial condition during the periods presented[180] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[182] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2020[183] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in material legal proceedings, but acknowledges potential future claims and their adverse impact - The company is not currently a party to any material legal proceedings[186] - Litigation, regardless of outcome, can have an adverse impact due to defense and settlement costs, and diversion of management resources[186] Item 1A. Risk Factors This section details factors that could adversely affect business, covering financial stability, clinical development, third-party reliance, IP, commercialization, and operational risks Risks Related to our Financial Position and Need for Additional Capital - The company has incurred losses since inception, with an accumulated deficit of $170.8 million at June 30, 2020, and expects substantial operating losses for the foreseeable future[188] - Substantial additional financing is required to achieve goals, as existing cash and cash equivalents ($14.5 million at June 30, 2020) are only sufficient into the second quarter of 2021, raising substantial doubt about the company's ability to continue as a going concern[190][191][192] - Raising additional capital may dilute existing stockholders, restrict operations, or require relinquishing rights to product candidates on unfavorable terms[196] - The loan agreement with Silicon Valley Bank contains restrictive covenants that limit operational flexibility and could trigger immediate repayment upon an event of default, including a material adverse change[197][199] Risks Related to Clinical Development and Regulatory Approval of Product Candidates - The strategy for accelerated approval of envafolimab based on overall response rate (ORR) in UPS/MFS may be delayed or prevented if the response rate is not significantly higher than existing therapies[200] - Developing product candidates in combination with other therapies (e.g., envafolimab with ipilimumab) exposes the company to additional risks, including patient intolerance, unexpected consequences, and issues with third-party therapy providers[201][202][203] - Clinical development is a lengthy, expensive, and uncertain process, with failures possible at any stage, and results from earlier or ex-U.S. trials may not be predictive of future outcomes[204] - Delays in clinical trials are common due to various factors, including funding, regulatory approvals, patient enrollment, and the impact of the COVID-19 pandemic, which could increase costs and jeopardize regulatory approval[206][208][209] - Product candidates may cause adverse events (e.g., anemia for TRC102, QTcF prolongation for TRC253) that could delay or prevent regulatory approval, limit the approved label, or hinder market acceptance[210][211][212] - The regulatory approval processes are lengthy, time-consuming, and unpredictable, and failure to obtain approval for any product candidate would substantially harm the business[213][216][218] - Disruptions at the FDA and other government agencies due to funding shortages or global health concerns (like COVID-19) could negatively impact the review and approval timelines for product candidates[219][220] - Obtaining and maintaining regulatory approval in one jurisdiction does not guarantee success in others, and foreign approval processes can be more stringent and time-consuming[224][225] - Even with regulatory approval, ongoing regulatory obligations and review (e.g., post-marketing surveillance, cGMPs, cGCPs) will incur significant expenses, and non-compliance could lead to penalties or market withdrawal[226][227][228] Risks Related to Our Reliance on Third Parties - The company relies on third-party manufacturers for product candidates, facing risks of supply delays, capacity shortages, quality control issues, and non-compliance with cGMP, which could delay clinical trials or regulatory approvals[229][230][231][233] - Dependence on NCI and other third-party sponsors for TRC102 clinical development means loss of their support or issues with their trial conduct could limit advancement[234][235] - Reliance on 3D Medicines and Alphamab for envafolimab development in North America carries risks of disagreements, non-performance, or negative events outside TRACON's control, potentially impacting commercialization[236][237][238] - The ability to realize value from I-Mab collaborations depends on I-Mab's activities and funding, and ongoing disputes regarding other licensing agreements could limit TRACON's rights and payment entitlements[239] - Failure to establish and maintain additional collaborations, particularly for TRC253 in China, could adversely affect the ability to develop and commercialize existing product candidates and leverage clinical development capabilities[240][241] - Reliance on third-party contractors and investigators for preclinical studies and clinical trials exposes the company to risks of non-compliance with cGCPs, insufficient patient recruitment, and data integrity issues, potentially delaying regulatory approval[242][243][244] Risks Related to Our Intellectual Property - Failure to obtain or adequately protect intellectual property rights (patents, trade secrets) could allow competitors to use technologies, harming the business and profitability[245][246] - The patent position is inherently uncertain; patent applications may not issue, or issued patents may be challenged, narrowed, or invalidated, and competitors may design around claims[247][248] - The transition to a 'first-to-file' patent system and other changes from the Leahy-Smith America Invents Act could increase uncertainties and costs in patent prosecution and enforcement[249] - The company relies on licensors (e.g., Case Western, Janssen, 3D Medicines/Alphamab, I-Mab) to prosecute and maintain material patents, and any failure by them could adversely impact the business[254][255] - Third-party claims of intellectual property infringement or misappropriation could lead to substantial expenses, damages, or force the company to stop or delay development and commercialization efforts[256][258][259][260] - Confidentiality agreements may not prevent unauthorized disclosure of trade secrets, and enforcing such claims is expensive and unpredictable, potentially