UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-36818
TRACON Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
4350 La Jolla Village Drive, Suite 800,
San Diego, CA
(Address of Principal Executive Offices)
34-2037594
(I.R.S. Employer
Identification No.)
92122
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(858) 550-0780
(Registrant’s Telephone Number, Including Area Code)
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
TCON
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☒
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 check mark whether the registrant has led a report on and attestation to its management’s assessment of the effectiveness of its internal control over nancial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting rm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and non-voting common
stock held by non-affiliates of the registrant was approximately $42.2 million, based on the closing price of the registrant’s common stock on the Nasdaq Capital Market on June 30, 2022 of
$2.00 per share.
1
The number of outstanding shares of the registrant’s common stock as of March 3, 2023 was 23,822,542.
Portions of the Registrant’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which the Registrant intends to file pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after the Registrant’s fiscal year ended December 31, 2022, are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
2
TRACON Pharmaceuticals, Inc.
FORM 10-K — ANNUAL REPORT
For the Fiscal Year Ended December 31, 2022
TABLE OF CONTENTS
Forward-Looking Statements
Summary of Risk Factors
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accountant Fees and Services.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
Signatures.
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Forward-Looking Statements
This Annual Report on Form 10-K (Annual Report), including the sections entitled “Summary of Risk Factors,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements within the meaning of the
safe harbor provisions for the U.S. Private Securities Litigation Reform Act of 1955. We may, in some cases, use words such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and
similar expressions that convey uncertainty of future events or outcomes, to identify these forward-looking statements. Any statements contained herein
that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements in this Annual Report include, but
are not limited to, statements about:
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the success, cost and timing of results of our and our collaborators’ ongoing clinical trials;
our and our collaborators’ plans to develop and commercialize our product candidates;
the potential benefits of our collaboration arrangements and our ability to enter into additional collaboration arrangements;
the potential outcome of our dispute with I-Mab Biopharma (I-Mab);
our regulatory strategy and potential benefits associated therewith;
the timing of, and our ability to obtain and maintain, regulatory approvals for our product candidates;
the effects of unfavorable U.S. and global economic conditions on our business, financial condition and results of operations;
the rate and degree of market acceptance and clinical utility of any approved product candidate;
the success of competing products that are or may become available;
the size and growth potential of the markets for our product candidates, and our ability to serve those markets;
our commercialization, marketing and manufacturing capabilities and strategy;
the potential effects of macroeconomic and geopolitical developments, such as the ongoing military conflict between Ukraine and Russia and
the COVID-19 pandemic, on our operations;
our intellectual property position;
our estimates regarding expenses, future revenues, capital requirements, the sufficiency of our current and expected cash resources, and our
need for additional financing; and
our ability to realize the anticipated benefits associated with our capital efficiency focused initiatives.
These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and
assumptions as of the date of this Annual Report and are subject to risks and uncertainties. We discuss many of these risks in greater detail under the
section entitled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is
not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these
uncertainties, you should not place undue reliance on these forward-looking statements.
We qualify all of the forward-looking statements in this Annual Report by these cautionary statements. Except as required by law, we undertake no
obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
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Summary of Risk Factors
Our business is subject to numerous risks, as more fully described immediately below. You should read these risks before you invest in our common
stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated
with our business include:
• We have incurred losses from operations since our inception and anticipate that we will continue to incur substantial operating losses for the
foreseeable future. We may never achieve or sustain profitability.
• We will require substantial additional financing to achieve our goals, and failure to obtain additional financing when needed could force us
to delay, limit, reduce or terminate our drug development efforts. There is substantial doubt as to our ability to continue as a going concern.
•
Unfavorable U.S. and global economic conditions could adversely affect our business, financial condition or results of operations.
• We are heavily dependent on the success of our lead clinical stage product candidate envafolimab. We cannot give any assurance that
envafolimab will successfully complete clinical development or receive regulatory approval, which is necessary before it can be
commercialized.
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Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results. Failure can occur at any stage of clinical development.
Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our
ability to obtain regulatory approval and commence product sales.
The regulatory approval processes of the U.S. Food and Drug Administration (FDA), and comparable foreign authorities are lengthy, time
consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our
business will be substantially harmed.
• We depend in part on NCI and other third-party sponsors to advance clinical development of TRC102. If these third-party sponsors ceased
their support for our product candidates, our ability to advance clinical development of product candidates could be limited and we may not
be able to pursue the number of different indications for our product candidates that are currently being pursued.
• We are dependent on our corporate partners for the advancement of our product candidates. Specifically, we are dependent on 3D Medicines
Co., Ltd. (3D Medicines) and Jiangsu Alphamab Biopharmaceuticals Co., Ltd. (Alphamab) with respect to certain aspects of our
development of envafolimab for sarcoma in North America. Similarly, we are dependent on Eucure (Beijing) Biopharma Co., Ltd. (Eucure)
and Biocytogen Pharmaceuticals (Beijing) Co., Ltd. (Biocytogen) with respect to certain aspects of our development of YH001 in North
America. The failure to maintain these collaboration agreements, the failure of our corporate partners to perform their obligations under the
agreements, or the actions of our corporate partners or their other partners with respect to envafolimab and YH001 in other indications or
outside North America could negatively impact our business. Additionally, our ability to realize value from any product candidates
developed under our agreements with I-Mab Biopharma (I-Mab) will depend in part on I-Mab’s activities and willingness to fund future
development.
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Our ability to realize value from any product candidates developed under our agreements with I-Mab will depend in part on I-Mab’s
activities and willingness to fund future development and the timing and outcome of our dispute with I-Mab of which we cannot predict the
outcome and could materially adversely affect our ability to operate our business and financial results.
The Loan Agreement with Runway Growth Capital (RGC) contains restrictions that limit our flexibility in operating our business. We may
be required to make a prepayment or repay the outstanding indebtedness earlier than we expect if a prepayment event or an event of default
occurs, including a material adverse change with respect to us, which could have a materially adverse effect on our business.
• We may not be able to protect our intellectual property rights throughout the world.
• We face intense competition and rapid technological change and the possibility that our competitors may develop therapies that are more
advanced or effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our
product candidates.
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Item 1.
Business.
Overview
PART I
We are a biopharmaceutical company focused on the development and commercialization of novel targeted therapeutics for cancer and utilizing our
cost efficient, contract research organization (CRO) independent product development platform to partner with other life science companies to develop and
commercialize innovative products in the United States.
In December 2019, we entered into a collaboration and clinical trial agreement (the Envafolimab Collaboration Agreement) with 3D Medicines Co.,
Ltd. (3D Medicines) and Jiangsu Alphamab Biopharmaceuticals Co., Ltd. (Alphamab) for the development of envafolimab, also known as KN035, an
investigational PD-L1 single-domain antibody (sdAb) administered by rapid subcutaneous injection for the treatment of sarcoma in North America. The
ENVASARC Phase 2 pivotal trial (the ENVASARC trial) is enrolling a total of 160 patients at 600mg of envafolimab, with 80 patients enrolling at 600mg
of envafolimab every three weeks in cohort C, and 80 patients enrolling at 600mg of envafolimab every three weeks in combination with Yervoy® at
1mg/kg every three weeks for four doses in cohort D, in the sarcoma subtypes of undifferentiated pleomorphic sarcoma (UPS) and myxofibrosarcoma
(MFS). Nine of 80 responses by blinded independent central review (BICR) in either cohort are needed to satisfy the primary objective of the trial which is
to statistically exceed the known 4% objective response rate (ORR) of Votrient® (pazopanib), the only U.S. Food and Drug Administration (FDA)-
approved treatment for patients with refractory UPS or MFS. Achieving the primary endpoint of exceeding the known 4% ORR could be the basis for
accelerated approval of envafolimab by the FDA as a single agent and/or in combination with Yervoy. The trial will provide at least 86% power to
demonstrate the lower bound of the 95% confidence interval is greater than 5% in each cohort, which would be greater than the 4% ORR of Votrient
reported in soft tissue sarcoma in its package insert. Votrient is the only approved treatment for refractory soft tissue sarcoma, which includes UPS and
MFS.
In August and October 2022, we announced that the ENVASARC trial will proceed as planned after the independent data monitoring committee
(IDMC) reviewed three and twelve weeks of safety data, respectively, from more than 20 patients enrolled in the trial as of June 30, 2022. The safety data
reviewed included data from more than 10 patients enrolled into cohort C of treatment with single agent envafolimab at 600mg every three weeks and more
than 10 patients enrolled into cohort D of treatment with envafolimab at 600mg every three weeks in combination with Yervoy (ipilimumab).
