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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, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number 000-30929

 

___________________________________________

TG THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

36-3898269

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

2 Gansevoort Street, 9th Floor

New York, New York 10014

(Address including zip code of principal executive offices)

 

(212) 554-4484

(Registrant’s telephone number, including area code)

 

Securities filed pursuant to Section 12(b) of the Act:

 

Title of Class

Trading Symbol(s)

Exchange Name

Common Stock, par value $0.001

TGTX

Nasdaq Capital Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer ☐

 

 

Non-accelerated filer ☐ (Do not check if smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes No ☒

 

There were 99,561,434 shares of the registrant’s common stock, $0.001 par value, outstanding as of November 5, 2019.

 

 

 

 

 

 

TG THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

 

TABLE OF CONTENTS

 

 

3

 

 

 

 

 

4

 

 

 

 

 

 4

 

 

 

 

 

 

 4

 

 

 

 

 

 

 5

 

 

 

 

 

 

 6

 

 

 

 

 

 

 8

 

 

 

 

 

 

9

 

 

 

 

 

 24

 

 

 

 

 

31

 

 

 

 

 

31

 

 

 

 

 

32

 

 

 

 

 

32

 

 

 

 

 

32

 

 

 

 

 

67

 

2

 

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this report, including matters discussed under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative of these words or other comparable terminology, although not all forward-looking statements contain these identifying words. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements about our:

 

 

expectations for increases or decreases in expenses;

 

expectations for the clinical and pre-clinical development, manufacturing, regulatory approval, and commercialization of our pharmaceutical product candidates or any other products we may acquire or in-license;

 

use of clinical research centers and other contractors;

 

expectations as to the timing of commencing or completing pre-clinical and clinical trials and the expected outcomes of those trials;

 

expectations for incurring capital expenditures to expand our research and development and manufacturing capabilities;

 

expectations for generating revenue or becoming profitable on a sustained basis;

 

expectations or ability to enter into marketing and other partnership agreements;

 

expectations or ability to enter into product acquisition and in-licensing transactions;

 

expectations or ability to build our own commercial infrastructure to manufacture, market and sell our drug candidates;

 

products being accepted by doctors, patients or payors;

 

ability to compete against other companies and research institutions;

 

ability to secure adequate protection for our intellectual property;

 

ability to attract and retain key personnel;

 

availability of reimbursement for our products;

 

estimates of the sufficiency of our existing cash and cash equivalents and investments to finance our operating requirements, including expectations regarding the value and liquidity of our investments;

 

stock price and its volatility; and

 

expectations for future capital requirements.

 

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

 

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as other factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in the documents where such forward-looking statements appear. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or enter into.

 

You should read this report and the documents that we have filed as exhibits to this report completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. Any forward-looking statements contained in this report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This report also contains estimates, projections and other information concerning our industry, our business and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

3

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION

 

TG Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

  September 30, 2019  

 

 

  December 31, 2018  

 

 

 

  (Unaudited)

 

 

  (Note 1)  

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,675

 

 

$

41,958

 

Short-term investment securities

 

 

27,776

 

 

 

26,943

 

Prepaid research and development

 

 

7,040

 

 

 

9,691

 

Other current assets

 

 

864

 

 

 

439

 

Total current assets

 

 

80,355

 

 

 

79,031

 

Restricted cash

 

 

1,248

 

 

 

1,241

 

Leasehold interest, net

 

 

2,157

 

 

 

2,294

 

Equipment, net

 

 

275

 

 

 

251

 

Right of use asset

 

 

8,493

 

 

 

 

Goodwill

 

 

799

 

 

 

799

 

Total assets

 

$

93,327

 

 

$

83,616

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

31,780

 

 

$

36,377

 

Other current liabilities

 

 

44,035

 

 

 

219

 

Lease liability – current portion

 

 

1,365

 

 

 

 

Accrued compensation

 

 

3,017

 

 

 

2,258

 

Total current liabilities

 

 

80,197

 

 

 

38,854

 

Deferred rent

 

 

 

 

 

1,462

 

Deferred revenue, net of current portion

 

 

800

 

 

 

914

 

Long-term debt

 

 

28,741

 

 

 

 

Lease liability – non current

 

 

9,380

 

 

 

 

Long-term liabilities

 

 

 

 

 

18,350

 

Total liabilities

 

 

119,118

 

 

 

59,580

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value per share (10,000,000 shares authorized, none issued and outstanding as of September 30, 2019 and December 31, 2018)

 

 

 

 

 

 

Common stock, $0.001 par value per share (150,000,000 shares authorized, 96,670,197 and 83,911,855 shares issued, 96,628,888 and 83,870,546 shares outstanding at September 30, 2019 and December 31, 2018, respectively)

 

 

97

 

 

 

84

 

Additional paid-in capital

 

 

635,989

 

 

 

552,531

 

Treasury stock, at cost, 41,309 shares at September 30, 2019 and December 31, 2018

 

 

(234

)

 

 

(234

)

Accumulated deficit

 

 

(661,643

)

 

 

(528,345

)

Total stockholders’ (deficit) equity

 

 

(25,791

)

 

 

24,036

 

Total liabilities and stockholders’ (deficit) equity

 

$

93,327

 

 

$

83,616

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

TG Therapeutics, Inc.

Condensed Consolidated Statements of Operations

 (in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

License revenue

 

$

38

 

 

$

38

 

 

$

114

 

 

$

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Noncash stock expense associated with in–licensing agreements

 

 

 

 

 

 

 

 

100

 

 

 

4,000

 

Noncash compensation

 

 

1,482

 

 

 

644

 

 

 

4,323

 

 

 

4,391

 

Other research and development

 

 

56,503

 

 

 

32,754

 

 

 

118,814

 

 

 

98,724

 

Total research and development

 

 

57,985

 

 

 

33,398

 

 

 

123,237

 

 

 

107,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncash compensation

 

 

593

 

 

 

(817

)

 

 

1,391

 

 

 

7,037

 

Other general and administrative

 

 

2,321

 

 

 

1,785

 

 

 

6,580

 

 

 

6,212

 

Total general and administrative

 

 

2,914

 

 

 

968

 

 

 

7,971

 

 

 

13,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

60,899

 

 

 

34,366

 

 

 

131,208

 

 

 

120,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(60,861

)

 

 

(34,328

)

 

 

(131,094

)

 

 

(120,250

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

1,537

 

 

 

221

 

 

 

3,388

 

 

 

657

 

Other income

 

 

(468

)

 

 

(598

)

 

 

(1,183

)

 

 

(1,285

)

Total other expense (income), net

 

 

1,069

 

 

 

(377

)

 

 

2,205

 

 

 

(628

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(61,930

)

 

$

(33,951

)

 

$

(133,299

)

 

$

(119,622

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.69

)

 

$

(0.43

)

 

$

(1.55

)

 

$

(1.61

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic and diluted net loss per common share

 

 

89,667,979

 

 

 

78,221,069

 

 

 

85,911,878

 

 

 

74,399,243

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

 

 

TG Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(in thousands, except share amounts)

(Unaudited)

 

 

 

  Common Stock  

 

 

 

 

 

  Treasury Stock  

 

 

 

 

 

 

 

 

 

  Shares  

 

 

Amount 

 

 

Additional paid-in capital

 

 

  Shares  

 

 

Amount 

 

 

Accumulated Deficit

 

 

Total

 

Balance at January 1, 2018

 

 

73,181,750

 

 

$

73

 

 

$

422,017

 

 

 

41,309

 

 

$

(234

)

 

$

(354,863

)

 

$

66,993

 

Issuance of restricted stock

 

 

87,500

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(123,911

)

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in At-the-Market offerings (net of offering costs of $0.9 million)

 

 

3,989,344

 

 

 

4

 

 

 

52,426

 

 

 

 

 

 

 

 

 

 

 

 

52,430

 

Compensation in respect of restricted stock granted to employees, directors and consultants

 

 

 

 

 

 

 

 

7,337

 

 

 

 

 

 

 

 

 

 

 

 

7,337

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,529

)

 

 

(41,529

)

Balance at March 31, 2018

 

 

77,134,683

 

 

$

  77

 

 

$

  481,781

 

 

 

41,309

 

 

$

 (234

)

 

$

 (396,392

)

 

$

  85,232

 

Issuance of restricted stock

 

 

1,333,011

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(6,750

)

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in At-the-Market offerings (net of offering costs of $1.0 million)

 

 

3,744,605

 

 

 

4

 

 

 

52,018

 

 

 

 

 

 

 

 

 

 

 

 

52,022

 

Compensation in respect of restricted stock granted to employees, directors and consultants

 

 

 

 

 

 

 

 

4,264

 

 

 

 

 

 

 

 

 

 

 

 

4,264

 

Shares issued in connection with in-licensing agreements

 

 

333,868

 

 

 

*

 

 

 

4,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,142

)

 

 

(44,142

)

Balance at June 30, 2018

 

 

82,539,417

 

 

$

82

 

 

$

542,062

 

 

 

41,309

 

 

$

(234

)

 

$

(440,534

)

 

$

101,376

 

Issuance of restricted stock

 

 

100,700

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(24,785

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in At-the-Market offerings (net of offering costs of $0.1 million)

 

 

358,000

 

 

 

 

 

 

4,492

 

 

 

 

 

 

 

 

 

 

 

 

4,492

 

Compensation in respect of restricted stock granted to employees, directors and consultants

 

 

 

 

 

 

 

 

(173

)

 

 

 

 

 

 

 

 

 

 

 

(173

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,951

)

 

 

(33,951

)

Balance at September 30, 2018

 

 

82,973,332

 

 

$

83

 

 

$

546,380

 

 

 

41,309

 

 

$

(234

)

 

$

(474,485

)

 

$

71,744

 

 

 

 

  Common Stock  

 

 

 

 

 

  Treasury Stock  

 

 

 

 

 

 

 

 

 

  Shares  

 

 

Amount 

 

 

Additional paid-in capital

 

 

  Shares  

 

 

Amount

 

 

Accumulated Deficit

 

 

  Total  

 

Balance at January 1, 2019

 

 

83,911,855

 

 

$

84

 

 

$

552,531

 

 

 

41,309

 

 

$

(234

)

 

$

(528,345

)

 

$

24,036

 

Issuance of restricted stock

 

 

23,000

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issued with debt financing

 

 

 

 

 

 

 

 

993

 

 

 

 

 

 

 

 

 

 

