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Table of Contents

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 March 31, 2020

 

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 001-32639

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

(Registrants telephone number, including area code)

Securities registered 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 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

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 113,747,986 shares of the registrant’s common stock, $0.001 par value, outstanding as of May 7, 2020.

Table of Contents

TG THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

3

 

 

 

PART I

FINANCIAL INFORMATION

 

5

 

Item 1

Financial Statements:

 

5

 

Condensed Consolidated Balance Sheets

 

5

 

Condensed Consolidated Statements of Operations (unaudited)

 

6

 

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity (unaudited)

 

7

 

Condensed Consolidated Statements of Cash Flows (unaudited)

 

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

9

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

Item 4

Controls and Procedures

 

35

 

PART II

OTHER INFORMATION

 

36

 

Item 1

Legal Proceedings

 

36

 

Item 1A

Risk Factors

 

36

 

Item 6

Exhibits

 

89

2

Table of Contents

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, (the “Securities Act”), and the Securities Exchange Act of 1934, as amended, (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;
expectations for future capital requirements; and
potential impact of the coronavirus (“COVID-19”) pandemic and government measures to control it.

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.

3

Table of Contents

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.

4

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION

TG Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

March 31, 

December 31, 

    

2020

    

2019

    

(Unaudited)

(Note 1)

 

Assets

Current assets:

 

  

 

  

Cash and cash equivalents

$

52,051

$

112,637

Short-term investment securities

 

26,284

 

27,798

Prepaid research and development

 

7,737

 

8,105

Other current assets

 

1,944

 

611

Total current assets

 

88,016

 

149,151

Restricted cash

 

1,252

 

1,251

Leasehold interest, net

 

2,168

 

2,129

Equipment, net

 

320

 

282

Right of use asset

9,294

9,402

Goodwill

 

799

 

799

Total assets

$

101,849

$

163,014

 

  

 

  

Liabilities and stockholders’ (deficit) equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

30,903

$

30,041

Other current liabilities

29,245

48,994

Lease liability – current portion

1,602

1,616

Accrued compensation

 

1,368

 

3,798

Total current liabilities

 

63,118

 

84,449

Deferred revenue, net of current portion

 

724

 

762

Long-term debt

29,201

28,970

Lease liability – non-current

10,159

10,218

Total liabilities

 

103,202

 

124,399

Commitments and contingencies

 

  

 

  

Stockholders’ (deficit) equity:

 

  

 

  

Common stock, $0.001 par value per share (150,000,000 shares authorized, 110,209,293 and 109,425,243 shares issued, 110,167,984 and 109,383,934 shares outstanding at March 31, 2020 and December 31, 2019, respectively)

 

110

 

109

Additional paid-in capital

 

751,103

 

739,956

Treasury stock, at cost, 41,309 shares at March 31, 2020 and December 31, 2019

 

(234)

 

(234)

Accumulated deficit

 

(752,332)

 

(701,216)

Total stockholders’ (deficit) equity

 

(1,353)

 

38,615

Total liabilities and stockholders’ (deficit) equity

$

101,849

$

163,014

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

5

Table of Contents

TG Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

Three months ended

March 31, 

    

2020

    

2019

 

  

 

  

License revenue

$

38

$

38

 

  

 

  

Costs and expenses:

 

  

 

  

Research and development:

 

  

 

  

Noncash compensation

 

1,979

 

1,489

Other research and development

 

34,043

 

30,896

Total research and development

 

36,022

 

32,385

 

 

  

General and administrative:

 

 

  

Noncash compensation

 

9,089

 

393

Other general and administrative

 

5,172

 

1,949

Total general and administrative

 

14,261

 

2,342

 

 

  

Total costs and expenses

 

50,283

 

34,727

 

  

 

  

Operating loss

 

(50,245)

 

(34,689)

 

  

 

  

Other (income) expense:

 

  

 

  

Interest expense

 

1,201

 

774

Other income

 

(330)

 

(307)

Total other expense, net

 

871

 

467

 

  

 

  

Net loss

$

(51,116)

$

(35,156)

 

  

 

  

Basic and diluted net loss per common share

$

(0.48)

$

(0.43)

 

  