In December 2022, we announced the IDMC recommended continued accrual as planned in both cohorts at the first planned interim efficacy
analysis. The IDMC reviewed interim safety and efficacy data from 18 patients enrolled into each cohort who completed a minimum of 12 weeks of
efficacy evaluations (two on-treatment scans). The double-digit ORR assessed by BICR in each cohort exceeded the prespecified futility rule that required
at least one response among the initial 18 patients enrolled at 600mg into each cohort. Envafolimab monotherapy (cohort C) and in combination with
Yervoy (cohort D) was well tolerated, with only a single related serious adverse event reported in 36 patients. A second interim efficacy analysis is planned
following the 12-week efficacy scan in the 92nd dosed patient, to allow for determination of the preliminary ORR, which we expect in the third quarter of
2023. There must be at least three responses among the initial 46 patients enrolled at 600mg into each cohort to continue enrollment in that cohort per the
futility rule of the trial.
In September 2022, we announced that the FDA had granted us fast track designation for the development of envafolimab for patients with locally
advanced, unresectable or metastatic UPS and MFS who have progressed on one or two prior lines of chemotherapy. We are also eligible to apply for
breakthrough therapy designation based on data from the ENVASARC clinical trial. We expect to complete enrollment by the end of 2023, have final
response assessment data including duration of response in all patients from the ENVASARC trial in mid-2024, and, assuming positive data, to submit a
biologics license application (BLA) to the FDA seeking accelerated approval in 2024. At any time that we reach nine responses in each cohort and meet the
endpoint, we expect to discuss the submission process with the FDA.
Our other clinical stage oncology product candidates include YH001, which is a monospecific investigational cytotoxic T-lymphocyte-associated
protein 4 (CTLA-4) antibody, that we licensed from Eucure (Beijing) Biopharma Co., Ltd. (Eucure) and Biocytogen Pharmaceuticals (Beijing) Co., Ltd.
(Biocytogen) in October 2021, TRC102, which is a small molecule that has been studied in Phase 1 and Phase 2 trials for the treatment of mesothelioma,
lung cancer, glioblastoma and solid tumors, and TJ004309, which is a CD73 antibody in Phase 1 clinical development for the treatment of solid tumors,
that we licensed from I-Mab Biopharma (I-Mab) in November 2018.
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YH001 is an investigational humanized CTLA-4 IgG1 monoclonal antibody that completed dosing in two Phase 1 trials sponsored by Eucure for the
treatment of various cancer indications. CTLA-4 is a protein expressed on T-cells and expressed at high levels specifically on regulatory T-cells that act as a
checkpoint to inhibit effector T-cell immune responses to cancer cells. The CTLA-4 inhibitor Yervoy (ipilimumab) marketed by BMS has been approved as
a single agent in melanoma and approved in combination with other therapies in multiple indications including non-small cell lung cancer, renal cell
carcinoma (RCC) and microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) cancer. Data from the Phase 1 dose escalation trial in
Australia of YH001 in combination with the PD-1 antibody, toripalimab, were presented at the American Society of Clinical Oncology 2022 Annual
Meeting. YH001 was well tolerated up to 4 mg/kg when combined with toripalimab in the 24 patients as of the December 31, 2021 data cut-off date. The
Phase 1 dose escalation trial in China of YH001 as a single agent, recently completed enrollment and determined a recommended Phase 2 dose. We expect
data to be presented in the second half of 2023. No CTLA-4 therapy is approved by the FDA for the treatment of soft tissue sarcoma.
In August 2022, we announced that the FDA had approved the Investigational New Drug (IND) application for the initiation of a Phase 1/2 clinical
trial of YH001 in combination with envafolimab and doxorubicin, an approved treatment for soft tissue sarcoma, for the treatment of sarcoma patients and
in December 2022, we initiated dosing in the Phase 1/2 clinical trial. The Phase 1/2 trial will assess the safety and efficacy of the triplet combination of
YH001, envafolimab and doxorubicin in the common sarcoma subtypes of leiomyosarcoma and dedifferentiated liposarcoma, and we expect Phase 1 data
in the second half of 2023. In addition, the trial will assess the safety and efficacy of the doublet combination of YH001 and envafolimab in patients with
the rare sarcoma subtypes of alveolar soft part sarcoma and chondrosarcoma. Additionally, we plan to initiate trials of YH001 as a single agent or in
combination with immunotherapies in other tumor types.
TRC102 is a small molecule in clinical development to reverse resistance to specific chemotherapeutics by inhibiting DNA base excision repair
(BER). In initial clinical trials of more than 100 patients, TRC102 has shown good tolerability and we believe promising anti-tumor activity in combination
with alkylating and antimetabolite chemotherapy for the treatment of cancer patients. TRC102 has been studied in Phase 1 or Phase 2 trials in
mesothelioma patients in combination with the approved chemotherapeutic Alimta® (pemetrexed), in glioblastoma, ovarian cancer, lung and colorectal
cancer patients in combination with the approved chemotherapeutic Temodar® (temozolomide) and in lung cancer patients in combination with the
approved chemotherapeutics Alimta and cisplatin as well as external beam radiation (i.e., chemoradiation). All current TRC102 trials are sponsored and
funded by the National Cancer Institute (NCI). We retain global rights to develop and commercialize TRC102 in all indications. In October 2020, we
received orphan drug designation (ODD) from the FDA for TRC102 for the treatment of patients with malignant glioma, including glioblastoma. O6-
methylguanine DNA methyltransferase (MGMT) deficiency is observed in about one-third of glioblastoma patients, and a prior study of Temodar and
TRC102 reported at the Society for Neuro-Oncology in 2018 demonstrated that two MGMT deficient glioblastoma patients had prolonged survival when
treated with Temodar and TRC102 after progressing previously on Temodar and radiation therapy. A December 2020 publication in Cancer Cell also
demonstrated Temodar and TRC102 were active in MGMT deficient patients with colorectal cancer. Based on these data, we believe a trial in first line
glioblastoma patients of Temodar, radiation therapy and TRC102 is warranted and are discussing further development with investigators at this time. In
addition, based on data presented at the ASCO 2020 virtual meeting that the combination of chemoradiation and TRC102 produced objective responses in
all 15 evaluable patients with advanced localized lung cancer treated in a Phase 1 trial, in January 2022, the NCI initiated a randomized Phase 2 trial of
chemoradiation with or without TRC102, followed by consolidative durvalumab treatment. The primary objective is to improve the 56% one-year
progression free survival (PFS) rate with current standard of care to 75% with current standard of care plus TRC102. The trial began enrollment in June
2022 and is expected to be complete in 2025.
TJ004309, also known as TJD5 or uliledlimab, is a novel humanized antibody against CD73 expressed on stromal cells and tumors that converts
extracellular adenosine monophosphate (AMP) to the immunosuppressive metabolite adenosine. We are developing TJ004309 in collaboration with I-Mab
under a strategic collaboration and clinical trial agreement that we entered into in November 2018 (the TJ004309 Agreement). In July 2019, we began
enrollment in a Phase 1 clinical trial to assess safety and preliminary efficacy of TJ004309 as a single agent and when combined with the PD-L1
checkpoint inhibitor Tecentriq® in patients with advanced solid tumors, and in June 2021 we presented data from the ongoing Phase 1 trial at the ASCO
2021 virtual meeting. In a poster presentation titled “The safety, pharmacokinetics (PK), pharmacodynamics (PD) and clinical efficacy of uliledlimab
(TJ004309), a differentiated CD73 antibody, in combination with atezolizumab in patients with advanced cancer,” uliledlimab was found to be well-
tolerated up to 20mg/kg every three weeks and 15mg/kg once weekly as a monotherapy and in combination therapy with atezolizumab 1200mg every three
weeks and no dose limiting toxicity (DLT) was observed and the maximum tolerated dose (MTD) was not reached. There was one complete response in a
PD-(L)1 naïve patient, two partial responses (PRs) with one PR in a PD-(L)1 naïve patient and one PR in a PD-(L)1 refractory patient, and three cases of
stable disease (SD) following treatment with uliledlimab and atezolizumab.
We entered into a separate strategic collaboration and clinical trial agreement (the Bispecific Agreement) which allows for the development of up to
five of I-Mab’s proprietary bispecific antibody (the BsAb) product candidates to be nominated by I-Mab within a five-year period for development and
commercialization in North America, with the option to opt-in and acquire product rights outside of Greater China and Korea prior to completing the first
pivotal clinical trial for any bispecific product candidate.
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In March 2020, I-Mab issued a press release announcing a strategic partnership with Kalbe Genexine Biologics (KG Bio), whereby KG Bio received
what the press release described as a right of first negotiation outside North America for TJ004309 for up to $340 million in potential payments to I-Mab.