 

 

993

 

Forfeiture of restricted stock

 

 

(67,628

)

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in public offering (net of offering costs of $0.2 million) 

 

 

4,715,000

 

 

 

5

 

 

 

27,494

 

 

 

 

 

 

 

 

 

 

 

 

27,499

 

Compensation in respect of restricted stock granted to employees, directors and consultants 

 

 

 

 

 

 

 

 

1,882

 

 

 

 

 

 

 

 

 

 

 

 

1,882

 

Net loss 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,156

)

 

 

(35,156

)

Balance at March 31, 2019

 

 

88,582,227

 

 

 

89

 

 

 

582,900

 

 

 

41,309

 

 

 

( 234

)

 

 

(563,501

)

 

 

19,254

 

Issuance of restricted stock

 

 

1,245,080

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(38,418

)

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in public offering 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

11

 

Issuance of common stock in At-the-Market offerings (net of offering costs of $0.5 million)

 

 

3,616,359

 

 

 

3

 

 

 

28,392

 

 

 

 

 

 

 

 

 

 

 

 

28,395

 

Compensation in respect of restricted stock granted to employees, directors and consultants

 

 

 

 

 

 

 

 

1,757

 

 

 

 

 

 

 

 

 

 

 

 

1,757

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,212

)

 

 

(36,212

)

Balance at June 30, 2019

 

 

93,405,248

 

 

$

93

 

 

$

613,059

 

 

 

41,309

 

 

$

(234

)

 

$

(599,713

)

 

$

13,205

 

Issuance of restricted stock

 

 

318,440

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(5,334

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in At-the-Market offerings (net of offering costs of $0.4 million)

 

 

2,943,460

 

 

 

4

 

 

 

20,755

 

 

 

 

 

 

 

 

 

 

 

 

20,759

 

Compensation in respect of restricted stock granted to employees, directors and consultants

 

 

 

 

 

 

 

 

2,075

 

 

 

 

 

 

 

 

 

 

 

 

2,075

 

Shares issued in connection with in-licensing agreements

 

 

8,383

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

100

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(61,930

)

 

 

(61,930

)

Balance at September 30, 2019

 

 

96,670,197

 

 

$

97

 

 

$

635,989

 

 

 

41,309

 

 

$

(234

)

 

$

(661,643

)

 

$

(25,791

)

 

* Amount less than one thousand dollars.

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

 

 

TG Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(133,299

)

 

$

(119,622

)

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

 

 

 

 

 

 

 

 

Noncash stock compensation expense

 

 

5,714

 

 

 

11,428

 

Noncash licensing expense 

 

 

100

 

 

 

4,000

 

Depreciation

 

 

72

 

 

 

64

 

Amortization of premium on investment securities

 

 

(209

)

 

 

(51

)

Amortization of debt issuance costs

 

 

539

 

 

 

 

Amortization of leasehold interest

 

 

137

 

 

 

98

 

Noncash change in lease liability and right-of-use asset

 

 

1,921

 

 

 

 

Change in fair value of notes payable and accrued interest

 

 

28

 

 

 

(37

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in prepaid research and development and other current assets

 

 

2,226

 

 

 

(3,421

)

Decrease in accrued interest receivable 

 

 

 

 

 

28

 

(Decrease) increase in accounts payable and accrued expenses

 

 

(3,837

)

 

 

12,321

 

Decrease in lease liability

 

 

(1,129

)

 

 

 

Increase in interest payable

 

 

787

 

 

 

 

Increase in other current liabilities

 

 

24,651

 

 

 

 

Increase in deferred rent

 

 

 

 

 

71

 

Decrease in deferred revenue

 

 

(114

)

 

 

(114

)

Net cash used in operating activities

 

 

(102,413

)

 

 

(95,235

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of equipment

 

 

(97

)

 

 

(84

)

Investment in short-term securities

 

 

(23,125

)

 

 

(24,574

)

Proceeds from maturity of short-term securities

 

 

22,500

 

 

 

25,600

 

Net cash (used in) provided by investing activities

 

 

(722

)

 

 

942

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net

 

 

76,664

 

 

 

108,945

 

Proceeds from debt financings

 

 

29,675

 

 

 

 

Financing costs paid

 

 

(480

)

 

 

 

Net cash provided by financing activities

 

 

105,859

 

 

 

108,945

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

2,724

 

 

 

14,652

 

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

43,199

 

 

 

57,305

 

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

 

$

45,923

 

 

$

71,957

 

 

 

 

 

 

 

 

 

 

Reconciliation to amounts on consolidated balance sheets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,675

 

 

$

70,718

 

Restricted cash

 

 

1,248

 

 

 

1,239

 

Total cash, cash equivalents and restricted cash 

 

$

45,923

 

 

$

71,957

 

 

 

 

 

 

 

 

 

 

NONCASH TRANSACTIONS:

 

 

 

 

 

 

 

 

Deferred financing costs

 

$

988

 

 

$

 

Warrants issued with debt financing

 

$

993

 

 

$

 

Shares issued in connection with in-licensing

 

$

100

 

 

$

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

7

 

 

 

TG Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Unless the context requires otherwise, references in this report to “TG,” the “Company,” “we,” “us” and “our” refer to TG Therapeutics, Inc. and our subsidiaries.

 

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

We are a biopharmaceutical company dedicated to developing and delivering medicines for patients with B-cell mediated diseases, including Chronic Lymphocytic Leukemia (CLL), non-Hodgkin Lymphoma (NHL) and Multiple Sclerosis (MS). We have developed a robust B-cell directed research and development (R&D) platform for identification of key B-cell pathways of interest and rapid clinical testing. Currently, we have five B-cell targeted drug candidates in clinical development, with the lead two therapies, ublituximab (TG-1101) and umbralisib (TGR-1202), in pivotal trials for CLL and NHL, with ublituximab also in pivotal trials for MS. Ublituximab is a novel anti-CD20 monoclonal antibody (mAb) that has been glycoengineered for enhanced potency over first generation antibodies. Umbralisib is an oral, once daily inhibitor of PI3K delta. Umbralisib also uniquely inhibits CK1-epsilon, which may allow it to overcome certain tolerability issues associated with first generation PI3K delta inhibitors. When used together in combination therapy, ublituximab and umbralisib are referred to as “U2”. Additionally, we have recently brought into Phase 1 clinical development TG-1501, an anti-PD-L1 monoclonal antibody, TG-1701, a covalently-bound Bruton’s Tyrosine Kinase (BTK) inhibitor, and TG-1801, an anti-CD47/CD19 bispecific antibody.

 

We also actively evaluate complementary products, technologies and companies for in-licensing, partnership, acquisition and/or investment opportunities. To date, we have not received approval for the sale of any of our drug candidates in any market and, therefore, have not generated any product sales from our drug candidates.

 

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X of the Exchange Act. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the condensed consolidated financial statements have been included. Nevertheless, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying condensed December 31, 2018 balance sheet has been derived from these statements. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

 

In December 2018, the Company created an Australian corporation, TG Therapeutics AUS Pty Ltd, as a wholly-owned subsidiary. This corporation’s functional currency, the Australian dollar, is also its reporting currency, and its financial statements are translated to U.S. dollars, the Company’s reporting currency, prior to consolidation. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, and all intercompany accounts and transactions have been eliminated in consolidation.

 

Liquidity and Capital Resources

 

We have incurred operating losses since our inception, expect to continue to incur operating losses for the foreseeable future, and may never become profitable. As of September 30, 2019, we have an accumulated deficit of approximately $661.6 million.

 

Our major sources of cash have been proceeds from the private placement and public offering of equity securities, as well as debt financings. We have not yet commercialized any of our drug candidates and cannot be sure if we will ever be able to do so. Even if we commercialize one or more of our drug candidates, we may not become profitable. Our ability to achieve profitability depends on many factors, including our ability to obtain regulatory approval for our drug candidates; successfully complete any post-approval regulatory obligations; and successfully commercialize our drug candidates alone or in partnership. We may continue to incur substantial operating losses even if we begin to generate revenues from our drug candidates.

 

As of September 30, 2019, we had $72.5 million in cash and cash equivalents, and investment securities. The Company believes its cash, cash equivalents, and investment securities on hand as of September 30, 2019 along with the additional capital raised in the fourth quarter of 2019 (see Note 5) will provide sufficient liquidity for more than a twelve-month period from the date of filing this Quarterly Report on Form 10-Q. The actual amount of cash that we will need to operate is subject to many factors, including, but not limited to, the timing, design and conduct of clinical trials for our drug candidates. We are dependent upon significant future financing to provide the cash necessary to execute our current operations, including the commercialization of any of our drug candidates.

 

Our common stock is listed on the Nasdaq Capital Market and trades under the symbol “TGTX.”

 

8

 

 

 

Recently Issued Accounting Standards

 

In July 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-11, “Leases - Targeted Improvements” (“ASU 2018-11”) as an update to ASU 2016-02, Leases (“ASU 2016-02” or “Topic 842”) issued on February 25, 2016. ASU 2016-02 is effective for public business entities for fiscal years beginning January 1, 2019. ASU 2016-02 required companies to adopt the new leases standard at the beginning of the earliest period presented in the financial statements, which is January 1, 2017, using a modified retrospective transition method where lessees must recognize lease assets and liabilities for all leases even though those leases may have expired before the effective date of January 1, 2017. Lessees must also provide the new and enhanced disclosures for each period presented, including the comparative periods.

 

ASU 2018-11 provides an entity with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with ASC 840, “Leases” (“ASC 840”). An entity that elects this additional (and optional) transition method must provide the required ASC 840 disclosures for all periods that continue to be in accordance with ASC 840. The amendments do not change the existing disclosure requirements in ASC 840.

 

ASU 2018-11 is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier adoption permitted. The Company adopted ASU 2018-11 on January 1, 2019 using a modified retrospective method and will not restate comparative periods. We elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification and our assessment on whether a contract is or contains a lease. The adoption of this guidance resulted in the addition of material balances of right of use assets and lease liability to our consolidated balance sheets at January 1, 2019, primarily relating to our lease of office space (see Note 8). The impact to our consolidated statements of operations was not material as a result of this standard.

 

In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 expands the scope of FASB Topic 718, Compensation – Stock Compensation (“Topic 718”) to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should only remeasure equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The entity must not remeasure assets that are completed. Disclosures required at transition include the nature of and reason for the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other components of equity.