impairing competitive position[275][276] - Protecting intellectual property rights globally is expensive and challenging, as foreign laws may offer less protection, potentially allowing competitors to use inventions or export infringing products[271][272] Risks Related to Commercialization of Product Candidates - Even if approved, product candidates may not gain market acceptance among physicians, patients, hospitals, and payors due to factors like clinical indications, side effects, cost, and reimbursement[277] - Off-label use of competing drugs (e.g., Keytruda in UPS/MFS) could adversely impact the peak net sales of TRACON's products if approved[278] - The company faces intense competition from major pharmaceutical and biotechnology companies with greater resources, who may develop more advanced or effective therapies, or achieve earlier regulatory approval[279][280] - The changing regulatory environment for 'biosimilars' could lead to earlier competition for biological products, reducing exclusivity and market share[282] - Successful sales depend on obtaining coverage and adequate reimbursement from third-party payors, which is a costly and time-consuming process with no assurance of sufficient rates[284][285][286][287] - Healthcare legislative reforms, such as challenges to the ACA and increased scrutiny over pharmaceutical pricing, could adversely affect the company's business, profitability, and ability to set fair prices[289][291][292] - Commercializing products outside the United States involves various risks, including different regulatory requirements, reimbursement regimes, intellectual property protection, economic instability, and foreign currency fluctuations[294][295] Risks Related to Our Business and Industry - The company lacks internal new drug discovery capabilities and relies on acquiring or in-licensing product candidates or entering collaborations, and failure to do so would limit business prospects[297] - High dependence on senior management and key clinical operations/regulatory personnel means the loss of these individuals could impede product development and business strategy[298][299] - The company is exposed to risks of misconduct or illegal activities by employees, contractors, and partners, which could lead to regulatory sanctions, reputational harm, and significant penalties[300][301] - Managing growth and expanding operations (development, regulatory, manufacturing, marketing, sales) will impose significant responsibilities and challenges, and failure to do so effectively could hinder commercialization[302] - The company is subject to extensive federal, state, and foreign healthcare regulations (e.g., anti-kickback, false claims, data privacy laws like HIPAA and GDPR), and non-compliance could result in significant penalties and operational disruption[303][304][305][306][307] - The use of product candidates in clinical trials and commercial sales exposes the company to product liability claims, which could result in substantial liability, costs, reputational harm, and commercialization delays, with current insurance potentially insufficient[308][309] - The ability to use net operating loss (NOL) carryforwards and other tax attributes may be limited by 'ownership changes' under Sections 382 and 383 of the Code, potentially impacting future profitability[311] - Internal computer systems or those of third parties are vulnerable to failures or security breaches, risking service interruption, data loss (clinical trial data, IP, personal information), reputational harm, and increased costs[312] - The COVID-19 pandemic continues to adversely impact the business, including clinical trials (delays in enrollment, site initiation, monitoring), supply chain disruptions, business development activities, and access to capital[313][314][316][317][318][319] Risks Related to Our Common Stock - The market price of the common stock may be highly volatile due to various factors, including clinical trial results, funding, regulatory decisions, competition, and general market conditions, potentially leading to loss of investment[321][322][323] - Failure to meet Nasdaq listing requirements could result in delisting, adversely affecting market liquidity and stock price, and making it harder to obtain financing[324][325][326] - As an 'emerging growth company,' reduced reporting requirements may make the common stock less attractive to investors, potentially leading to a less active trading market and more volatile stock price[327][328] - Future sales and issuances of common stock or rights to purchase common stock, including under equity incentive plans, could result in additional dilution of existing stockholders' ownership and cause the stock price to fall[332] - 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[334] - Provisions in the company's charter documents and Delaware law may have anti-takeover effects, making it more difficult or costly for a third party to acquire the company, even if beneficial to stockholders[335][336] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports the issuance of common stock to a consultant in March 2020, exempt from Securities Act registration - On March 24, 2020, the company issued 100,000 shares of common stock to a consultant, valued at $126,000 ($1.26 per share)[339] - These securities were issued in reliance on exemptions from registration provided by Section 4(2) of the Securities Act and/or Rule 506 of Regulation D[339] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reported period - There were no defaults upon senior securities[340] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the company[341] Item 5. Other Information No other information is reported for the period - No other information is reported for this item[342] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, agreements, and certifications - The exhibits include corporate documents (e.g., Amended and Restated Certificate of Incorporation, Bylaws), various agreements (e.g., Investors' Rights Agreement, Loan and Security Agreement, Common Stock Purchase Agreement), and certifications (31.1, 32.1)[344] Signatures This section contains the official signature of the company's authorized officer, certifying the report's submission - The report was signed by Charles P. Theuer, M.D., Ph.D., President and Chief Executive Officer, on August 5, 2020[348]