In March 2020, we also learned that I-Mab had entered into two license and collaboration agreements with ABL Bio in July 2018 (ABL Bio License 1 and
ABL Bio License 2). Under ABL Bio License 1, I-Mab granted to ABL Bio exclusive, worldwide (excluding Greater China), royalty-bearing rights to
develop and commercialize a BsAb using certain monoclonal antibody sequences. Under ABL License 2, I-Mab and ABL agreed to collaborate to develop
three PD-L1-based bispecific antibodies by using ABL Bio’s proprietary BsAb technology and commercialize them in their respective territories, which,
collectively, include China, Hong Kong, Macau, Taiwan and South Korea, and other territories throughout the rest of the world if both parties agree to do
so in such other territories during the performance of the agreement.
In June 2020, I-Mab commenced an arbitration proceeding under the Rules of Arbitration of the International Chamber of Commerce (the ICC)
before an arbitration tribunal seated in New York City (the Tribunal) after we invoked contractual dispute resolution provisions asserting that I-Mab had
breached its contractual obligations concerning two strategic collaboration and clinical trial agreements with us entered into in November 2018. Those
strategic collaboration and clinical trial agreements relate to the development of TJ004309 and five of I-Mab’s proprietary bispecific antibody product
candidates to be nominated by I-Mab within a five-year period for development and commercialization in North America. We filed counterclaims in the
arbitration seeking to recover over $200 million in damages from I-Mab based on I-Mab’s breaches of the two strategic collaboration and clinical trial
agreements. In 2021, I-Mab sent us notices purporting to terminate the TJ004309 Agreement, which would result in I-Mab owing us a prespecified
termination fee of $9.0 million. However, I-Mab does not have an option to terminate the TJ004309 Agreement without cause until the ongoing Phase 1
clinical trial of TJ004309 is “Complete,” as that term is defined in the TJ004309 Agreement, and we responded by disputing the basis for I-Mab’s
termination. In March 2021, I-Mab filed a lawsuit in the Delaware Court of Chancery seeking a variety of relief including an order of specific performance
requiring us to comply with I-Mab’s purported termination of the TJ004309 Agreement. In May 2021, the Delaware Court of Chancery stayed the lawsuit
in favor of arbitration. The Tribunal held a hearing on the merits in February 2022, and final post-hearing briefs were submitted by us and I-Mab in May
2022. On November 8, 2022, the Tribunal invited the parties to submit additional, limited briefing on two discrete issues by December 9, 2022. Following
that submission, the parties submitted their respective cost submissions for attorney fees reimbursement in January 2023. The Tribunal did not indicate
when it expects to render its final decision; however, it did note that it was far along in its deliberations and preparation of a final award. We expect the
Tribunal to render its final decision in the first quarter of 2023.
Under the applicable rules of the arbitration, the prevailing party may be awarded attorneys’ fees at the Tribunal’s discretion. The claims under the
arbitration are complex; accordingly, we cannot predict the outcome of the arbitration, and we are unable to estimate the amount of recovery or damages, if
any, that may be awarded by the Tribunal. The dispute with I-Mab has caused, and could continue to cause, us to incur significant costs.
The following table summarizes key information regarding ongoing and planned development of our clinical stage product candidates:
Envafolimab
Soft Tissue Sarcoma (UPS and MFS)
Pivotal Phase 2
Interim Data – Q3 2023
Final Data – mid-2024
Envafolimab + YH001
Multiple Soft Tissue Sarcoma Subtypes
Phase 1/2 (planned)
Second half of 2023 and 2024
TRC102
Lung Cancer
Randomized Phase 2
2025
Phase
Data Expected
We utilize a CRO-independent product development platform that emphasizes capital efficiency. Our experienced clinical operations, data
management, quality assurance, product development and regulatory affairs groups manage significant aspects of our clinical trials with internal resources.
We use these internal resources to reduce the costs associated with utilizing CROs to conduct clinical trials. In our experience, this model has resulted in
capital efficiencies and improved communication with clinical trial sites, which can expedite patient enrollment and improve the quality of patient data as
compared to a CRO-managed model. We have leveraged this platform in all of our sponsored clinical trials. We have also leveraged our product
development platform to diversify our product pipeline without payment of upfront license fees through license agreements with Eucure and Biocytogen,
3D Medicines and Alphamab, I-Mab, and Janssen. We continue to evaluate life science companies that would benefit from a rapid and capital-efficient U.S.
drug development solution that includes U.S. and European Union (EU) clinical development expertise. We believe we will continue to be recognized as a
preferred U.S. clinical development partner through a cost- and risk-sharing partnership structure, which may include U.S. commercialization.
Our goal is to be a leader in the development of targeted therapies for patients with cancer and other diseases of high unmet medical need.
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Our Lead Clinical Stage Product Candidate – Envafolimab
Overview of PD-L1
PD-L1 is an immune-inhibitory checkpoint molecule expressed on epithelial and vascular endothelial cells, as well as by a number of immune cells,
that is utilized by tumor cells as an immune escape mechanism. Numerous preclinical and clinical studies of PD-1/PD-L1 products have demonstrated that
antibodies that block the interaction of PD-1 with its ligands, PD-L1 and PD-L2, or those that block only the interaction of PD-L1 with PD-1, can augment
anti-tumor T-cell responses and lead to complete and durable tumor eradication in a certain proportion of patients. Potent therapeutic anti-tumor responses
due to blocking of the PD-1/PD-L1 interaction has been demonstrated by these approved products in patients with various solid tumors including, but not
limited to, NSCLC, small cell lung cancer, gastric cancer, melanoma, RCC, head and neck cancer, cutaneous squamous cell carcinoma (cSCC) and
urothelial carcinoma.
About Envafolimab and Preclinical Studies
Envafolimab is a sdAb that binds selectively to PD-L1 and is administered by rapid subcutaneous injection without an adjuvant. In November 2021
we announced that our partners 3D Medicines and Alphamab had received marketing authorization for envafolimab from the Chinese National Medical
Products Association (NMPA) in the indication of MSI-H/dMMR cancer, and is being further developed by 3D Medicines for the treatment of various
cancer indications, including an ongoing first line biliary tract cancer (BTC) pivotal trial in China, and by us in the United States for the treatment of
sarcoma in the pivotal ENVASARC trial.
Single-domain antibodies are a novel class of therapeutic protein that contain the unique structural and functional properties of naturally-occurring
antibodies from camels and llamas that contain heavy chains and lack light chains. On February 6, 2019, the FDA approved the first sdAb, Cablivi®
(caplacizumab), for adults with acquired thrombotic thrombocytopenic purpura.
Envafolimab is a camelid IgG1 sdAb with single digit nanomolar affinity to PD-L1. Benefitting from the sdAb format, envafolimab has
approximately half the molecular weight compared to a typical monoclonal antibody with better stability and high solubility, which enables the
development of a high concentration formulation suitable for rapid subcutaneous injection. In addition, the effector functions are muted in envafolimab to
help limit side effects and limit its exposure to the immune system to avoid unwanted adverse immune responses. As a result, compared with approved PD-
(L)1 inhibitors, envafolimab potentially has the following advantages:
•
•
•
Better patient compliance with increased convenience. Subcutaneous injection enables more rapid administration and the potential for self-
injection, which enables better patient compliance with the treatment regimen;
Relatively stable plasma-drug concentration. The plasma-drug concentration of envafolimab is relatively stable without significant fluctuations
due to the nature of subcutaneous administration. This unique PK profile compared with intravenous formulations may result in lower risks to
patients; and
Potential for improved tumor penetration. Envafolimab is approximately half the size of a typical monoclonal antibody, which may provide for
improved tumor penetration in cancer patients as was observed in pre-clinical experiments. This unique tumor penetration compared with typical
monoclonal antibodies may improve efficacy.
In pre-clinical studies in human cell models and a humanized mouse model, envafolimab was compared with 2.41H90P, an antibody with a sequence
that is identical to durvalumab, an approved PD-L1 inhibitor marketed by AstraZeneca, and envafolimab showed the following potential advantages:
•
Stronger T-cell activation effect. The level of T-cell activation can be measured by the secretion levels of IFN- and IL-2. Higher secretion levels
are generally associated with stronger T-cell activation. In pre-clinical studies, envafolimab (referred to as KN035) demonstrated higher potency
and a higher maximal stimulatory effect on IFN- and IL-2 secretion compared to 2.41H90P, as illustrated in the following figure.
9
•
Higher anti-tumor efficacy. Envafolimab and 2.41H90P were each injected intraperitoneally in mice at 0.1mg/kg, 0.3mg/kg and 1.0mg/kg dose
levels. As illustrated in the following graph, envafolimab showed more potent tumor growth inhibition effects with maximum inhibition
demonstrated at a ten-fold lower dose.