 

ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material effect on our consolidated financial statements as of January 1, 2019. The adoption of ASU 2018-07 had no impact on nonemployee performance awards as they are measured based on the outcome that is probable.

 

Other pronouncements issued by the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant to our consolidated financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the applicable reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. Actual results could differ from those estimates. Such differences could be material to the financial statements.

 

 

9

 

 

 

Cash and Cash Equivalents

 

We treat liquid investments with original maturities of less than three months when purchased as cash and cash equivalents.

 

Restricted Cash

 

We record cash pledged or held in trust as restricted cash. As of September 30, 2019 and December 31, 2018, we have approximately $1.2 million of restricted cash pledged to secure a line of credit as a security deposit for an Office Agreement (see Note 8).

 

Investment Securities

 

Investment securities at September 30, 2019 and December 31, 2018 consist of short-term government securities. We classify these securities as held-to-maturity. Held-to-maturity securities are those securities in which we have the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.

 

A decline in the market value of any investment security below cost, that is deemed to be other than temporary, results in a reduction in the carrying amount to fair value. The impairment is charged to operations and a new cost basis for the security is established. Other-than-temporary impairment charges are included in interest and other income (expense), net. Unrealized gains, if determined to be temporary, are included in accumulated other comprehensive income in equity. Dividend and interest income are recognized when earned.

 

Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company maintains its cash and cash equivalents and short-term investments with high-credit quality financial institutions. At times, such amounts may exceed federally-insured limits.

 

Revenue Recognition

 

Effective January 1, 2018, the Company began recognizing revenue under ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue standard was not material to our consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2018. The core principle of this new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

 

Step 1: Identify the contract with the customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to the performance obligations in the contract

 

Step 5: Recognize revenue when the company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

 

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct).

 

The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

 

 

10

 

 

 

Research and Development Costs

 

Generally, research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. We make estimates of costs incurred in relation to external clinical research organizations, or CROs, and clinical site costs. We analyze the progress of clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of the amount expensed and the related prepaid asset and accrued liability. Significant judgments and estimates must be made and used in determining the accrued balance and expense in any accounting period. We review and accrue CRO expenses and clinical trial study expenses based on work performed and rely upon estimates of those costs applicable to the stage of completion of a study. Accrued CRO costs are subject to revisions as such trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. With respect to clinical site costs, the financial terms of these agreements are subject to negotiation and vary from contract to contract. Payments under these contracts may be uneven, and depend on factors such as the achievement of certain events, the successful recruitment of patients, the completion of portions of the clinical trial or similar conditions. The objective of our policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical site costs are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.

 

Prepaid research and development in our condensed consolidated balance sheets includes, among other things, certain costs to third party service providers related to development and manufacturing services as well as clinical development. These agreements often require payments in advance of services performed or goods received. Accordingly, as of September 30, 2019 and December 31, 2018, we recorded approximately $7.0 million and $9.7 million, respectively, in prepaid research and development related to such advance agreements.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. If the likelihood of realizing the deferred tax assets or liability is less than “more likely than not,” a valuation allowance is then created.

 

We, and our subsidiaries, file income tax returns in the U.S. Federal jurisdiction and in various states. We have tax net operating loss carryforwards that are subject to examination for a number of years beyond the year in which they were generated for tax purposes. Since a portion of these net operating loss carryforwards may be utilized in the future, many of these net operating loss carryforwards will remain subject to examination. We recognize interest and penalties related to uncertain income tax positions in income tax expense.

 

Stock-Based Compensation

 

We recognize all stock-based payments to employees and non-employee directors (as compensation for service) as noncash compensation expense in the condensed consolidated financial statements based on the fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

In addition, because some of the options, restricted stock and warrants issued to employees, consultants and other third-parties vest upon achievement of certain milestones, the total expense is uncertain. Compensation expense for such awards that vest upon the achievement of milestones is recognized when the achievement of such milestones becomes probable.

 

 

11

 

 

 

 

Basic and Diluted Net Loss Per Common Share

 

Basic net loss per share of our common stock is calculated by dividing net loss applicable to the common stock by the weighted average number of our common stock outstanding for the period. Diluted net loss per share of common stock is the same as basic net loss per share of common stock since potentially dilutive securities from stock options, stock warrants and convertible preferred stock would have an antidilutive effect either because we incurred a net loss during the periods presented or because such potentially dilutive securities were out of the money and the Company realized net income during the periods presented. The amounts of potentially dilutive securities excluded from the calculation were 8,060,758 and 5,230,922 for the three and nine months ended September 30, 2019 and 2018, respectively.

 

The following outstanding shares of potentially dilutive securities were excluded from the computation of net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:

 

 

 

Three and Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Unvested restricted stock

 

 

5,357,204

 

 

 

4,604,775

 

Stock options

 

 

2,539,540

 

 

 

610,000

 

Warrants

 

 

147,058

 

 

 

 

Shares issuable upon note conversion

 

 

16,956

 

 

 

16,147

 

Total

 

 

8,060,758

 

 

 

5,230,922

 

Long-Lived Assets and Goodwill

 

Long-lived assets are reviewed for potential impairment when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, we make certain assumptions in determining the impairment amount. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized.

 

Goodwill is reviewed for impairment annually, or earlier when events arise that could indicate that an impairment exists. We test for goodwill impairment using a two-step process. The first step compares the fair value of the reporting unit with the unit’s carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit’s goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the unit’s goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value. We will continue to perform impairment tests annually, at December 31, and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable.

 

NOTE 2 – CASH AND CASH EQUIVALENTS

 

The following tables summarize our cash and cash equivalents at September 30, 2019 and December 31, 2018:

 

(in thousands)

 

  September 30, 2019  

 

 

  December 31, 2018  

 

 

 

 

 

 

 

 

 

 

Checking and bank deposits

 

$

42,302

 

 

$

39,268

 

Money market funds

 

 

2,373

 

 

 

2,690

 

Total

 

$

44,675

 

 

$

41,958

 

NOTE 3 – INVESTMENT SECURITIES

 

Our investments as of September 30, 2019 and December 31, 2018 are classified as held-to-maturity. Held-to-maturity investments are recorded at amortized cost.

 

The following tables summarize our investment securities at September 30, 2019 and December 31, 2018:

 

(in thousands)

 

  September 30, 2019  

 

 

 

Amortized cost, as adjusted

 

 

Gross unrealized holding gains

 

 

Gross unrealized holding losses

 

 

Estimated fair value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of domestic governmental agencies (maturing between October 2019 and September 2020) (held-to-maturity)

 

$

27,776

 

 

$

35

 

 

$

3

 

 

$

27,808

 

Total short-term investment securities

 

$

27,776

 

 

$

35

 

 

$

3

 

 

$

27,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  December 31, 2018  

 

 

 

Amortized cost, as adjusted

 

 

Gross unrealized holding gains

 

 

Gross unrealized holding losses

 

 

Estimated fair value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of domestic governmental agencies (maturing between January 2019 and November 2019) (held-to-maturity)

 

$

26,943

 

 

$

2

 

 

$

10

 

 

$

26,935

 

Total short-term investment securities

 

$

26,943

 

 

$

2

 

 

$

10

 

 

$

26,935

 

NOTE 4 – FAIR VALUE MEASUREMENTS

 

We measure certain financial assets and liabilities at fair value on a recurring basis in the condensed consolidated financial statements. The fair value hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

 

Level 1 – quoted prices in active markets for identical assets and liabilities;

 

 

Level 2 – inputs other than Level 1 quoted prices that are directly or indirectly observable; and

 

 

Level 3 – unobservable inputs that are not corroborated by market data.

 

12

 

 

As of September 30, 2019 and December 31, 2018, the fair values of cash and cash equivalents, restricted cash, and notes and interest payable, approximate their carrying value.

 

At the time of our merger (we were then known as Manhattan Pharmaceuticals, Inc.) with Ariston Pharmaceuticals, Inc. (“Ariston”) in March 2010, Ariston issued $15.5 million of five-year 5% notes payable (the “5% Notes”) in satisfaction of several note payable issuances. The 5% Notes and accrued and unpaid interest thereon are convertible at the option of the holder into common stock at the conversion price of $1,125 per share. Ariston agreed to make quarterly payments on the 5% Notes equal to 50% of the net product cash flow received from the exploitation or commercialization of Ariston’s product candidates, AST-726 and AST-915. We have no obligations under the 5% Notes aside from (a) 50% of the net product cash flows from Ariston’s product candidates, if any, payable to noteholders; and (b) the conversion feature, discussed above.

 

The cumulative liability to the Ariston subsidiary including accrued and unpaid interest of the 5% Notes was approximately $19.1 million at September 30, 2019 and $18.4 million at December 31, 2018. No payments have been made on the 5% Notes since the merger and through September 30, 2019.

 

In December 2011, we elected the fair value option for valuing the 5% Notes. The fair value option was elected in order to reflect in our financial statements the assumptions that market participants use in evaluating these financial instruments.

 

As of December 31, 2013, as a result of expiring intellectual property rights and other factors, it was determined that net product cash flows from AST-726 were unlikely. As we have no other obligations under the 5% Notes aside from the net product cash flows and the conversion feature, the conversion feature was used to estimate the 5% Notes’ fair value as of September 30, 2019 and December 31, 2018. The assumptions, assessments and projections of future revenues are subject to uncertainties, difficult to predict, and require significant judgment. The use of different assumptions, applying different judgment to inherently subjective matters and changes in future market conditions could result in significantly different estimates of fair value and the differences could be material to our condensed consolidated financial statements.

 

The following tables provide the fair value measurements of applicable financial liabilities as of September 30, 2019 and December 31, 2018:

 

(in thousands)

 

  Financial liabilities at fair value as of September 30, 2019  

 

 

 

  Level 1  

 

 

  Level 2  

 

 

  Level 3  

 

 

  Total  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5% Notes

 

$

 

 

$

 

 

$

95

 

 

$

95

 

Total

 

$

 

 

$

 

 

$

95

 

 

$

95

 

 

 

 

  Financial liabilities at fair value as of December 31, 2018  

 

 

 

  Level 1  

 

 

  Level 2  

 

 

  Level 3  

 

 

  Total  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5% Notes

 

$

 

 

$

 

 

$

67

 

 

$

67

 

Total

 

$

 

 

$

 

 

$

67

 

 

$

67

 

The Level 3 amounts above represent the fair value of the 5% Notes and related accrued interest.