 

  

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

 

105,461,892

 

81,174,301

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

6

Table of Contents

TG Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(in thousands, except share amounts)

(Unaudited)

    

    

    

    

Additional

    

    

    

Common Stock

paid-in

Treasury Stock  

Accumulated

Shares

Amount

 capital

Shares

Amount 

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 At-the-Market offerings (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

Balance at January 1, 2020

 

109,425,243

$

109

$

739,956

 

41,309

$

(234)

$

(701,216)

$

38,615

Issuance of common stock in connection with exercise of options

19,750

*

80

80

Issuance of restricted stock

 

774,300

 

1

 

(1)

 

  

 

  

 

  

 

Forfeiture of restricted stock

 

(10,000)

 

*

 

*

 

  

 

  

 

  

 

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

 

  

 

  

 

11,068

 

  

 

  

 

  

 

11,068

Net loss 

 

  

 

  

 

  

 

  

 

  

 

(51,116)

 

(51,116)

Balance at March 31, 2020

 

110,209,293

$

110

$

751,103

 

41,309

$

(234)

$

(752,332)

$

(1,353)

*   Amount less than one thousand dollars.

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

7

Table of Contents

TG Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three months ended

March 31, 

    

2020

    

2019

    

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

 

 

  

 

  

 

Consolidated net loss

$

(51,116)

$

(35,156)

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

 

  

 

  

Non-cash stock compensation expense

 

11,068

 

1,882

Depreciation and amortization

 

30

 

23

Amortization of premium on investment securities

 

(44)

 

(75)

Amortization of debt issuance costs

231

77

Amortization of leasehold interest

54

46

Non-cash change in lease liability and right-of-use asset

2,001

373

Change in fair value of notes payable

 

(20)

 

66

Changes in assets and liabilities:

 

 

  

Increase in other current assets

 

(1,057)

 

(2,454)

Decrease in accrued interest receivable

 

40

 

14

(Decrease) increase in accounts payable and accrued expenses

 

(1,567)

 

2,240

Decrease in lease liabilities

(1,967)

(339)

(Decrease) increase in interest payable

(832)

549

Decrease in other liabilities

 

(18,898)

 

(559)

Decrease in deferred revenue

 

(38)

 

(38)

Net cash used in operating activities

 

(62,115)

 

(33,351)

 

  

 

  

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Proceeds from maturity of short-term securities

 

9,000

 

7,050

Investment in held-to-maturity securities

 

(7,482)

 

(8,171)

Purchases of equipment

 

(68)

 

(14)

Net cash provided by (used in) investing activities

 

1,450

 

(1,135)

 

  

 

  

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from sale of common stock, net

27,678

Proceeds from exercise of options

 

81

 

Proceeds from debt financings

29,740

Financing costs paid

 

 

(538)

Net cash provided by financing activities

 

81

 

56,880

 

  

 

  

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

(60,584)

 

22,394

 

  

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

113,887

 

43,199

 

  

 

  

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

$

53,303

$

65,593

 

  

 

  

 

  

 

  

Reconciliation to amounts on consolidated balance sheets:

 

  

 

  

Cash and cash equivalents

$

52,051

$

64,349

Restricted cash

 

1,252

 

1,244

Total cash, cash equivalents and restricted cash 

$

53,303

$

65,593

 

  

 

  

Cash paid for:

 

  

 

  

Interest

$

777

$

NONCASH TRANSACTIONS

 

  

 

  

Accrued offering costs

$

$

179

Deferred financing costs

$

$

1,157

Warrants issued with debt financing

$

$

993

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

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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 two lead 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, dual inhibitor of PI3K-delta and CK1-epsilon, which may lead to a differentiated safety profile. When used together in combination therapy, ublituximab and umbralisib are referred to as “U2”. Additionally, in early clinical development we have an anti-PD-L1 monoclonal antibody referred to as cosibelimab (TG-1501), an oral Bruton’s Tyrosine Kinase (BTK) inhibitor referred to as TG-1701, and an anti-CD47/CD19 bispecific antibody referred to as TG-1801. 