•
More rapid tumor penetration. After injection of envafolimab and 2.4H90P in tumor bearing nude mice, the tumor radioactivity signal was
consistently higher in the envafolimab group up to 52 hours post injection. The tumor radioactivity signal in the envafolimab group between 1
hour to 2.5 hours was statistically significantly higher, which suggests potentially better distribution of envafolimab into the tumor.
Clinical Trials of Envafolimab
As of December 31, 2022, envafolimab had been dosed in more than 1,000 patients in a total of more than 7 ongoing or completed clinical trials in
the United States, China or Japan, including our ENVASARC trial, a pivotal Phase 2 trial in MSI-H/dMMR cancer patients in China, a Phase 2 trial of
envafolimab plus chemotherapy in gastric cancer, a Phase 3 randomized trial of envafolimab plus chemotherapy versus chemotherapy alone in BTC in
China, a Phase 1 dose escalation and dose exploration trial in the United States, a Phase 1 dose escalation and dose exploration trial in China, and a Phase 1
dose escalation and dose exploration trial in Japan.
10
Phase 1 Dose Escalation Clinical Trial in China
An open-label, single-arm Phase 1 dose escalation and exploration clinical trial of envafolimab has completed enrollment in China. The safety and
efficacy data from this trial were presented at the American Society of Clinical Oncology (ASCO) Annual Meeting in June 2019. Based on the data
presented at the 2019 ASCO Annual Meeting (the ASCO Presentation), 17 subjects were enrolled in the dose escalation phase in this trial as of May 1,
2019. A total of 287 subjects were enrolled in this Phase 1 trial at dose levels shown to be tolerable during dose escalation.
Trial purpose. The primary objectives of the Phase 1 dose escalation were to assess the safety and tolerability profile and MTD of single agent
envafolimab administered subcutaneously in subjects with advanced solid tumors. The secondary objectives were to evaluate the PK profile,
immunogenicity and anti-tumor activity.
Trial design of the dose escalation phase. This trial adopted a modified “3+3” design with a DLT evaluation period of 28 days. Subjects received
envafolimab in six cohorts at 0.1mg/kg, 0.3mg/kg, 1.0mg/kg, 2.5mg/kg, 5.0mg/kg and 10.0mg/kg once every week (QW) subcutaneously. Starting from the
1.0mg/kg cohort, a traditional “3+3” design was followed. Safety and tolerability were assessed by monitoring treatment emergent adverse events
(TEAEs). Tumor assessments were performed based on RECIST version 1.1.
Safety of dose escalation phase. The majority of the subjects received two or more prior systemic oncology treatments. According to the ASCO
Presentation, 16 of the subjects discontinued treatment due to disease progression (n=15) or consent withdrawal (n=1). All of the enrolled subjects
experienced TEAEs. 13 (76.5%) subjects experienced treatment-related TEAEs. Three (17.6%) subjects experienced serious TEAEs, although none were
determined to be treatment-related. A TEAE led to treatment discontinuation in one subject and was also determined to be not treatment-related. No DLT
was reported and the MTD was not reached. Details of the TEAEs observed from the 17 subjects enrolled in the Phase 1 dose escalation trial are
summarized in the following table.
11
Efficacy. According to the ASCO Presentation, 15 out of 17 subjects were evaluable for the efficacy analysis. Three subjects had confirmed PR,
including one RCC subject in the 2.5mg/kg cohort, one intrahepatic cholangiocarcinoma subject from the 5.0mg/kg cohort and one BTC subject from the
10.0mg/kg cohort. In addition, five subjects achieved stable disease. All 15 subjects completed at least one post-baseline tumor assessment, according to
the ASCO Presentation. Two enrolled subjects who had not reached the first post-baseline tumor assessment were excluded. The table below summarizes
the best overall response in the efficacy analysis of this trial, according to the ASCO Presentation.
The following waterfall plot shows the best overall response of the 15 evaluable subjects receiving envafolimab as measured by percentage of
change of target lesions from baseline, according to the ASCO Presentation.
Conclusion. According to the ASCO Presentation, envafolimab exhibited a tolerable safety profile and preliminary efficacy in patients with
advanced malignancies in the Phase 1 dose escalation trial in China.
12
Phase 1 Dose Escalation Clinical Trial in the United States
An open-label Phase 1 dose escalation and dose exploration clinical trial of envafolimab was conducted in the United States. Safety and efficacy data
from the dose escalation phase of the trial were presented at the 2018 Annual Congress of the European Society for Medical Oncology (ESMO) in October
2018. Based on the data presented at ESMO (the ESMO Presentation), 18 subjects were enrolled in the dose escalation phase of this trial as of July 5, 2018.
Trial purpose of the dose escalation phase. The primary objectives of the Phase 1 dose escalation clinical trial were to evaluate and characterize the
tolerability and safety profile of single agent envafolimab in subjects with locally advanced or metastatic solid tumors. The secondary objectives were to
characterize the PK profile, determine MTD and to evaluate anti-tumor activity.
Trial design of the dose escalation phase. This trial adopted a modified “3+3” design with a DLT evaluation period of 28 days. Subjects received
envafolimab across eight cohorts at 0.01mg/kg, 0.03mg/kg, 0.1mg/kg, 0.3mg/kg, 1.0mg/kg, 2.5mg/kg, 5.0mg/kg and 10.0mg/kg QW subcutaneously.
Starting from the 0.3mg/kg cohort, a traditional “3+3” design was followed. Safety and tolerability were assessed by monitoring TEAEs. Tumor
assessments were performed based on RECIST version 1.1.
Safety of dose escalation phase. The median duration of exposure to envafolimab was 9 weeks with a range of 6 to 32 weeks. As of July 5, 2018, two
of the subjects (11.1%) remained in the trial, 11 subjects had discontinued treatment due to disease progression, three subjects had discontinued treatment
due to TEAEs, and two subjects had discontinued treatment due to the opinion of the investigator that no more clinical benefit could be obtained or for
other reasons. All of the 18 enrolled subjects experienced TEAEs. Treatment-related TEAEs at grade 3 or above included increased aspartate
aminotransferase (10.5%), increased alanine aminotransferase (10.5%) and lymphopenia (10.5%). No DLT was observed and the planned maximum dose
of 10.0mg/kg was reached.
Efficacy of dose escalation phase. According to the ESMO Presentation, 17 out of 18 subjects were evaluable for the efficacy analysis. Two subjects
had confirmed PR, including one NSCLC subject from the 0.3mg/kg QW cohort (response duration of 9 months) and one MSI-H prostate cancer subject
from the 2.5mg/kg QW cohort. In addition, five subjects achieved SD. All 17 evaluable subjects completed at least one post-baseline tumor assessment
according to the ESMO Presentation. One enrolled subject who had not reached the first post-baseline tumor assessment was excluded. The table below
summarizes the best overall response in the efficacy analysis of this trial according to the ESMO Presentation.
PK profile of dose escalation phase. This trial showed that the exposure to envafolimab was dose-dependent and increased proportionally across all
eight dose levels. Mean half-life of envafolimab was approximately 200 hours.
Conclusion. According to the ESMO Presentation, envafolimab exhibited a favorable safety profile in subjects with advanced solid tumors and
preliminary efficacy results demonstrated encouraging anti-tumor activity. Based on the PK profile, patients in the trial were treated with envafolimab at
300mg every 4 weeks by subcutaneous injection.
13
Phase 1 Clinical Trial in Japan
An open-label Phase 1 dose escalation and dose exploration clinical trial of envafolimab was conducted in Japan. The safety, efficacy and PK data of
this trial as of May 5, 2019 were presented at the ASCO Annual Meeting in June 2019. Based on the data presented in the ASCO Annual Meeting (the
Japan Trial ASCO Presentation), 26 subjects were enrolled in this trial as of May 5, 2019.
Trial purpose. The primary objectives of the Phase 1 clinical trial were to assess the safety and tolerability profile of single agent envafolimab in
Japanese subjects with previously treated advanced solid tumors. The secondary objectives were to characterize the PK profile, determine MTD and
evaluate the anti-tumor activity.
Trial design. This Phase 1 trial consisted of a multi-dose escalation phase followed by a dose exploration phase. Subjects received envafolimab
across five cohorts at 1.0mg/kg, 2.5mg/kg and 5.0mg/kg QW subcutaneously, and 2.5mg/kg and 5.0mg/kg Q2W subcutaneously. The QW schedule
adopted a traditional “3+3” design. For the Q2W schedule, six patients were planned for each cohort. Safety and tolerability were assessed by monitoring
TEAEs under common terminology criteria for adverse events (CTCAE) version 4.0. Tumor assessments were performed based on RECIST version 1.1.
Full PK sampling was performed after the first dose of cycle 1 (28 days) and sparse PK samples were collected at pre-dose and around Cmax during the
subsequent cycles.