 

The Company’s financial instruments include cash, cash equivalents consisting of money market funds, accounts payable and debt. Cash, cash equivalents, accounts payable and debt are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature.

 

13

 

 

 

The following table summarizes the changes in Level 3 instruments during the nine months ended September 30, 2019:

 

(in thousands)

 

    

 

 

 

 

 

 

Fair value at December 31, 2018

 

$

67

 

Interest accrued on face value of 5% Notes

 

 

690

 

Change in fair value of Level 3 liabilities

 

 

(662

)

Fair value at September 30, 2019

 

$

95

 

The change in the fair value of the Level 3 liabilities is reported in other (income) expense in the accompanying condensed consolidated statements of operations.

 

NOTE 5 - STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Our amended and restated certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, $ 0.001 par value, with rights senior to those of our common stock, issuable in one or more series. Upon issuance, we can determine the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock.

 

Common Stock

 

Our amended and restated certificate of incorporation authorizes the issuance of up to 150,000,000 shares of $ 0.001 par value common stock.

 

In May 2017, we filed a shelf registration statement on Form S-3 (the “2017 S-3”), which was declared effective in June 2017, replacing the 2015 S-3. Under the 2017 S-3, the Company may sell up to a total of $300 million of its securities. In connection with the 2017 S-3, we entered into an At-the-Market Issuance Sales Agreement (the “2017 ATM”) with Jefferies LLC, Cantor Fitzgerald & Co., FBR Capital Markets & Co., SunTrust Robinson Humphrey, Inc., Raymond James & Associates, Inc., Ladenburg Thalmann & Co. Inc. and H.C. Wainwright & Co., LLC (each a “2017 Agent” and collectively, the “2017 Agents”), relating to the sale of shares of our common stock. Under the 2017 ATM we pay the 2017 Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock.

 

In March 2019, we completed an underwritten public offering of 4,100,000 shares of our common stock (plus a 30-day underwriter overallotment option to purchase up to an additional 615,000 shares of common stock, which was exercised), at a price of $5.87 per share. Proceeds from this offering, including the overallotment, after underwriting discounts and offering expenses were approximately $27.5 million.

 

During the nine months ended September 30, 2019, we sold a total of 6,559,819 shares of common stock under the 2017 ATM for aggregate total gross proceeds of approximately $50.0 million at an average selling price of $7.62 per share, resulting in net proceeds of approximately $49.2 million after deducting commissions and other transactions costs.

 

Subsequent to the third quarter, from October 1, 2019 through November 12, 2019, we sold an aggregate of 3,641,346 shares of common stock pursuant to the 2017 ATM for aggregate total gross proceeds of approximately $22.4 million at an average selling price of $6.16 per share, resulting in net proceeds of approximately $22.1 million after deducting commissions and other transactions costs.

 

 The 2017 S-3 is currently our only active shelf registration statement. After deducting shares already sold there is approximately $36.3 million of common stock that remains available for sale under the 2017 S-3. We may offer the securities under the 2017 S-3 from time to time in response to market conditions or other circumstances if we believe such a plan of financing is in the best interests of our stockholders. We believe that the 2017 S-3 provides us with the flexibility to raise additional capital to finance our operations as needed.

14

 

 

Equity Incentive Plans

 

The TG Therapeutics, Inc. Amended and Restated 2012 Incentive Plan (“2012 Incentive Plan”) was approved by stockholders in June 2018. As of September 30, 2019, 6,857,207 shares of restricted stock and 2,539,540 options were outstanding and up to an additional 1,114,263 shares may be issued under the 2012 Incentive Plan.

 

Effective as of January 1, 2017, we entered into an amendment (the “Amendment”) to the employment agreement entered as of December 15, 2011 (together with the Amendment, the “Employment Agreement”) with Michael S. Weiss, our Executive Chairman and Chief Executive Officer and President. Under the Amendment, Mr. Weiss will remain as Chief Executive Officer and President, removing the interim status. Simultaneously, we entered into a Strategic Advisory Agreement (the “Advisory Agreement”) with Caribe BioAdvisors, LLC (the “Advisor”) owned by Mr. Weiss to provide the services of Mr. Weiss as Chairman of the Board and as Executive Chairman. As part of the Amendment, Mr. Weiss also agreed to forfeit 3,381,866 restricted shares previously granted under the Employment Agreement that were predominantly subject to time-based vesting over the next three years. Simultaneously, (i) Mr. Weiss was issued 418,371 restricted shares under the Employment Agreement that vest in 2018 and 2019 and (ii) the Advisor was issued 2,960,000 restricted shares under the Advisory Agreement that vested on market capitalization thresholds ranging from $375 million to $750 million. In accordance with GAAP, there was no incremental stock compensation expense recognition as a result of the modification.

 

Stock Options

 

The following table summarizes stock option activity for the nine months ended September 30, 2019:

 

 

 

Number of shares

 

 

Weighted- average exercise price

 

 

Weighted- average contractual term

 

 

Aggregate

intrinsic value

 

 

 

 

 

 

 

 

 

 

 

 

  (in years)  

 

 

 

 

 

Outstanding at December 31, 2018

 

 

1,916,900

 

 

$

6.50

 

 

 

9.75

 

 

$

 

Granted

 

 

740,000

 

 

 

6.90

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(117,360)

 

 

 

6.25

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2019

 

 

2,539,540

 

 

$

6.63

 

 

 

9.14

 

 

$

1,849,055

 

Expected to vest at September 30, 2019

 

 

2,539,540

 

 

$

6.63

 

 

 

9.14

 

 

$

1,849,055

 

Exercisable at September 30, 2019

 

 

 

 

$

 

 

 

 

 

$

 

Total expense associated with the stock options was approximately $0.8 million and zero during the three months ended September 30, 2019 and 2018, respectively, and $2.3 million and zero during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was approximately $3.4 million of total unrecognized compensation cost related to unvested time-based stock options, which is expected to be recognized over a weighted-average period of 1.72 years. As of September 30, 2019, the stock options outstanding include options granted to both employees and non-employees which are both time-based and milestone-based. Stock-based compensation for milestone-based options will be recorded if and when a milestone occurs.

 

The fair value of the Company’s option awards granted during the nine months ended September 30, 2019 and 2018 were estimated on the grant date using the Black-Scholes option-pricing model using the assumptions below:

 

 

 

Nine months ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Volatility

 

 

172.99-291.61

 

 

 

186.99-305.77

 

Expected term (in years)

 

 

5.0-6.25

 

 

 

5.0-6.25

 

Risk-free rate

 

 

1.96-2.49

%

 

 

2.56-2.72

%

Expected dividend yield

 

 

%

 

 

%

 

 

15

 

 

 

Restricted Stock

 

Certain employees, directors and consultants have been awarded restricted stock. The restricted stock vesting consists of milestone and time-based vesting.

 

 

The following table summarizes restricted share activity for the nine months ended September 30, 2019:

 

 

 

Number of Shares

 

 

Weighted Average Grant Date Fair Value

 

Outstanding at December 31, 2018

 

 

6,095,692

 

 

$

8.07

 

Granted

 

 

1,586,520

 

 

 

12.95

 

Vested

 

 

(713,625

)

 

 

9.21

 

Forfeited

 

 

(111,380

)

 

 

7.84

 

Outstanding at September 30, 2019

 

 

6,857,207

 

 

$

7.68

 

Total expense associated with restricted stock grants was approximately $1.3 million and $(0.2) million during the three months ended September 30, 2019 and 2018, respectively, and $3.4 million, and $11.4 million during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was approximately $5.3 million of total unrecognized compensation cost related to unvested time-based restricted stock, which is expected to be recognized over a weighted-average period of 1.2 years. This amount does not include, as of September 30, 2019, 4,182,391 shares of restricted stock outstanding which are milestone-based and vest upon certain corporate milestones. Until the measurement date is reached for milestone awards, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the grant date.

 

Stock-Based Compensation

 

The following table summarizes stock-based compensation expense information about restricted stock and stock options for the three and nine months ended September 30, 2019:

 

(in thousands)

 

Three months ended September 30, 2019

 

 

Nine months ended September 30, 2019

 

Stock-based compensation expense associated with restricted stock

 

$

1,253

 

 

$

3,381

 

Stock-based compensation expense associated with option grants

 

 

822

 

 

 

2,333

 

Total

 

$

2,075

 

 

$

5,714

 

Warrants

 

The following table summarizes warrant activity for the nine months ended September 30, 2019:

 

 

 

Warrants

 

 

Weighted-average exercise price

 

 

Aggregate Intrinsic Value

 

Outstanding at December 31, 2018

 

 

 

 

$

 

 

$

 

Issued

 

 

147,058

 

 

 

4.08

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2019

 

 

147,058

 

 

$

4.08

 

 

$

224,999

 

There was no stock compensation expense related to warrants during the nine months ended September 30, 2019.

 

NOTE 6 – OTHER LIABILITIES

 

The following is a summary of Notes Payable included in other current liabilities on the Company’s condensed consolidated balance sheet:

 

 

  September 30, 2019  

 

 

  December 31, 2018  

 

(in thousands)

 

Current

portion, net

 

 

Non-current portion, net

 

 

Total

 

 

Current portion, net

 

 

Non-current portion, net

 

 

Total

 

Convertible 5% Notes Payable

 

$

95

 

 

$

 

 

$

95

 

 

$

67

 

 

$

 

 

$

67

 

Total

 

$

95

 

 

$

 

 

$

95

 

 

$

67

 

 

$

 

 

$

67

 

16

 

 

 

Convertible 5% Notes Payable

 

The 5% Notes and accrued and unpaid interest thereon are convertible at the option of the holder into common stock at the conversion price of $1,125 per share. We have no obligation under the 5% Notes aside from (a) 50% of the net product cash flows from Ariston’s product candidates, if any, payable to noteholders; and (b) the conversion feature, discussed above. Interest accrues monthly, is added to principal on an annual basis, every March 8, and is payable at maturity, which was March 8, 2015 (see Note 4 for further details).

 

The cumulative liability including accrued and unpaid interest of these notes was approximately $19.1 million at September 30, 2019 and $18.4 million at December 31, 2018. No payments have been made on the 5% Notes as of September 30, 2019.

 

In December 2011, we elected the fair value option for valuing the 5% Notes. The fair value option was elected in order to reflect in our financial statements the assumptions that market participants use in evaluating these financial instruments (see Note 4 for further details).