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, 2019. The accompanying condensed December 31, 2019 balance sheet has been derived from these statements. The results of operations for the three months ended March 31, 2020 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. (“TG AUS”), 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 activities of TG AUS result in immaterial currency translation adjustments and, thus, are included in Other Income/Expense on the Company’s condensed consolidated statement of operations. 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 March 31, 2020, we have an accumulated deficit of approximately $752.3 million.

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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 March 31, 2020, we had $78.3 million in cash and cash equivalents, and investment securities. The Company believes its cash, cash equivalents, and investment securities on hand as of March 31, 2020, along with the additional capital raised in the second quarter of 2020 (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.

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 Accounting Standard Codification (“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 liabilities 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.

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ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). 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 with future effective dates are either not applicable or not significant to our condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with 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.

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 March 31, 2020 and December 31, 2019, we have approximately $1.3 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 March 31, 2020 and December 31, 2019 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.

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Revenue Recognition

The Company recognizes revenue under ASC 606. The core principle of this 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); and
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.

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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 March 31, 2020 and December 31, 2019, we recorded approximately $7.7 million and $8.1 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.

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020.  The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer’s social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.  At this time, the Company does not believe that the CARES Act will have a material impact on the Company’s income tax provision for 2020.  The Company will continue to evaluate the impact of the CARES Act on its financial position, results of operations and cash flows.

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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 recognized as they occur.

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.

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 period presented or because such potentially dilutive securities were out of the money and the Company realized net income during the period presented. The amounts of potentially dilutive securities excluded from the calculation were 8,579,266 and 6,768,530 for the three months ended March 31, 2020 and 2019, 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:

March 31, 

    

2020

    

2019

 

 Unvested restricted stock

 

5,828,852

 

4,039,620

 

 Options

 

2,585,980

 

2,565,310

 

Warrants

 

147,058

 

147,058

 

 Shares issuable upon note conversion

 

17,376

 

16,542

 

 Total

 

8,579,266

 

6,768,530

 

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.

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NOTE 2 CASH AND CASH EQUIVALENTS

The following tables summarize our cash and cash equivalents at March 31, 2020 and December 31, 2019:

 

March 31, 

    

December 31, 

 (in thousands)

2020

2019

 

  

 

  

Checking and bank deposits

$

47,905

$

110,135

Money market funds

 

4,146

 

2,502

    Total

$

52,051

$

112,637

NOTE 3 INVESTMENT SECURITIES

Our investments as of March 31, 2020 and December 31, 2019 are classified as held-to-maturity. Held-to-maturity investments are recorded at amortized cost.

The following tables summarize our investment securities at March 31, 2020 and December 31, 2019:

March 31, 2020

  Amortized

  Gross

  Gross

cost, as

unrealized

unrealized

  Estimated

(in thousands)

    

adjusted

    

holding gains

    

holding losses

    

fair value

Short-term investments:

 

  

 

  

 

  

 

  

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

$

26,284

$

106

$

$

26,390

Total short-term investment securities

$

26,284

$

106

$

$

26,390

December 31, 2019

    

Amortized

    

Gross

    

Gross

    

cost, as

unrealized

unrealized

Estimated fair

adjusted

holding gains

holding losses

value

Short-term investments:

 

  

 

  

 

  

 

  

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

$

27,798

$

28

$

$

27,826

Total short-term investment securities

$

27,798

$

28

$

$

27,826

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.

As of March 31, 2020 and December 31, 2019, the fair values of cash and cash equivalents, restricted cash, and notes and interest payable, approximate their carrying value.

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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 $19.5 million at March 31, 2020 and $19.3 million at December 31, 2019. No payments have been made on the 5% Notes since the merger and through March 31, 2020.

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 March 31, 2020 and December 31, 2019. 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 March 31, 2020 and December 31, 2019:

    

Financial liabilities at fair value as of March 31, 2020

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

  

  

  

  

5% Notes

$

$

$

171

$

171

Total

$

$

$

171

$

171

    

Financial liabilities at fair value as of December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

 

  

 

  

 

  

 

  

5% Notes

$

$

$

190

$

190

Total

$

$

$

190

$

190

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.