Safety. According to the Japan Trial ASCO Presentation, as of May 5, 2019, no MTD had been reached. As of the same date, three subjects had
remained in the trial. 21 subjects had discontinued treatment due to disease progression and two subjects had discontinued treatment due to TEAEs. All of
the enrolled subjects experienced TEAEs, 17 subjects (65.4%) experienced treatment-related TEAEs, and only one grade 3 treatment-related TEAE
(cerebral infraction) was reported. There were no grade 4/5 treatment-related TEAEs. There were a total of four serious adverse events, two of which were
treatment-related. No DLT was reported.
Efficacy. According to the Japan Trial ASCO Presentation, nine out of 26 patients were evaluable for the efficacy analysis as of May 5, 2019. Two
subjects had confirmed PR and two subjects had unconfirmed PR. The other five evaluable subjects had achieved SD. 17 enrolled subjects who did not
reach the first post-baseline tumor assessment were excluded.
PK profile. In the dose escalation phase, the exposure to envafolimab was dose-dependent and increased proportionally. Tmax varied from 96 to 168
hours after a single dose as shown in Figure 1 below. In the dose exploration phase, the exposure to envafolimab was dose-dependent and increased
proportionally. Preliminary PK suggested a prolonged half-life that may support a less frequent dosing schedule than once every 2 weeks.
Conclusion. Envafolimab exhibited a favorable safety profile in patients with advanced malignancies and preliminary efficacy results demonstrated
promising anti-tumor activity in the Phase 1 clinical trial in Japan. Based on the PK profile, patients in the trial were treated with envafolimab at 300mg
every 4 weeks by subcutaneous injection.
14
Pivotal Clinical Trial in China in MSI-H/dMMR tumors
A pivotal clinical trial of envafolimab dosed as a single agent for the treatment of MSI-H/dMMR tumors was initiated in August 2018. The trial was
a non-randomized trial enrolling approximately 110 patients in China, including CRC patients who are required to have been previously treated with
standard therapies, which must include fluoropyrimidine, oxaliplatin or irinotecan, and other solid tumor patients, who are required to have been previously
treated with at least one line of systemic standard of care therapy. Patients received 150mg of envafolimab subcutaneously dosed weekly and ORR was the
primary endpoint defined by RECIST version 1.1. In a presentation at the CSCO 2020 Virtual Scientific Program entitled, “Subcutaneous Injection of PD-
L1 Antibody Envafolimab (KN035) in Advanced Tumors with Mismatch-Repair Deficiency,” single agent envafolimab was shown to have a 32%
confirmed ORR by central radiographic review in 41 patients with MSI-H/dMMR CRC who failed a fluoropyrimidine, oxaliplatin and irinotecan, and had
at least two on-study tumor assessments. The 32% ORR is nearly identical to the 28% ORR reported for Opdivo and 33% ORR reported for Keytruda in
separate trials of MSI-H/dMMR CRC patients who failed a fluoropyrimidine, oxaliplatin and irinotecan. DOR was greater than or equal to 12 months in
75% of patients and OS was greater than or equal to 12 months in 65% of patients. The ORR in the overall population (n=103) of MSI-H/dMMR cancer
patients, including tumor types other than CRC, was 43%, DOR was greater than or equal to 12 months in 92% of patients and OS was greater than or
equal to 12 months in 75% of patients. In November 2021, envafolimab received marketing authorization from the Chinese NMPA and was approved for
adult patients with MSI-H/dMMR advanced solid tumors, including those patients with advanced colorectal cancer who have experienced disease
progression following treatment with a fluoropyrimidine, oxaliplatin, and irinotecan, as well as patients with other advanced solid tumors who have
experienced disease progression following prior systemic treatment and have no satisfactory alternative treatment options.
Clinical Development in Sarcoma in the United States
The ENVASARC trial is enrolling a total of 160 patients at 600mg of envafolimab, with 80 patients enrolling at 600mg of envafolimab every three
weeks in cohort C, and 80 patients enrolling at 600mg of envafolimab every three weeks in combination with Yervoy® at 1mg/kg every three weeks for
four doses in cohort D, in the sarcoma subtypes of UPS and MFS. Nine of 80 responses by BICR in either cohort are needed to satisfy the primary
objective of the trial which is to statistically exceed the known 4% ORR of Votrient® (pazopanib), the only FDA-approved treatment for patients with
refractory UPS or MFS. Achieving the primary endpoint of ORR could be the basis for accelerated approval of envafolimab by the FDA as a single agent
and/or in combination with Yervoy. The trial will provide at least 86% power to demonstrate the lower bound of the 95% confidence interval is greater than
5% in each cohort, which would be greater than the 4% ORR of Votrient reported in soft tissue sarcoma in its package insert. Votrient is the only approved
treatment for refractory soft tissue sarcoma, which includes UPS and MFS.
In August and October 2022, we announced that the ENVASARC trial will proceed as planned after the IDMC reviewed three and twelve weeks of
safety data, respectively, from more than 20 patients enrolled in the trial as of June 30, 2022. The safety data reviewed included data from more than 10
patients enrolled into cohort C of treatment with single agent envafolimab at 600mg every three weeks and more than 10 patients enrolled into cohort D of
treatment with envafolimab at 600mg every three weeks in combination with Yervoy (ipilimumab).
In December 2022, we announced the IDMC recommended continued accrual as planned in both cohorts at the first planned interim efficacy
analysis. The IDMC reviewed interim safety and efficacy data from 18 patients enrolled into each cohort who completed a minimum of 12 weeks of
efficacy evaluations (two on-treatment scans). The double-digit ORR assessed by BICR in each cohort more than satisfied the prespecified futility rule that
required at least one response among the initial 18 patients enrolled at 600mg into each cohort. Envafolimab monotherapy (cohort C) and in combination
with Yervoy (cohort D) was well tolerated, with only a single related serious adverse event reported in 36 patients. A second interim efficacy analysis is
planned following the 12-week efficacy scan in the 92nd dosed patient, to allow for determination of the preliminary ORR, which we expect in the third
quarter of 2023. There must be at least three responses among the initial 46 patients enrolled at 600mg into each cohort to continue enrollment in that
cohort per the futility rule of the trial.
In September 2022, we announced that the FDA had granted us fast track designation for the development of envafolimab for patients with locally
advanced, unresectable or metastatic UPS and MFS who have progressed on one or two prior lines of chemotherapy. We are also eligible to apply for
breakthrough therapy designation based on data from the ENVASARC clinical trial. We expect to complete enrollment by the end of 2023, have final
response assessment data including duration of response in all patients from the ENVASARC trial in mid-2024, and, assuming positive data, to submit a
BLA to the FDA seeking accelerated approval in 2024. At any time that we reach nine responses in each cohort and meet the endpoint, we expect to
discuss the submission process with the FDA.
UPS has an incidence of 0.8 to 1.0 cases per 100,000 patients in the western world per orpha.net and accounts for 10-15% of new cases of soft tissue
sarcoma in the United States, with prevalence rates estimated at approximately 1.5 to 2.0 times incidence, and MFS accounts for half as many cases as UPS
in the United States. We estimate that marketing envafolimab in refractory UPS and MFS could generate peak annual sales of up to $200 million in the
United States without considering a price premium to the reference PD-1 inhibitors Opdivo (nivolumab) or Keytruda (pembrolizumab) that are
administered intravenously. We estimate that marketing envafolimab in rarer sarcoma subtypes where the activity of checkpoint inhibition has been
demonstrated could generate annual sales of up to $100 million in the United States.
15
Other Ongoing Clinical Trials
A Phase 3 randomized clinical trial in BTC was initiated by 3D Medicines in April 2018. This trial is an open-label trial to assess the safety and
efficacy of envafolimab plus standard of care gemcitabine-based chemotherapy compared to gemcitabine-based chemotherapy alone with OS as the
primary endpoint. In the envafolimab arm, envafolimab will be dosed at 2.5mg/kg subcutaneously QW, along with gemcitabine and oxaliplatin at
recommended doses. The trial is expected to enroll over 390 patients in China and data are expected in 2023.
A Phase 2 clinical trial of envafolimab in combination with folinic acid, fluorouracil and oxaliplatin chemotherapy (FOLFOX) in the first line
treatment of advanced gastric cancer was fully enrolled (n=15) as of January 15, 2019. In an abstract at the ASCO 2020 Virtual Scientific Program entitled
“Envafolimab plus chemotherapy in advanced gastric or gastroesophageal junction (G/GEJ) cancer” data were reported in 15 patients who were evaluable
for response. The Eastern Cooperative Oncology Group (ECOG) performance status was 1 in 80% of subjects and the majority had gastric cancer (86.7%).