 

Current Liabilities

 

In 2018, we entered into an agreement with a contract manufacturer for the clinical and potential commercial supply of one of our product candidates. As part of this agreement, the contract manufacturer has agreed to defer payment of certain costs and expenses under the agreement in exchange for the payment of an administrative fee. To date we have incurred expenses related to this agreement of approximately $43.0 million as of September 30, 2019, which include both service fees and raw material costs. No payments have been made to the contract manufacturer as of September 30, 2019. Accordingly, as of September 30, 2019, $43.0 million is included in current liabilities in the Company’s unaudited condensed consolidated balance sheet, of which $17.7 million, $4.0 million and $21.3 million are due in the first, second and third quarter of 2020, respectively. As of December 31, 2018, $18.4 million is included in long-term liabilities in the Company’s condensed consolidated balance sheet. We will incur an administrative fee of six percent (6%) per year starting from the date of invoice issuance. For the three and nine months ended September 30, 2019, we have accrued $0.5 million in administrative fees in connection with these costs, which has been included in interest expense in the Company’s unaudited condensed consolidated statements of operations.

 

NOTE 7 – LONG-TERM DEBT

 

On February 28, 2019 (the “Closing Date”), the Company (“Borrower”) entered into a term loan facility of up to $60.0 million (“Term Loan”) with Hercules Capital, Inc., (“Hercules”), the proceeds of which will be used for its ongoing research and development programs and for general corporate purposes. The Term Loan is governed by a loan and security agreement, dated February 28, 2019 (the “Loan Agreement”), which provides for up to four separate advances. The first advance of $30.0 million was drawn on the Closing Date. Two additional advances of $10.0 million may be drawn at the Borrower’s option but subject to the clinical trial milestones, and the fourth advance of $10.0 million, available in minimum increments of $5.0 million, is available through December 15, 2020 subject to the approval of Hercules’ investment committee.

 

17

 

 

The Term Loan will mature on March 1, 2022 (the “Loan Maturity Date”). Each advance accrues interest at a per annum rate of interest equal to the greater of either (i) the “prime rate” as reported in The Wall Street Journal plus 4.75%, and (ii) 10.25%. The Term Loan provides for interest-only payments until October 1, 2020. The interest-only period may be extended to April 1, 2021 if the Borrower, on or before September 30, 2020, achieves either the third milestone or the Company has raised at least an amount equal to $150.0 million in unrestricted net cash proceeds from one or more equity financings, subordinated indebtedness and/or upfront proceeds from business development transactions permitted under the Loan Agreement, in each case after February 7, 2019, and prior to September 30, 2020. Thereafter, amortization payments will be payable monthly in eighteen installments (or, if the period requiring interest-only payments has been extended to April 1, 2021, in twelve installments) of principal and interest (subject to recalculation upon a change in prime rates). At its option upon seven business days’ prior written notice to Hercules, the Company may prepay all or any portion greater than or equal to $5.0 million of the outstanding advances by paying the entire principal balance (or portion thereof), all accrued and unpaid interest, subject to a prepayment charge of 3.0%, if such advance is prepaid in any of the first twelve months following the Closing Date, 1.5%, if such advance is prepaid after twelve months following the Closing Date but on or prior to twenty-four months following the Closing Date, and 0% thereafter. In addition, an end of term charge equal to 3.25% of the aggregate principal amount of the loan extended by Hercules is due on the maturity date. Amounts outstanding during an event of default shall be payable on demand and shall accrue interest at an additional rate of 4.0% per annum of the past due amount outstanding.

 

The Term Loan is secured by a lien on substantially all of the assets of the Borrower, other than intellectual property and contains customary covenants and representations, including a liquidity covenant, financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries. As of September 30, 2019, the Company has been in compliance with all covenants.

 

The events of default under the Loan Agreement include, without limitation, and subject to customary grace periods, (1) the Borrower’s failure to make any payments of principal or interest under the Loan Agreement, promissory notes or other loan documents, (2) the Borrower’s breach or default in the performance of any covenant under the Loan Agreement, (3) the occurrence of a material adverse effect, (4) the Borrower making a false or misleading representation or warranty in any material respect, (5) the Borrower’s insolvency or bankruptcy, (6) certain attachments or judgments on the Borrower’s assets, or (7) the occurrence of any material default under certain agreements or obligations of the Borrower involving indebtedness in excess of $750,000. If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the Loan Agreement.

 

The Loan Agreement also contains warrant coverage of 2% of the total amount funded. A warrant (the “Warrant”) was issued by Borrower to Hercules to purchase 147,058 shares of common stock with an exercise price of $4.08. The Warrant shall be exercisable for seven years from the date of issuance. Hercules may exercise the Warrant either by (a) cash or check or (b) through a net issuance conversion. The shares will be registered and freely tradeable within six months of issuance. The Company accounted for the Warrant as an equity instrument since it was indexed to the Company’s common shares and met the criteria for classification in shareholders’ equity. The relative fair value of the Warrant on the date of issuance was approximately $1.0 million and was treated as an offset to the Term Loan. This amount will be amortized to interest expense using the straight line method, which approximates the effective interest method, over the life of the Term Loan.

 

The Company estimated the fair value of the Warrant using the Black-Scholes model based on the following key assumptions:

 

Exercise Price

 

$

4.08

 

Common share price on date of issuance

 

$

6.80

 

Volatility

 

 

195.9

%

Risk-free interest rate

 

 

2.63

%

Expected dividend yield

 

 

%

Contractual term (in years)

 

 

7.00 years

 

The Company incurred financing expenses of $2.8 million related to the Hercules Loan Agreement which are recorded as an offset to long-term debt on the Company’s condensed consolidated balance sheet. The debt issuance costs are being amortized over the term of the debt using the straight-line method, which approximates the effective interest method, and are included in interest expense in the Company’s unaudited condensed consolidated statements of operations. Amortization of debt issuance costs was $0.2 million and $0.5 million for the three and nine months ended September 30, 2019, respectively. At September 30, 2019, the remaining unamortized balance of debt issuance costs were $2.2 million.

 

18

 

 

 

 

Long-term debt as of as of September 30, 2019, is as follows (in thousands):

 

 

 

September 30, 2019

 

Long-term debt

 

$

30,000

 

End of term fee

 

 

975

 

 

 

 

30,975

 

Less: unamortized debt issuance costs

 

 

(2,234

)

 

 

 

28,741

 

Less: Current portion

 

 

 

Long-term debt– non-current

 

$

28,741

 

NOTE 8 – LEASES

 

In October 2014, we entered into an agreement (the “Office Agreement”) with Fortress Biotech, Inc. (“FBIO”) to occupy approximately 45% of the 24,000 square feet of New York City office space leased by FBIO, which is now our corporate headquarters. The Office Agreement requires us to pay our respective share of the average annual rent and other costs of the 15-year lease. We approximate an average annual rental obligation of $1.1 million under the Office Agreement. We began to occupy this new space in April 2016, with rental payments beginning in the third quarter of 2016. At January 1, 2019 we recognized a lease liability and corresponding Right of Use (ROU) asset based on the present value of the remaining lease payments for all of our leased office spaces, the majority of which is comprised of our New York City office space. The present values of our lease liability and corresponding ROU asset are $10.7 million and $8.5 million, respectively, as of September 30, 2019. Our leases have remaining lease terms of 1 year to 12 years. One lease has a renewal option to extend the lease for an additional term of 2 years.

 

The initial commitment period of the 45% rate is for a period of three (3) years. We and FBIO currently determine actual office space utilization annually and if our utilization differs from the amount we have been billed, we will either receive credits or be assessed incremental utilization charges. Also in connection with this lease, in October 2014 we pledged $0.6 million to secure a line of credit as a security deposit for the Office Agreement, which has been recorded as restricted cash in the accompanying consolidated balance sheets. Additional collateral of $0.6 million was pledged in April 2018 to increase the letter of credit for the office space.

 

The following components of lease expense are included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2019:

 

 

 

Three months ended,

 

 

Nine months ended,

 

(in thousands)

 

September 30, 2019

 

 

September 30, 2019

 

Operating lease cost

 

$

1,065

 

 

$

2,058

 

Net lease cost

 

$

1,065 

 

 

$

2,058

 

As of September 30, 2019, the weighted-average remaining operating lease term was 9.5 years and the weighted-average discount rate for operating leases was 10.25%. Cash paid for amounts included in the measurement of operating lease liabilities during the nine months ended September 30, 2019 was $1.1 million.

 

The balance sheet classification of lease liabilities was as follows:

 

(in thousands)

 

September 30, 2019

 

Liabilities

 

 

 

 

Lease liability – current portion

 

$

1,365

 

Lease liability – non-current

 

 

9,380

 

Total lease liability

 

$

10,745

 

19

 

 

 

As of September 30, 2019, the maturities of lease liabilities were as follows:

 

(in thousands)

 

Operating leases

 

Remainder of 2019

 

$

393

 

2020

 

 

1,551

 

2021

 

 

1,560

 

2022

 

 

1,586

 

2023

 

 

1,581

 

After 2023

 

 

12,061

 

Total lease payments

 

 

18,732

 

Less: Interest

 

 

(7,987

)

Present value of lease liabilities(*)

 

$

10,745

 

(*) As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date and considering the term of the lease to determine the present value of lease payments. We used the incremental borrowing rate of 10.25% on February 28, 2019, for operating leases that commenced prior to that date.

 

NOTE 9 – LICENSE AGREEMENTS

 

TG-1101 (Ublituximab)

 

In November 2012, we entered into an exclusive (within the territory) sublicense agreement with Ildong Pharmaceutical Co. Ltd. (“Ildong”) relating to the development and commercialization of ublituximab in South Korea and Southeast Asia. Under the terms of the sublicense agreement, Ildong has been granted a royalty bearing, exclusive right, including the right to grant sublicenses, to develop and commercialize ublituximab in South Korea, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam, and Myanmar.

 

An upfront payment of $2.0 million, which was received in December 2012, net of $0.3 million of income tax withholdings, is being recognized as license revenue on a straight-line basis over the life of the agreement, which is through the expiration of the last licensed patent right or 15 years after the first commercial sale of a product in such country, unless the agreement is earlier terminated, and represents the estimated period over which we will have certain ongoing responsibilities under the sublicense agreement. We recorded license revenue of approximately $38,000 for each of the three months ended September 30, 2019 and 2018, and $114,000 for each of the nine months ended September 30, 2019 and 2018 and, at September 30, 2019 and December 31, 2018, have deferred revenue of approximately $1.0 million and $1.1 million, respectively, associated with this $2 million payment (approximately $152,000 of which has been classified in current liabilities at September 30, 2019 and December 31, 2018).