The following table summarizes the changes in Level 3 instruments during the three months ended March 31, 2020:

(in thousands)

Balance at December 31, 2019

$

190

Interest accrued on face value of 5% Notes

 

238

Change in fair value of Level 3 liabilities

 

(257)

Balance at March 31, 2020

$

171

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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’ (DEFICIT) 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.

On September 5, 2019, we filed an automatic “shelf registration” statement on Form S-3 (the “2019 WKSI Shelf”) as a “well-known seasoned issuer” as defined in Rule 405 under the Securities Act, which registered an unlimited and indeterminate amount of debt or equity securities for future issuance and sale. The 2019 WKSI Shelf was declared effective in September 2019. In connection with the 2019 WKSI Shelf, we entered into an At-the-Market Issuance Sales Agreement (the “2020 ATM”) with Jefferies LLC, Cantor Fitzgerald & Co. and B. Riley FBR, Inc. (each a “2020 Agent” and collectively, the “2020 Agents”), relating to the sale of shares of our common stock. Under the 2020 ATM, we pay the 2020 Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock.

Subsequent to the first quarter, we sold an aggregate of 4,535,608 shares of common stock pursuant to the 2020 ATM for total gross proceeds of approximately $77.4 million at an average selling price of $17.07 per share, resulting in net proceeds of approximately $76.0 million after deducting commissions and other transactions costs.

The 2019 WKSI Shelf is currently our only active shelf registration statement. We may offer any combination of the securities registered under the 2019 WKSI Shelf 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 2019 WKSI provides us with the flexibility to raise additional capital to finance our operations as needed.

Equity Incentive Plans

The TG Therapeutics, Inc. Amended and Restated 2012 Incentive Plan (the “2012 Incentive Plan”) was approved by stockholders in June 2018. As of March 31, 2020, 7,328,852 shares of restricted stock and 2,585,980 options were outstanding and up to an additional 28,026 shares may be issued under the 2012 Incentive Plan.

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Stock Options

The following table summarizes stock option activity for the three months ended March 31, 2020:

    

    

    

Weighted-

    

average

Weighted-

Contractual 

Number of 

 average 

Term

Aggregate 

shares

exercise price

(in years)

intrinsic value

Outstanding at December 31, 2019

2,605,730

$

6.73

8.92

$

11,706,110

Granted

Exercised

(19,750)

4.10

Forfeited

Expired

Outstanding at March 31, 2020

 

2,585,980

$

6.75

 

8.73

$

9,153,390

Total expense associated with the stock options was approximately $3.9 million and $0.7 million during the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was approximately $2.1 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 1.7 years. As of March 31, 2020, 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 three months ended March 31, 2019 were estimated on the grant date using the Black-Scholes option-pricing model using the assumptions below. There were no options granted during the three months ended March 31, 2020.

March 31, 2019

Volatility

 

204.59-291.61

%

Expected term (in years)

 

5.0-6.25

Risk-free rate

 

2.40-2.49

%

Expected dividend yield

 

--

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 three months ended March 31, 2020:

    

    

Weighted Average 

Grant Date Fair 

Number of Shares

Value

Outstanding at December 31, 2019

 

7,091,789

$

7.78

Granted

 

774,300

 

10.16

Vested

 

(527,237)

 

7.27

Forfeited

 

(10,000)

 

7.54

Outstanding at March 31, 2020

 

7,328,852

$

8.07

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Total expense associated with restricted stock grants was approximately $7.1 million and $1.2 million during the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was approximately $26.0 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 1.0 year. This amount does not include, as of March 31, 2020, 3,003,011 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 months ended March 31, 2020 and 2019:

    

 

Three months ended

 

March 31, 

 

March 31, 

(in thousands)

 

2020

 

2019

Stock-based compensation expense associated with restricted stock

$

7,120

$

1,177

Stock-based compensation expense associated with option grants

 

3,948

 

705

Total

$

11,068

$

1,882

Warrants

The following table summarizes warrant activity for the three months ended March 31, 2020:

    

Weighted-

    

 average exercise 

Aggregate 

Warrants

price

intrinsic value

Outstanding at December 31, 2019

 

147,058

$

4.08

$

1,032,347

Issued

 

 

 

Exercised

 

 

 

Expired

 

 

 

Outstanding at March 31, 2020

 