At the time of data cutoff, the minimum follow-up was 6 months. The occurrence of TEAEs was 100% (all grades) and 73.3% (grades 3-4). The most
frequent grade 3-4 TEAEs included neutrophil count decreased 46.7%, anemia 20.0%, and platelet disorder 20% (3/15). Confirmed ORR was 60%
(unconfirmed ORR: 73.3%). Median DOR was not reached. Median PFS was 6.8 months.
Our Second Clinical Stage Product Candidate – YH001
YH001 is an investigational humanized CTLA-4 IgG1 monoclonal antibody. YH001 is being developed by Eucure for the treatment of various
cancer indications. In October 2021, we entered into a collaborative development and commercialization agreement with Eucure and Biocytogen pursuant
to which we obtained an exclusive license to develop and commercialize YH001 in North America for the treatment of multiple specified indications.
CTLA-4 is a protein expressed on all T-cells but which is expressed at the highest level on Tregs and contributes to the suppressor function of Tregs
and acts as a checkpoint that prevents T-cell immune responses to cancer cells. A CTLA-4 inhibitor has been approved as a single agent in melanoma and
approved in combination with other therapies in multiple indications including NSCLC, RCC and MSI-H colorectal cancer.
Clinical Development of YH001
As of December 31, 2021, YH001 had been dosed to more than 41 patients in China and Australia in two completed Phase 1 clinical trials. YH001
is also being studied in additional ongoing Phase 1 clinical trials in combination with investigational and approved immunotherapies China sponsored by
Eucure.
Phase I Dose Escalation Clinical Trial in Australia
An open-label, single-arm Phase 1 dose escalation clinical trial of YH001 in combination with the PD-1 antibody, toripalimab, was completed in
Australia. The safety and efficacy data from this trial were presented at the 2022 ASCO Annual Meeting in June 2022. Based on the data presented in the
ASCO presentation, 24 subjects were enrolled in this trial as of December 31, 2021.
Study purpose. The primary objectives of the Phase 1 dose escalation clinical trial were to assess the safety and tolerability profile and MTD of
YH001 in combination with the PD-1 inhibitor toripalimab in subjects with advanced solid tumors. The secondary objectives were to evaluate the PK
profile and anti-tumor activity.
Study design. This trial adopted a modified “3+3” design. Subjects receive YH001 in six cohorts at 0.05mg/kg, 0.1mg/kg, 0.3mg/kg, 1.0mg/kg,
2.0mg/kg, 4.0mg/kg, and 6.0mg/kg by IV administration during a three week run-in period, after which subjects receive YH001 in combination with
240mg of the PD-1 antibody toripalimab every three weeks for four doses.
Safety. At the December 31, 2021 data cutoff, the maximum tolerated and recommended Phase 2 dose of YH001 when given with toripalimab was 4
mg/kg i.v. every three weeks for up to one year of dosing.
Efficacy. Among 23 patients that had tumor imaging assessments available at the December 31, 2021 data cut-off, four achieved PR by RECIST,
including in one patient with urothelial cancer who had failed prior treatment with a PD-1 antibody, and nine had stable disease.
16
Conclusion. The authors concluded that YH001 was well tolerated up to 4 mg/kg when combined with toripalimab and demonstrated activity in
patients with advanced solid tumors.
Phase I Dose Escalation Clinical Trial in China
An open-label, single-arm Phase 1 dose escalation clinical trial of YH001 was completed in China.
Preclinical Studies
In pre-clinical studies in mice, YH001 was compared with ipilimumab, an approved CTLA-4 inhibitor marketed by BMS, and YH001 showed the
following potential advantages:
•
Superior in vivo activity compared to ipilimumab as a single agent and when combined with pembrolizumab, a PD-1 antibody marketed by
Merck. The following graphs illustrate the tumor size growth and body weight changes in mice.
•
More potent and active than ipilimumab. YH001 was more potent and active than ipilimumab in blocking hCTLA-4 inhibition of CD80/86
activity. The following graph illustrates an in vitro reporter assay demonstrating the ability of YH001 or ipilimumab to induce T-cell proliferation
by inhibiting the interaction of hCTLA-4 with CD80/86.
17
Clinical Development in North America
In August 2022, we announced that the FDA had approved the IND application for the initiation of a Phase 1/2 clinical trial of YH001 in
combination with envafolimab and doxorubicin, an approved treatment for soft tissue sarcoma, for the treatment of sarcoma patients and in December
2022, we initiated dosing in the Phase 1/2 clinical trial. The Phase 1/2 trial will assess the safety and efficacy of the triplet combination of YH001,
envafolimab and doxorubicin in the common sarcoma subtypes of leiomyosarcoma and dedifferentiated liposarcoma, and we expect Phase 1 data in the
second half of 2023. In addition, the trial will assess the safety and efficacy of the doublet combination of YH001 and envafolimab in patients with the rare
sarcoma subtypes of alveolar soft part sarcoma and chondrosarcoma. Additionally, we plan to initiate trials of YH001 as a single agent or in combination
with immunotherapies in other tumor types.
Our Third Clinical Stage Product Candidate – TRC102
Overview of Base Excision Repair and the Mechanism of Action of TRC102
Base-excision repair (BER) is a complex and fundamental cellular process used by cancer cells to repair the DNA damage caused by
chemotherapeutics, especially the classes of chemotherapeutics known as alkylating agents, including Temodar, dacarbazine and bis-dichloroethyl-
nitrosourea (BCNU), and anti-metabolite agents, including Fludara and Alimta. The process of BER removes DNA bases damaged by chemotherapy,
resulting in the formation of gaps in the DNA strand called apurinic and apyrimidinic (AP) sites. The appropriate base is then inserted in this gap to restore
the proper tumor DNA sequence. By this process, cancer cells can circumvent the anti-tumor effects of chemotherapy.
Inhibition of BER has been proposed as a way to improve the efficacy of chemotherapeutics; however, to our knowledge, no inhibitors of BER have
been tested in clinical trials. We are developing TRC102 (methoxyamine hydrochloride) to reverse resistance to specific chemotherapeutics by inhibiting
BER. TRC102 interrupts BER by rapidly and covalently binding within AP sites, converting the AP site to a substrate for the enzyme topoisomerase II,
which cleaves TRC102-bound DNA, resulting in an accumulation of DNA strand breaks that trigger cellular apoptosis, or programmed cell death, as
illustrated in the figure below:
18
TRC102 binding results in apoptosis
The induction of apoptosis by TRC102 is relatively selective for cancer cells, which typically overexpress topoisomerase II. In nonmalignant cells
with low topoisomerase II expression, TRC102-bound DNA is excised and replaced by a separate DNA repair system.
In November 2020, we announced the publication of clinical data in the journal Cancer Cell that provides molecular insight into TRC102’s
mechanism of action and patient populations most likely to respond to treatment. The article, entitled, “Molecular Features of Cancers Exhibiting
Exceptional Responses to Treatment,” highlighted the clinical features and tumor biology of an exceptional responder patient treated with TRC102 at the
NCI. The patient was diagnosed with metastatic and highly refractory CRC and received Temodar and TRC102. Following treatment, the patient was
considered an exceptional responder through the achievement of a near complete response lasting 45 months at the most recent follow-up. Detailed
molecular analyses of the patient’s tumor showed silencing of DNA repair pathways that may have resulted in sensitivity to the inhibition of DNA BER
pathway by TRC102. Specifically, MGMT expression was silenced by promoter methylation, and RAD50, a mediator of DNA double strand break repair,
was silenced by genetic mutation and loss of heterozygosity. The publication authors hypothesized that the combination of Temodar and TRC102 was
effective because all necessary DNA repair pathways were compromised genetically or through the activity of TRC102. MGMT expression was also
assessed in biopsies from 11 colorectal patients who subsequently enrolled in an expansion cohort, one of whom demonstrated a PR. The tumor associated
with the PR did not express MGMT, whereas each of the 10 tumors that did not respond to therapy expressed this enzyme robustly. MGMT deficiency is
observed in about one third of glioblastoma patients, and a prior study of Temodar and TRC102 reported at the Society for Neuro-Oncology in 2018
demonstrated that two MGMT deficient glioblastoma patients had prolonged survival when treated with Temodar and TRC102 after progressing previously
on Temodar and radiation therapy. Based on these data, we believe a trial in first line glioblastoma patients of Temodar, radiation therapy and TRC102 is
warranted and are discussing further development with investigators at this time.
19
TRC102 Development in Oncology
TRC102 is being developed to reverse resistance to Temodar, an alkylating chemotherapeutic, as well as to Alimta and Fludara, two antimetabolite
chemotherapeutics. We consider it advantageous to combine TRC102 with Alimta because Alimta is approved in one large market indication (lung cancer)
and one orphan drug indication (mesothelioma). Temodar is an approved chemotherapeutic used as a standard of care agent to treat glioblastoma, and
Fludara is an approved chemotherapeutic used as a standard of care agent to treat lymphoma and leukemia. In initial clinical trials of more than 100
patients, TRC102 has shown good tolerability and promising anti-tumor activity in combination with alkylating and antimetabolite chemotherapy.