 

We may receive up to an additional $5.0 million in payments upon the achievement of pre-specified milestones. In addition, upon commercialization, Ildong will make royalty payments to us on net sales of ublituximab in the sublicense territory.

 

TG-1701: BTK

 

In January 2018, we entered into a global exclusive license agreement with Jiangsu Hengrui Medicine Co. (“Hengrui”), to acquire worldwide intellectual property rights, excluding Asia but including Japan, and for the research, development, manufacturing, and commercialization of products containing or comprising of any of Hengrui’s Bruton’s Tyrosine Kinase inhibitors containing the compounds of either TG-1701 (SHR1459 or EBI1459) or TG1702 (SHR1266 or EBI1266). Pursuant to the agreement, in April 2018, we paid Jiangsu an upfront fee of $1.0 million in our common stock recorded to noncash stock expense associated with in-licensing agreements in our condensed consolidated statement of operations. In addition, in July 2019, we paid Jiangsu the first milestone of $0.1 million in our common stock recorded to noncash stock expense associated with in-licensing agreements in our consolidated statement of operations. Jiangsu is eligible to receive milestone payments totaling approximately $350 million upon and subject to the achievement of certain milestones. Various provisions allow for payments in conjunction with the agreement to be made in cash or our common stock, while others limit the form of payment. Royalty payments in the low double digits are due on net sales of licensed products and revenue from sublicenses.

 

TG-1801: anti-CD47/anti-CD19

 

In June 2018, we entered into a Joint Venture and License Option Agreement with Novimmune SA (“Novimmune”) to collaborate on the development and commercialization of Novimmune’s novel first-in-class anti-CD47/anti-CD19 bispecific antibody known as TG-1801 (previously NI-1701). The companies will jointly develop the product on a worldwide basis, focusing on indications in the area of hematologic B-cell malignancies. We serve as the primary responsible party for the development, manufacturing and commercialization of the product. Pursuant to the agreement, in June 2018 we paid Novimmune an upfront payment of $3.0 million in our common stock recorded to noncash stock expense associated with in-licensing agreements in our consolidated statement of operations. Further milestone payments will be paid based on early clinical development, and the Company will be responsible for the costs of clinical development of the product through the end of the Phase 2 clinical trials, after which the Company and Novimmune will be jointly responsible for all development and commercialization costs. The Company and Novimmune will each maintain an exclusive option, exercisable at specific times during development, for the Company to license the rights to TG-1801, in which case Novimmune is eligible to receive additional milestone payments totaling approximately $185 million as well as tiered royalties on net sales in the high single to low double digits upon and subject to the achievement of certain milestones.

 

 

 

20

 

 

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

In October 2014, we entered into an agreement (the “Office Agreement”) with Fortress Biotech, Inc. (“FBIO”), to occupy approximately 45% of the 24,000 square feet of New York City office space leased by FBIO, which is now our corporate headquarters. The Office Agreement requires us to pay our respective share of the average annual rent and other costs of the 15-year lease. We approximate an average annual rental obligation of $1.1 million under the Office Agreement. We began to occupy this new space in April 2016, with rental payments beginning in the third quarter of 2016. At January 1, 2019, we recognized a lease liability of $9.3 million, with a corresponding Right of Use (ROU) asset of $7.7 million based on the present value of the remaining lease payments for all of our leased office spaces, the majority of which is comprised of our New York City office space. Mr. Weiss, our Executive Chairman and CEO, is also Executive Vice Chairman of FBIO.

 

Under the Office Agreement, we agreed to pay FBIO our portion of the build out costs, which have been allocated to us at the 45% rate mentioned above. The allocated build-out costs have been recorded in Leasehold Interest, net on the Company’s condensed consolidated balance sheets and will be amortized over the 15-year term of the Office Agreement. The initial commitment period of the 45% rate is for a period of three (3) years. We and FBIO currently determine actual office space utilization annually and if our utilization differs from the amount we have been billed, we will either receive credits or be assessed incremental utilization charges. Also, in connection with this lease, in October 2014 we pledged $0.6 million to secure a line of credit as a security deposit for the Office Agreement, which has been recorded as restricted cash in the accompanying consolidated balance sheets. Additional collateral of $0.6 million was pledged in April 2018 to increase the letter of credit for the office space.

 

In July 2015, we entered into a Shared Services Agreement (the “Shared Services Agreement”) with FBIO to share the cost of certain services such as facilities use, personnel costs and other overhead and administrative costs. This Shared Services Agreement requires us to pay our respective share of services utilized. In connection with the Shared Services Agreement, we incurred expenses of approximately $0.6 million and $1.4 million for shared services for the nine months ended September 30, 2019 and 2018, respectively, and expenses of approximately $0.2 million for each of the three months ended September 30, 2019 and 2018, primarily related to shared personnel.

 

In March 2015, we entered into a Global Collaboration Agreement (“Collaboration Agreement”) with Checkpoint for the development and commercialization of anti-PD-L1 and anti-GITR antibody research programs in the field of hematological malignancies. The Collaboration Agreement was amended in June 2019 and upon execution of the amendment we incurred an upfront fee of $1.0 million. We incurred expenses of approximately $4.0 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively, and expenses of approximately $2.7 million and $0.1 million for the three months ended September 30, 2019 and 2018, the majority of which relates to manufacturing expenses of PD-L1. The relevant expenses are recorded in other research and development in the accompanying condensed consolidated statement of operations.

 

NOTE 11 – SUBSEQUENT EVENTS

 

In October 2019, we finalized a five-year lease for office space in New Jersey (the “NJ Lease”). We approximate an average annual rental obligation of $0.3 million under the NJ Lease. We began to occupy this new space in October 2019, with rental payments beginning in November 2019.

 

 

21

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis contain forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Risk Factors.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.

 

You should read the following discussion and analysis in conjunction with the unaudited condensed consolidated financial statements, and the related footnotes thereto, appearing elsewhere in this report, and in conjunction with management’s discussion and analysis and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

OVERVIEW

 

We are a biopharmaceutical company dedicated to developing and delivering medicines for patients with B-cell mediated diseases, including Chronic Lymphocytic Leukemia (CLL), non-Hodgkin Lymphoma (NHL) and Multiple Sclerosis (MS). We have developed a robust B-cell directed research and development (R&D) platform for identification of key B-cell pathways of interest and rapid clinical testing. Currently, we have five B-cell targeted drug candidates in clinical development, with the lead two therapies, ublituximab (TG-1101) and umbralisib (TGR-1202), in pivotal trials for CLL and NHL, with ublituximab also in pivotal trials for MS. Ublituximab is a novel anti-CD20 monoclonal antibody (mAb) that has been glycoengineered for enhanced potency over first generation antibodies. Umbralisib is an oral, once daily inhibitor of PI3K delta. Umbralisib also uniquely inhibits CK1-epsilon, which may allow it to overcome certain tolerability issues associated with first generation PI3K delta inhibitors. When used together in combination therapy, ublituximab and umbralisib are referred to as “U2”. Additionally, we have recently brought into Phase 1 clinical development TG-1501, an anti-PD-L1 monoclonal antibody, TG-1701, a covalently-bound Bruton’s Tyrosine Kinase (BTK) inhibitor, and TG-1801, an anti-CD47/CD19 bispecific antibody.

 

We also actively evaluate complementary products, technologies and companies for in-licensing, partnership, acquisition and/or investment opportunities. To date, we have not received approval for the sale of any of our drug candidates in any market and, therefore, have not generated any product sales from our drug candidates.

 

OUR PRODUCTS UNDER DEVELOPMENT

 

We have leveraged our B-cell platform to develop a robust drug pipeline of both targeted orally available, potent and selective small molecule kinase inhibitors and intravenously delivered “off-the-shelf” immunotherapies that leverage the patient’s own immune system to fight cancer. We currently own worldwide development and commercial rights, subject to certain limited geographical restrictions, to all of our pre-clinical and clinical programs. The following table summarizes our most advanced drug candidates:

 

Clinical Drug Candidate

(molecular target)

Initial Target Disease

Stage of Development

(pivotal study)

Ublituximab/TG-1101 (anti-CD20/mAb)

Chronic Lymphocytic Leukemia

Phase 3 trial (UNITY-CLL)

Relapsing Multiple Sclerosis

Phase 3 trials (ULTIMATE I and II)

Umbralisib/TGR-1202 (PI3K delta inhibitor)

Chronic Lymphocytic Leukemia

Phase 3 trial (UNITY-CLL)

Marginal Zone Lymphoma

Phase 2b trial (UNITY-NHL)

Follicular Lymphoma

Phase 2b trial (UNITY-NHL)

TG-1501 (anti-PDL1)

B-cell Cancers

Phase 1 trial

TG-1701 (BTK inhibitor)

B-cell Cancers

Phase 1 trial

TG-1801 (anti-CD47/CD19)

B-cell Cancers

Phase 1 trial

 

22

 

 

Phase 3 and Registration-Directed Clinical Trial Highlights

 

We have initiated and enrolled several Phase 3 and registration-directed Phase 2b clinical trials (i.e., clinical trials that may support a marketing application for approval). The following are the current Phase 3 trials and registration-directed Phase 2b clinical trials:

 

 

UNITY-NHL Phase 2b Trial: UNITY-NHL is a broad Phase 2b registration-directed clinical trial designed to evaluate the efficacy and safety of umbralisib monotherapy and U2 combinations in patients with previously treated NHL. The marginal zone lymphoma (MZL) and the follicular lymphoma (FL)/small lymphocytic lymphoma (SLL) single agent umbralisib cohorts of this trial are fully enrolled. The primary objective of these cohorts is to assess the efficacy of single agent umbralisib as measured by Overall Response Rate (ORR).