147,058

$

4.08

$

847,054

There was no stock compensation expense related to warrants during the three months ended March 31, 2020 and 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:

(in thousands)

March 31, 2020

December 31, 2019

Non-

Non-

Current 

current 

Current 

current 

portion, 

portion, 

portion, 

portion, 

    

net

    

net

    

Total

    

net

    

net

    

Total

Convertible 5% Notes Payable

$

171

$

$

171

$

190

$

$

190

  Totals

$

171

$

$

171

$

190

$

$

190

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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 $19.5 million at March 31, 2020 and $19.3 million at December 31, 2019. No payments have been made on the 5% Notes as of March 31, 2020.

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).

Other 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 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 $49.0 million as of March 31, 2020, which include service fees, raw material costs and administrative fees. Payments of $20.3 million have been made to the contract manufacturer as of March 31, 2020. Accordingly, as of March 31, 2020, $28.3 million is included in other current liabilities in the Company’s unaudited condensed consolidated balance sheet. As of March 31, 2020, there are no long-term liabilities in the Company’s unaudited condensed consolidated balance sheet related to this agreement. We will incur an administrative fee of six percent (6%) per year starting from the date of invoice issuance. For the three months ended March 31, 2020, we have accrued $0.4 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”), we entered into a term loan facility of up to $60.0 million (“Term Loan”) with Hercules Capital, Inc. (“Hercules”), the proceeds of which were used for 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 Borrowers 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.

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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, on or before September 30, 2020, we achieve either the third milestone or we have raised at least $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 (“Milestone IV”). 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). As a result of the Company having raised in excess of $150 million before the required timeline in the Loan Agreement, the interest-only period has been extended to April 1, 2021. At our option upon seven business days’ prior written notice to Hercules, we 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, a final payment equal to 3.5% 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 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 our assets, 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 March 31, 2020 and through the filing date of this report, 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) our failure to make any payments of principal or interest under the Loan Agreement, promissory notes or other loan documents, (2) our breach or default in the performance of any covenant under the Loan Agreement, (3) the occurrence of a material adverse effect, (4) a false or misleading representation or warranty in any material respect, (5) our insolvency or bankruptcy, (6) certain attachments or judgments on our assets, or (7) the occurrence of any material default under certain agreements or obligations 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 “Hercules Warrant”) was issued to Hercules to purchase 147,058 shares of common stock with an exercise price of $4.08. The Hercules Warrant is exercisable for seven years from the date of issuance. Hercules may exercise the Hercules 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. We accounted for the Hercules Warrant as an equity instrument since it was indexed to our common shares and met the criteria for classification in shareholders’ (deficit) equity. The relative fair value of the Hercules Warrant on the date of issuance was approximately $1.0 million and was treated as debt issuance costs and 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

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The Company incurred financing expenses of $2.8 million (including the fair value of the Hercules Warrant) related to the Hercules Loan Agreement which are recorded as debt issuance costs and as an offset to long-term debt on the Company’s unaudited 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 $0.1 million for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, the remaining unamortized balance of debt issuance costs were $1.8 million.

Long-term debt as of March 31, 2020 is as follows:

    

March 31,

(in thousands)

 

2020

Long-term debt

$

30,000

End of term fee

 

975

 

30,975

Less: unamortized debt issuance costs

 

(1,774)

 

29,201

Less: Current portion

 

Long-term debt non-current

$

29,201

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. 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 $1.4 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 of $9.5 million and $8.1 million, respectively, 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 initial commitment period of the 45% rate was 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. As of March 31, 2020, the allocation rate is 61% and will be evaluated again in August 2020 for the following rent year. 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 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 took possession of this space in October 2019, with rental payments beginning in November 2019. We incurred rent expense of $0.1 million for the three months ended March 31, 2020.

The present values of our lease liability and corresponding ROU asset are $11.8 million and $9.3 million, respectively, as of March 31, 2020. 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 1 year. The following components of lease expense are included in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively:

 

March 31, 

 

March 31, 

(in thousands)

 

2020

 

2019

Operating lease cost

$

507

$

418

Net lease cost

$

507

$

418

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As of March 31, 2020, the weighted-average remaining operating lease term was 8.0 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 three months ended March 31, 2020 was $1.9 million.