We filed an IND application for TRC102 in March 2008, Case Western filed an IND application for TRC102 in March 2006, and NCI filed an IND
for TRC102 in March 2013, all for the treatment of patients with advanced solid tumors. The IND application filed by NCI cross references our IND
application.
The following table summarizes certain key information regarding ongoing clinical trials of TRC102 in cancer patients:
Phase
1
2
Indication
Solid Tumors and Lymphomas
Non-Squamous Non-Small Cell Lung
Sponsor
NCI
NCI
Cancer
Companion
Treatment
Temodar
Chemoradiation +
Durvalumab
Design
(Number of Patients)
Dose escalation (65)
Randomized Phase 2 (78 patients)
In May 2020, positive data from multiple TRC102 clinical trials were presented at the 2020 ASCO Virtual Scientific Program. Dr. Koczywas of City
of Hope Medical Center presented Phase 1 data for TRC102 in combination with cisplatin and Alimta in patients with advanced solid tumors, and Phase 2
data for TRC102 in combination with Alimta in patients with mesothelioma refractory to Alimta and platinum therapy. Notably two of 14 mesothelioma
patients who progressed previously on Alimta had objective responses following treatment with Alimta and TRC102. Multiple responses were also noted
in the Phase 1 trial of Alimta, cisplatin and TRC102, with particular activity noted in parotid salivary gland tumors. Dr. Biswas of Case Comprehensive
Cancer Center presented Phase 1 data of TRC102 in combination with chemoradiation for locally advanced non-squamous non-small cell lung cancer. All
15 patients demonstrated an objective response, including three patients with a complete response to treatment. The 100% ORR compares favorably to
historical data of the same combination of chemoradiation without TRC102 in locally advanced lung cancer. For example, the PROCLAIM clinical trial
reported an ORR of 36% and the PACIFIC clinical trial reported an ORR of 51% in locally advanced non-squamous non-small cell lung cancer patients
treated with Alimta, cisplatin and thoracic radiation. In addition, based on data presented at the ASCO 2020 virtual meeting that the combination of
chemoradiation and TRC102 produced objective responses in all 15 evaluable patients with advanced localized lung cancer treated in a Phase 1 trial, in
January 2022, the NCI initiated a randomized trial of chemoradiation with or without TRC102, followed by consolidative durvalumab treatment. The
primary objective is to improve the 56% PFS rate with current standard of care to 75% with current standard of care plus TRC102. The trial began
enrollment in June 2022 and is expected to be complete in 2025.
Phase 1 ascending dose clinical trials evaluating the safety, tolerability, PK, PD and anti-tumor activity of TRC102 were completed with Alimta in
patients with advanced solid tumors, with Fludara in patients with hematologic malignancy and with Temodar in patients with solid tumors. In each trial,
TRC102 was tolerable with the companion chemotherapeutic, and demonstrated signs of activity. One patient treated with TRC102 and Alimta had a PR
as assessed by RECIST 1.1 and remained in our clinical trial without cancer progression for 14 months. In addition, 14 patients had SD including patients
with squamous cell lung cancer (three patients), epithelial ovarian cancer (three patients), CRC (two patients), non-squamous non-small cell lung cancer
(one patient), pancreatic cancer (one patient), prostate cancer (one patient), endometrial cancer (one patient), head and neck cancer (one patient) and breast
cancer (one patient). These data were published in Investigational New Drugs in 2012. Case Western reported data from a trial of intravenous TRC102
given in combination with Fludara in a Phase 1 clinical trial that were published in Oncotarget in 2017. Anti-tumor activity, including PR, was noted in
patients with lymphoma and chronic lymphocytic leukemia, including patients treated previously with Fludara. TRC102 combined with Fludara was safe
and well tolerated. Hematologic toxicity was comparable to single agent Fludara and activity appeared to correlate with increased levels of DNA damage.
Case Western reported data from a trial of TRC102 given intravenously in combination with Temodar in a Phase 1 clinical trial at the ASCO annual
meeting in June 2015. Anti-tumor activity was noted in patients with ovarian cancer and neuroendocrine tumors.
The NCI reported data from the Phase 1 trial of TRC102 in combination with Temodar in relapsed solid tumors and lymphoma patients at ASCO in
2017. There were no pharmacologic interactions between the two drugs and TRC102 target concentrations were achieved. Based on PRs in patients with
ovarian cancer, non-small cell lung cancer, and KRAS-positive CRC, the NCI decided to enroll expansion cohorts in each of these tumor types at the
recommended Phase 2 oral dose of TRC102. The authors concluded that the combination of Temodar and TRC102 is active, and DNA damage response
markers (Rad51, ϒ-H2AX and/or pNbs1) were induced in four of five paired colonic biopsies, indicating DNA damage following treatment. Updated data
in the cohort of patients with CRC reported by the NCI at AACR in 2019 indicated a low response rate in patients with CRC treated with Temodar and
TRC102.
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The combination of TRC102 and Temodar was assessed in a Phase 2 trial of patients with recurrent glioblastoma that was reported at the Society for
Neuro-Oncology annual meeting in November 2018. The combination of Temodar and TRC102 was tolerable, but did not meet the primary efficacy
endpoint of demonstrating objective responses by Response Assessment in Neuro-Oncology criteria in the 19 enrolled patients, most of whom were treated
at Cleveland Clinic. Two patients (10.5%) demonstrated evidence of clinical benefit and met the secondary endpoint of PFS beyond six months. Both
patients who demonstrated PFS for more than 11 months were alive over 30 months following treatment initiation with TRC102 and Temodar for recurrent
glioblastoma. PFS of greater than 11 months was associated with N-methylpurine DNA glycosylase expression, a biomarker that initiates the BER
pathway of resistance that is inhibited by TRC102. Efforts to identify whether DNA glycosylase expression or other biomarkers can be used as a predictive
biomarker of TRC102 activity are expected to continue in ongoing TRC102.
Our Fourth Clinical Stage Product Candidate – TJ004309
TJ004309, is a novel, humanized antibody against CD73, an ecto-enzyme expressed on stromal cells and tumors that converts extracellular AMP to
the immunosuppressive metabolite adenosine. In December 2018, we submitted an IND application to the FDA for the initiation of a Phase 1 clinical trial
in patients with advanced solid tumors, which was cleared by the FDA in January 2019. In July 2019, we began enrollment in a Phase 1 clinical trial to
assess safety and preliminary efficacy of TJ004309 as a single agent and when combined with the PD-L1 checkpoint inhibitor Tecentriq® in patients with
advanced solid tumors, and in June 2021 we presented data from the ongoing Phase 1 trial at the ASCO 2021 virtual meeting. In a poster presentation titled
“The safety, pharmacokinetics (PK), pharmacodynamics (PD) and clinical efficacy of uliledlimab (TJ004309), a differentiated CD73 antibody, in
combination with atezolizumab in patients with advanced cancer,” uliledlimab was found to be well-tolerated up to 20mg/kg every three weeks and
15mg/kg once weekly as a monotherapy and in combination therapy with atezolizumab 1200mg every three weeks and no dose limiting toxicity (DLT) was
observed and the maximum tolerated dose (MTD) was not reached. There was one complete response in a PD-(L)1 naïve patient, two partial responses
(PRs) with one PR in a PD-(L)1 naïve patient and one PR in a PD-(L)1 refractory patient, and three cases of stable disease (SD) following treatment with
uliledlimab and atezolizumab.
Collaboration and License Agreements
Collaboration Agreement with 3D Medicines and Alphamab
In December 2019, we, 3D Medicines, and Alphamab entered into the Envafolimab Collaboration Agreement for the development of envafolimab,
an investigational PD-L1 sdAb, or nanobody, administered by rapid subcutaneous injection, for the treatment of sarcoma in North America.
Pursuant to the Envafolimab Collaboration Agreement, we were granted an exclusive license to develop and commercialize envafolimab for the
treatment of sarcoma in North America. We are responsible for conducting and will bear the costs of any Phase 1, Phase 2, and Phase 3 or post-approval
clinical trial in North America for envafolimab in the indications of refractory and first line treatment of sarcoma. 3D Medicines and Alphamab are
responsible for conducting and will bear the costs of IND-enabling studies (other than those specific to the sarcoma indication) and the preparation of the
chemistry, manufacturing and controls (CMC) activities sections of an IND application for envafolimab. 3D Medicines and Alphamab have agreed to
manufacture and supply, or to arrange for a third-party manufacturer to manufacture and supply, envafolimab to us at pre-negotiated prices that vary based
on clinical or commercial use. 3D Medicines and Alphamab retained the right to develop envafolimab in all territories outside of North America as well as
within North America for all indications other than sarcoma.