 

 

UNITY-NHL MZL Single Agent Umbralisib Cohort: The MZL cohort enrolled adult patients who had at least one prior line of therapy that included an anti-CD20 monoclonal antibody. In February 2019, we announced that the MZL cohort met the primary endpoint of ORR as determined by Independent Review Committee (IRC) for all treated patients (n=69). The results met our target guidance of 40-50% ORR. Interim safety and efficacy data from the MZL cohort were presented in an oral presentation at the American Association for Cancer Research (AACR) annual meeting on April 1, 2019. The data presented included safety and tolerability data on all 69 treated patients (safety population) and efficacy data on 42 patients who were enrolled at least 9 cycles (28 day cycles) prior to the data cut-off date (interim efficacy population). The safety population had a median duration of exposure of 6.9 months and no unexpected toxicities were observed. Analysis of the interim efficacy population showed an ORR by IRC of 52%, including 19% CR rate, an 88% clinical benefit rate by IRC (defined as patients obtaining Complete Response + Partial Response + Stable Disease) and a median duration of exposure of 10.1 months. These results were also presented in oral presentations during the 2019 American Society of Clinical Oncology (ASCO) annual meeting and the 2019 International Conference on Malignant Lymphoma (ICML) both held in June of 2019. Previously, in January 2019, the U.S. Food and Drug Administration (FDA) granted Breakthrough Therapy Designation (BTD) to umbralisib for the treatment of adult patients with MZL who have received at least one prior anti-CD20 regimen. The BTD was based on interim data from the MZL cohort of the UNITY-NHL trial. In April 2019, the FDA granted orphan drug designation to umbralisib for the treatment of patients with any of the three types of marginal zone lymphoma (MZL): nodal, extranodal, and splenic MZL. In June of 2019, we had a BTD meeting with the FDA to discuss the MZL submission strategy. Based on this meeting, we anticipate initiating a New Drug Application (NDA) submission for patients with previously treated MZL around year-end 2019.

 

 

UNITY-NHL FL/SLL Single Agent Umbralisib Cohort: The FL/SLL cohort enrolled adult patients who had two or more prior lines of therapy that included an anti-CD20 monoclonal antibody and an alkylating agent. In October 2019, we announced that the FL patients within this cohort met the primary endpoint of ORR as determined by Independent Review Committee (IRC) for all treated follicular lymphoma patients (n=118). The results met our target guidance of 40-50% ORR. Importantly, umbralisib monotherapy appeared to be well tolerated with a safety profile consistent with previous reports. We plan to present the data at a future medical conference as well as discuss the data with the FDA.

 

 

 

 

UNITY-NHL Additional Cohorts: There are additional exploratory cohorts of the UNITY-NHL trial focused on Diffuse Large B-Cell Lymphoma (DLBCL) and Mantle Cell Lymphoma (MCL). In total, there are currently four cohorts in the UNITY-NHL trial including, MZL, FL/SLL, DLBCL, and MCL. Each cohort is enrolled and evaluated separately from the others.

 

 

UNITY-CLL Phase 3 Trial Evaluating Umbralisib plus Ublituximab (U2): UNITY-CLL is a global Phase 3 randomized controlled clinical trial comparing the U2 combination to an active control arm of obinutuzumab plus chlorambucil in patients with both treatment naïve and relapsed or refractory CLL. Two additional arms evaluating single agent ublituximab and single agent umbralisib were also enrolled for purposes of evaluating contribution in the U2 combination regimen. The primary endpoint for this study is progression free survival (PFS) which we intend to use to support a submission for approval of the U2 combination in CLL. The study completed enrollment in October 2017 with over 600 patients across the four treatment arms, with approximately 420 patients in the U2 and the active control arm combined. This trial is conducted under Special Protocol Assessment (SPA) with the FDA. In March 2019, the UNITY-CLL Data and Safety Monitoring Board (DSMB) conducted a pre-planned futility analysis of PFS. The DSMB determined that the trial was not futile and recommended the UNITY-CLL trial continue as planned. The pre-specified futility analysis of the UNITY-CLL trial did not allow for early stopping due to positive efficacy but only for lack of efficacy. The DSMB also reviewed safety information from all 600+ CLL patients on trial, including over 300 treatment naïve and previously treated patients on umbralisib alone or in combination with ublituximab. Based on its review, no safety concerns were identified and the DSMB recommended the UNITY-CLL trial continue without modification.

 

 

 

 

ULTIMATE I & II Trials Evaluating Single Agent Ublituximab in RMS: ULTIMATE I and ULTIMATE II are two independent Phase 3 trials. Each trial is a global, randomized, multi-center, double-blinded, double-dummy, active-controlled study comparing ublituximab to teriflunomide in subjects with relapsing forms of Multiple Sclerosis (RMS). The primary endpoint for each study is Annualized Relapse Rate (ARR) following 96 weeks of treatment which we intend to use to support a submission for approval of ublituximab in RMS. These trials are conducted under a SPA with the FDA. Full enrollment was completed in October of 2018, with approximately 1,100 subjects enrolled in both studies combined.

 

23

 

 

GENERAL CORPORATE

 

Our license revenues currently consist of license fees arising from our agreement with Ildong. We recognize upfront license fee revenues ratably over the estimated period in which we will have certain significant ongoing responsibilities under the sublicense agreement, with unamortized amounts recorded as deferred revenue.

 

We have not earned any revenues from the commercial sale of any of our drug candidates.

 

Our research and development expenses consist primarily of expenses related to in-licensing of new product candidates, fees paid to consultants and outside service providers for clinical and laboratory development, facilities-related and other expenses relating to the design, development, manufacture, testing and enhancement of our drug candidates and technologies including clinical trial related expenses. We expense our research and development costs as they are incurred.

 

Our general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including investor relations, legal activities and facilities-related expenses.

 

Our results of operations include noncash compensation expenses as a result of the grants of restricted stock. Compensation expense for awards of restricted stock granted to employees and directors represents the fair value of the award recorded over the respective vesting periods of the individual awards. The expense is included in the respective categories of expense in the condensed consolidated statements of operations. We expect to continue to incur significant non-cash compensation expenses.

 

We recognize all stock-based payments to employees and non-employee directors (as compensation for service) as noncash compensation expense in the condensed consolidated financial statements based on the fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

In addition, because some of the options, restricted stock and warrants issued to employees, consultants and other third-parties vest upon achievement of certain milestones, the total expense is uncertain. Compensation expense for such awards that vest upon the achievement of milestones is recognized when the achievement of such milestones becomes probable.

 

Our clinical trials will be lengthy and expensive. Even if these trials show that our drug candidates are effective in treating certain diseases, there is no guarantee that we will be able to record commercial sales of any of our drug candidates in the near future, or at all. In addition, we expect losses to continue as we fund in-licensing and development of new drug candidates. As we further our development efforts, we may enter into additional third-party collaborative agreements and incur additional expenses, such as licensing fees and milestone payments. In addition, we may need to establish a commercial infrastructure required to manufacture, market and sell our medicines following approval, if any, by the FDA or a foreign health authority, which would result in incurring additional expenses. As a result, our quarterly results may fluctuate and a quarter-by-quarter comparison of our operating results may not be a meaningful indication of our future performance.

 

24

 

 

RESULTS OF OPERATIONS

 

Three months ended September 30, 2019 and 2018

 

License Revenue. License revenue was approximately $38,000 for each of the three months ended September 30, 2019 and 2018. License revenue is related to the amortization of an upfront payment of $2.0 million received in 2012 associated with our license agreement with Ildong. The upfront payment from Ildong will be recognized as license revenue on a straight-line basis through December 2025, which represents the estimated period over which the Company will have certain ongoing responsibilities under the sublicense agreement.

 

Noncash Compensation Expense (Research and Development). Noncash compensation expense (research and development) related to equity incentive grants totaled $1.5 million for the three months ended September 30, 2019, as compared to $0.6 million during the comparable period in 2018. The increase in noncash compensation expense was primarily due to noncash stock expense related to stock options during the period ended September 30, 2019.

 

Other Research and Development Expenses. Other research and development expenses increased by $23.7 million to $56.5 million for the three months ended September 30, 2019, as compared to $32.8 million for the three months ended September 30, 2018. The increase in R&D expense is primarily attributable to ongoing late-stage clinical development programs and related manufacturing costs for ublituximab during the three months ended September 30, 2019. We expect our other research and development costs to decrease modestly for the remainder of 2019.

 

Noncash Compensation Expense (General and Administrative). Noncash compensation expense (general and administrative) related to equity incentive grants increased by $1.4 million to $0.6 million for the three months ended September 30, 2019, as compared to a credit of $0.8 million for the three months ended September 30, 2018. The increase in noncash compensation expense was primarily related to greater compensation expense during the three months ended September 30, 2019 related to restricted stock granted to executive personnel due to a prior year credit for nonemployee awards

 

Other General and Administrative Expenses. Other general and administrative expenses was $2.3 million for the three months ended September 30, 2019, as compared to $1.8 million for the three months ended September 30, 2018. The increase was due primarily to increased personnel and other general and administrative costs. We expect our other general and administrative expenses to remain at a comparable level for the remainder of 2019. 

 

Interest Expense. Interest expense increased by $1.3 million to $1.5 million for the three months ended September 30, 2019, as compared to expense of $0.2 million for the three months ended September 30, 2018. The increase is mainly due to the interest expense related to the Hercules financing agreement and the associated amortization of debt issuance costs for the three months ended September 30, 2019.

 

Other Income. Other income decreased by $0.1 million to $0.5 million for the three months ended September 30, 2019, as compared to $0.6 million for the three months ended September 30, 2018. We expect our other income to remain at a comparable level for the remainder of 2019. 

 

25

 

 

Nine months ended September 30, 2019 and 2018

 

License Revenue. License revenue was approximately $0.1 million for each of the nine months ended September 30, 2019 and 2018. License revenue for the nine months ended September 30, 2019 and 2018 was related to the amortization of an upfront payment of $2.0 million received in 2012 associated with our license agreement with Ildong.

 

Noncash Stock Expense Associated with In-Licensing Agreement (Research and Development). Noncash stock expense associated with in-licensing agreement (research and development) amounted to $0.1 million for the nine months ended September 30, 2019, as compared to $4.0 million during the comparable period in 2018. The expense during the nine months ended September 30, 2018 was recorded in conjunction with the stock issued to Novimmune and Jiangsu Hengrui as upfront payments for the licenses to the CD47/CD19 and BTK programs.

 

Noncash Compensation Expense (Research and Development). Noncash compensation expense (research and development) related to equity incentive grants totaled $4.3 million for the nine months ended September 30, 2019, as compared to $4.4 million during the comparable period in 2018.

 

Other Research and Development Expenses. Other research and development expenses increased by $20.1 million to $118.8 million for the nine months ended September 30, 2019, as compared to $98.7 million for the nine months ended September 30, 2018. The increase in R&D expense is primarily attributable to ongoing late-stage clinical development programs and related manufacturing costs for ublituximab during the nine months ended September 30, 2019. We expect our other research and development costs to decrease modestly for the remainder of 2019.