The balance sheet classification of lease liabilities was as follows:

    

March 31, 

(in thousands)

 

2020

Liabilities

 

  

Lease liability current portion

$

1,602

Lease liability non-current

 

10,159

Total lease liability

$

11,761

As of March 31, 2020, the maturities of lease liabilities were as follows:

    

Operating

(in thousands)

 

leases

Remainder of 2020

$

1,416

2021

 

1,889

2022

 

1,911

2023

 

1,913

2024

 

1,796

After 2024

 

10,615

Total lease payments

 

19,540

Less: Interest

 

(7,779)

Present value of lease liabilities(*)

$

11,761

(*)

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 March 31, 2020 and 2019, and, at March 31, 2020 and December 31, 2019, have deferred revenue of approximately $0.7 million and $0.7 million, respectively, associated with this $2 million payment (approximately $152,000 of which has been classified in current liabilities at March 31, 2020 and December 31, 2019).

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.

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TG-1501: PDL1 (Cosibelimab)

In March 2015, we entered into a Global Collaboration Agreement (“Collaboration Agreement”) with Checkpoint Therapeutics, Inc. (“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 in March of 2020 achieved the first Milestone event for which we incurred expenses of approximately $0.9 million for the three months ended March 31, 2020.

TG-1601: BET

In May 2016, as part of a broader agreement with Jubilant Biosys (“Jubilant”), we entered into a sub-license agreement (“JBET Agreement”) with Checkpoint (see Note 10), for the development and commercialization of Jubilant’s novel BET inhibitor program in the field of hematological malignancies.

Under the terms of the agreement, we paid Checkpoint an up-front licensing fee of $1.0 million and will make additional payments contingent on certain preclinical, clinical, and regulatory milestones, including commercial milestones totaling up to approximately $177 million and a single-digit royalty on net sales. TG will also provide funding to support certain targeted research efforts at Jubilant.

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 Brutons 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 Hengrui 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 Hengrui 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. Hengrui 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. We incurred expenses of approximately $0.8 million and zero for the three months ended March 31, 2020 and 2019, respectively, the majority of which relates to manufacturing expenses of BTK. The relevant expenses are recorded in other research and development in the accompanying unaudited condensed consolidated statement of operations.

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.

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NOTE 10 RELATED PARTY TRANSACTIONS

In October 2014, we entered into the Office Agreement with FBIO, to occupy approximately 45% of the 24,000 square feet of New York City office space leased by FBIO. 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 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 was 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. As of March 31, 2020, the allocation rate is 61% and will be evaluated again in August 2020 for the following rent year. 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 $0.2 million for shared services for each of the three months ended March 31, 2020 and 2019, 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 $1.0 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively.

NOTE 11 SUBSEQUENT EVENTS

On January 3, 2020, we paid $2.9 million to the FDA as an NDA User Fee for umbralisib. Subsequently, on January 10, 2020, we submitted a letter to the FDA requesting a refund of the NDA User Fee under the small business waiver provision, section 736(d)(1)(C)2 of the Federal Food, Drug, and Cosmetic Act. On April 24, 2020, we received a reply from the FDA notifying us that they granted our request for the refund. The $2.9 million should be received within 45 days of the letter.

On March 11, 2020, the World Health Organization declared that the rapidly spreading strain of coronavirus, which causes a disease referred to as COVID-19, had evolved into a pandemic. In response to the pandemic, many governments around the world are implementing a variety of measures to reduce the spread of COVID-19, including travel restrictions and bans, instructions to residents to practice social distancing, quarantine advisories, shelter-in-place orders and required closures of non-essential businesses.  The pandemic and associated measures to contain it have impacted the global economy, disrupted global supply chains, affected healthcare systems, and created significant volatility in the financial markets.

COVID-19 has not had a material adverse effect on our business to date.   However, there remain many uncertainties regarding the pandemic.  As a result, the extent to which COVID-19 may impact our business in the future cannot be accurately predicted and depends on factors including the duration and severity of the pandemic and the actions taken to contain it (See Item 1A: “Risk Factors” for additional details).

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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. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. 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