 

Noncash Compensation Expense (General and Administrative). Noncash compensation expense (general and administrative) related to equity incentive grants decreased by $5.6 million to $1.4 million for the nine months ended September 30, 2019, as compared to $7.0 million for the nine months ended September 30, 2018. The decrease in noncash compensation expense was primarily related to greater compensation expense during the nine months ended September 30, 2018 related to restricted stock granted to executive personnel.

 

Other General and Administrative Expenses. Other general and administrative expenses increased by $0.4 million to $6.6 million for the nine months ended September 30, 2019, as compared to $6.2 million for the nine months ended September 30, 2018. We expect our other general and administrative expenses to remain at a comparable level for the remainder of 2019.

 

Interest Expense. Interest expense increased by $2.7 million to $3.4 million for the nine months ended September 30, 2019, as compared to expense of $0.7 million for the nine months ended September 30, 2018. The increase is mainly due to the interest expense related to the Hercules financing agreement and the associated amortization of debt issuance costs for the nine months ended September 30, 2019.

 

Other Income. Other income decreased by $0.1 million to $1.2 million for the nine months ended September 30, 2019, as compared to $1.3 million for the nine months ended September 30, 2018. We expect our other income to remain at a comparable level for the remainder of 2019. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of cash have been from the sale of equity securities, debt financings, the upfront payment from our Sublicense Agreement with Ildong, and warrant and option exercises. We have not yet commercialized any of our drug candidates and cannot be sure if we will ever be able to do so. Even if we commercialize one or more of our drug candidates, we may not become. Our ability to achieve profitability depends on a number of factors, including our ability to obtain regulatory approval for our drug candidates, successfully complete any post-approval regulatory obligations and successfully commercialize our drug candidates alone or in partnership. We may continue to incur substantial operating losses even if we begin to generate revenues from our drug candidates.

 

As of September 30, 2019, we had approximately $72.5 million in cash and cash equivalents, and investment securities. We anticipate that our cash, cash equivalents, and investment securities on hand as of September 30, 2019, combined with the additional capital raised in the fourth quarter of 2019, will provide sufficient liquidity for more than a twelve-month period from the date of filing this Quarterly Report on Form 10-Q. The actual amount of cash that we will need to operate is subject to many factors, including, but not limited to, the timing, design and conduct of clinical trials for our drug candidates. We are dependent upon significant financing to provide the cash necessary to execute our current operations, including the commercialization of any of our drug candidates.

 

Cash used in operating activities for the nine months ended September 30, 2019 was $102.4 million as compared to $95.2 million for the nine months ended September 30, 2018. The increase in cash used in operating activities was due primarily to increased expenditures associated with our ongoing clinical development programs and paydown of accounts payable and accrued expenses.

 

For the nine months ended September 30, 2019, net cash used in investing activities was $0.7 million as compared to cash provided by investing activities of $0.9 million for the nine months ended September 30, 2018. The decrease in net cash provided by investing activities was primarily due to the greater investment in treasury securities during the nine months ended September 30, 2019.

 

For the nine months ended September 30, 2019, net cash provided by financing activities of $105.9 million related to the net proceeds from debt financings and net proceeds from the issuance of common stock as part of our 2017 ATM program and a public offering in March 2019.

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

As of September 30, 2019, we have known contractual obligations, commitments and contingencies of $92.4 million related to our long-term debt, contract manufacturer and operating lease obligations.

 

 Payment due by period (in thousands)

 

 

Total 

 

 

Less than 1 year 

 

 

1-3 years 

 

 

3-5 years 

 

 

More than 5 years

 

Contractual obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract manufacturer

 

43,001

 

 

43,001

 

 

 

 

 

 

 

Long-term debt

 

 

30,000

 

 

 

 

 

 

30,000

 

 

 

 

 

 

 

Operating leases

 

 

19,383

 

 

 

2,208

 

 

 

3,133

 

 

 

3,083

 

 

 

10,959

 

Total

 

$

92,384

 

 

$

45,209

 

 

$

33,133

 

 

$

3,083

 

 

$

10,959

 

 

The terms of certain of our licenses, royalties, development and collaboration agreements, as well as other research and development activities, require us to pay potential future milestone payments based on product development success. The above table excludes such obligations as the amount and timing of such obligations are unknown or uncertain.

 

CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions or conditions.

 

We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include the following:

 

Revenue Recognition. Effective January 1, 2018, the Company began recognizing revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue standard was not material to our consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2018. The core principle of this new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

 

Step 1: Identify the contract with the customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to the performance obligations in the contract

 

Step 5: Recognize revenue when the company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

 

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct).

 

The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

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If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

 

Stock Compensation. We have granted stock options and restricted stock to employees, directors and consultants, as well as warrants to other third parties. For employee, director and consultant grants the value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account volatility in the price of our stock, the risk-free interest rate, the estimated life of the option, the closing market price of our stock and the exercise price. We base our estimates of our stock price volatility on the historical volatility of our common stock and our assessment of future volatility; however, these estimates are neither predictive nor indicative of the future performance of our stock. For purposes of the calculation, we assumed that no dividends would be paid during the life of the options and warrants. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those equity awards expected to vest. As a result, if other assumptions had been used, our recorded stock-based compensation expense could have been materially different from that reported. In addition, because some of the options, restricted stock and warrants issued to employees, consultants and other third-parties vest upon the achievement of certain milestones, the total expense is uncertain. Compensation expense for such awards that vest upon the achievement of milestones is recognized when the achievement of such milestone becomes probable.

 

Accruals for Clinical Research Organization and Clinical Site Costs. We make estimates of costs incurred in relation to external clinical research organizations, or CROs, and clinical site costs. We analyze the progress of clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of the amount expensed and the related prepaid asset and accrued liability. Significant judgments and estimates must be made and used in determining the accrued balance and expense in any accounting period. We review and accrue CRO expenses and clinical trial study expenses based on work performed and rely upon estimates of those costs applicable to the stage of completion of a study. Accrued CRO costs are subject to revisions as such trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. With respect to clinical site costs, the financial terms of these agreements are subject to negotiation and vary from contract to contract. Payments under these contracts may be uneven, and depend on factors such as the achievement of certain events, the successful recruitment of patients, the completion of portions of the clinical trial or similar conditions. The objective of our policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical site costs are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.

 

Accounting For Income Taxes. In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimation of our actual current tax exposure and assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have fully offset our deferred tax assets with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the reversal or expiration of such deferred tax assets were the primary factors considered by management in maintaining the valuation allowance.

 

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RECENTLY ISSUED ACCOUNTING STANDARDS

 

In July 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-11, “Leases - Targeted Improvements” (“ASU 2018-11”) as an update to ASU 2016-02, Leases (“ASU 2016-02” or “Topic 842”) issued on February 25, 2016. ASU 2016-02 is effective for public business entities for fiscal years beginning January 1, 2019. ASU 2016-02 required companies to adopt the new leases standard at the beginning of the earliest period presented in the financial statements, which is January 1, 2017, using a modified retrospective transition method where lessees must recognize lease assets and liabilities for all leases even though those leases may have expired before the effective date of January 1, 2017. Lessees must also provide the new and enhanced disclosures for each period presented, including the comparative periods.

 

ASU 2018-11 provides an entity with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with ASC 840, “Leases” (“ASC 840”). An entity that elects this additional (and optional) transition method must provide the required ASC 840 disclosures for all periods that continue to be in accordance with ASC 840. The amendments do not change the existing disclosure requirements in ASC 840.

 

ASU 2018-11 is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier adoption permitted. The Company adopted ASU 2018-11 on January 1, 2019 using a modified retrospective method and will not restate comparative periods. We elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification and our assessment on whether a contract is or contains a lease. The adoption of this guidance resulted in the addition of material balances of right of use assets and lease liability to our consolidated balance sheets at January 1, 2019, primarily relating to our lease of office space (see Note 8). The impact to our consolidated statements of operations was not material as a result of this standard.

 

In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 expands the scope of FASB Topic 718, Compensation – Stock Compensation (“Topic 718”) to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should only remeasure equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The entity must not remeasure assets that are completed. Disclosures required at transition include the nature of and reason for the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other components of equity.

 

ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material effect on our consolidated financial statements as of January 1, 2019. The adoption of ASU 2018-07 had no impact on nonemployee performance awards as they are measured based on the outcome that is probable.

 

Other pronouncements issued by the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant to our consolidated financial statements.

 

The primary objective of our investment activities is to preserve principal while maximizing our income from investments and minimizing our market risk. We invest in government and investment-grade corporate debt in accordance with our investment policy. Some of the securities in which we invest have market risk. This means that a change in prevailing interest rates, and/or credit risk, may cause the fair value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of our investment will probably decline. As of September 30, 2019, our portfolio of financial instruments consists of cash equivalents, including bank deposits, and investments.

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2019, management carried out, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective.

 

Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We, and our subsidiaries, are not a party to, and our property is not the subject of, any material pending legal proceedings.

 

ITEM 1A. RISK FACTORS.

 

You should carefully consider the following risks and uncertainties. If any of the following occurs, our business, financial condition or operating results could be materially harmed. An investment in our securities is speculative in nature, involves a high degree of risk, and should not be made by an investor who cannot bear the economic risk of its investment for an indefinite period of time and who cannot afford the loss of its entire investment. You should carefully consider the following risk factors and the other information contained elsewhere in this Quarterly Report before making an investment in our securities.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We are a biopharmaceutical company with a limited operating history and have not generated any revenue from drug sales. We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future.

 

We are a biopharmaceutical company with a limited operating history on which investors can base an investment decision. Biopharmaceutical drug development is a highly speculative undertaking and involves a substantial degree of risk. We commenced operations in January 2012. Our operations to date have been limited primarily to organizing and staffing our company, business planning, raising capital, developing our technology, identifying potential drug candidates and undertaking pre-clinical studies and commencing clinical trials. We have never generated any revenue from drug sales. We have not obtained regulatory approvals for any of our drug candidates.

 

We have not yet demonstrated our ability to successfully complete large-scale, pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale drug, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. Typically, it takes many years to develop one new drug from the time it is discovered to when it is available for treating patients. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history. We will need to transition from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

 Since inception, we have focused substantially all of our efforts and financial resources on clinical trials and manufactu