We will be responsible for commercializing envafolimab for sarcoma in North America, including booking of sales revenue, unless (a) envafolimab
is first approved in North America for an indication other than sarcoma and launched in North America, or (b) envafolimab is first approved in North
America for sarcoma and subsequently approved in North America for an additional non-orphan indication and sold commercially by 3D Medicines and/or
Alphamab, or licensee, in which case 3D Medicines and Alphamab will be responsible for commercializing envafolimab for sarcoma in North America,
including booking of sales revenue. If 3D Medicines and Alphamab become responsible for commercialization under the Envafolimab Collaboration
Agreement, we have the option to co-market envafolimab for sarcoma in North America. In the event that envafolimab is first approved in North America
for sarcoma and within three years of the commercial launch of envafolimab in North America for sarcoma 3D Medicines and Alphamab replace us as the
party responsible for commercialization, and we elect and 3D Medicines and Alphamab agree for us to not co-market envafolimab for sarcoma in North
America, then 3D Medicines and Alphamab will be required to compensate us for our costs associated with preparing for and conducting commercial
activities.
If we have the responsibility for commercialization under the Envafolimab Collaboration Agreement, we will owe 3D Medicines and Alphamab
tiered double digit royalties on net sales of envafolimab for sarcoma in North America ranging from the teens to mid-double digits. If 3D Medicines and
Alphamab have responsibility for commercialization under the Envafolimab Collaboration Agreement, we will be entitled to (a) tiered double digit
royalties on net sales of envafolimab for sarcoma in North America ranging from the teens to mid-double digits if we have elected to not co-market
envafolimab in sarcoma or (b) a 50% royalty on net sales of envafolimab for sarcoma in North America if we have chosen to co-market envafolimab in
sarcoma. Payment obligations under the Envafolimab Collaboration Agreement continue on a country-by-country basis until the last to expire licensed
patent covering envafolimab expires.
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3D Medicines and Alphamab retain the right to reacquire the rights to envafolimab for sarcoma in North America in connection with an arm’s length
sale to a third party of the rights to develop and commercialize envafolimab in North America for all indications, provided that the sale may not occur prior
to completion of a pivotal trial of envafolimab in sarcoma without our written consent and the parties must negotiate in good faith and agree to fair
compensation be paid to us for the value of and opportunity represented by the reacquired rights.
Each party agreed that during the term of the Envafolimab Collaboration Agreement, it would not develop or license from any third party a
monospecific inhibitor to PD-L1 or PD-1 in sarcoma.
The term of the Envafolimab Collaboration Agreement continues until the later of the date the parties cease further development and
commercialization of envafolimab for sarcoma in North America or the expiration of all payment obligations. The Envafolimab Collaboration Agreement
may be terminated earlier by a party in the event of an uncured material breach by the other party or bankruptcy of the other party, or for safety reasons
related to envafolimab. In the event we elect, or a joint steering committee (JSC) determines, to cease further development or commercialization of
envafolimab, or if we fail to use commercially reasonable efforts to develop (including progress in clinical trials) and commercialize envafolimab and do
not cure such failure within a specified time period, then our rights and obligations under the Envafolimab Collaboration Agreement will revert to 3D
Medicines and Alphamab.
Collaboration Agreement with Eucure and Biocytogen
In October 2021, we, Eucure and Biocytogen entered into a collaborative development and commercialization agreement (the YH001 Collaboration
Agreement) for the development of YH001, a monospecific investigational CTLA-4 antibody. Pursuant to the YH001 Collaboration Agreement, we were
granted an exclusive (including with respect to Eucure and its affiliates), nontransferable, license to develop and commercialize YH001 in North America
for the treatment, through administration of YH001 by intravenous or subcutaneous means, of multiple human indications, including sarcoma,
microsatellite stable colorectal cancer, RCC, and K-ras positive non-small cell lung cancer (collectively, the Initial Indications) or one or more of bladder
cancer, endometrial cancer, and melanoma as substitute indications, which may be substituted for Initial Indications at our discretion (each upon such
substitution, a Substitute Indication). We are responsible for, and will bear the costs of, preparing and filing all regulatory submissions and conducting any
Phase 1, Phase 2, Phase 3, or post-approval clinical trials in North America for YH001 in the Initial Indications and potentially the Substitute Indications,
while Eucure is responsible for conducting, and will bear the costs of, the preparation of CMC activities for YH001. Eucure has agreed to manufacture and
supply, or to arrange for a third-party manufacturer to manufacture and supply, YH001 to us for clinical trials pursuant to the terms of a clinical supply and
quality agreement that will be separately negotiated and agreed in good faith between the parties.
Eucure may pursue clinical trials for YH001 in North America outside of the Initial Indications or Substitute Indications, and also within the Initial
Indications or Substitute Indications as part of a combination therapy of YH001 and an additional Eucure product. During a specified period, we have the
option, subject to Eucure’s prior written approval, to expand the license to include the development and commercialization of YH001 for the treatment,
through administration by intravenous or subcutaneous means, of all human and veterinary therapeutic indications in North America for a payment to
Eucure in the low single digit millions (the Company Option).
Pursuant to the YH001 Collaboration Agreement, we granted Eucure an irrevocable, perpetual, royalty-free, exclusive license, with the right to grant
sublicenses to develop, register, sell, offer to sell, have sold, market and distribute YH001 in all territories outside of North America as well as within North
America for all indications other than the Initial Indications and the Substitute Indications.
We will be responsible for commercializing YH001 in North America, including booking of sales revenue in the Initial and Substitute Indications.
We will owe Eucure escalating double digit royalties on net sales of YH001 in North America ranging from the mid-twenties to mid-double digits;
provided that until the end of the first full calendar year following the first commercial sale of YH001, royalties will range from the lower double digits to
the mid-double digits. If sales of YH001 exceed a pre-determined sales threshold in the first full year of sales following first commercial sale, we will owe
a milestone to Eucure in the high single digit millions. Payment obligations under the YH001 Collaboration Agreement continue on a country-by-country
basis until the latest of (i) expiration of the last to expire licensed patent covering YH001, (ii) expiration of marketing or regulatory exclusivity covering
YH001 and (iii) 10 years from the first commercial sale of YH001 in such country in North America. Eucure has agreed to manufacture and supply, or to
arrange for a third-party manufacturer to manufacture and supply, YH001 to us at cost plus a low double-digit markup for commercial sales pursuant to the
terms of a commercial supply and quality agreement that will be separately negotiated and agreed in good faith between the parties within 180 days prior to
the anticipated first commercial sale in North America.
Pursuant to the YH001 Collaboration Agreement, each party agreed that during the term of the YH001 Collaboration Agreement, it would not
develop, manufacture, commercialize or license from any third party a monospecific inhibitor to CTLA-4.
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The term of the YH001 Collaboration Agreement continues until the earlier of (i) the date that the parties cease further development and
commercialization of YH001 in North America or (ii) on a country-by-county basis, the expiration of the royalty obligations in such country. The YH001
Collaboration Agreement may be terminated earlier by a party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or for safety reasons related to YH001. In the event of a termination of the YH001 Collaboration Agreement, other than by us as a result of Eucure’s
material uncured breach or bankruptcy, (i) our license shall terminate and (ii) we would be obligated to grant Eucure an irrevocable, perpetual, royalty-free,
non-exclusive license with the right to grant sublicenses under its rights in all development data and intellectual property to develop, register, sell, offer to
sell, have sold, market and distribute YH001 in North America. In the event of a termination of the YH001 Collaboration Agreement by us as a result of
Eucure’s material uncured breach or bankruptcy, the license shall continue in the Initial Indications in North America, provided that (i) such license shall
remain exclusive during the royalty term and non-exclusive thereafter; (ii) we shall have the right to have YH001 manufactured for its development and
commercialization requirements in the Initial Indications in North America; and (iii) the license shall terminate in the event of an uncured material breach
by us of any provision (including payment obligations) that survives termination of the YH001 Collaboration Agreement. In the event the YH001
Collaboration Agreement terminates for safety reasons related to YH001, by mutual agreement of the parties or by Eucure in the event of an uncured
material breach or bankruptcy by us, then our rights and obligations under the YH001 Collaboration Agreement will revert to Eucure. In the event Eucure
does not approve the Company Option, we may terminate the YH001 Collaboration Agreement for convenience with a 30-day notice to Eucure, provided
that such termination is given within 12 months of the effective date of the YH001 Collaboration Agreement (the Company Option Termination). In the
event of a Company Option Termination, Eucure would be obligated to reimburse us for all costs and expenses that we incurred in performing the
development activities.
Collaboration Agreements with I-Mab Biopharma
In November 2018, we entered into two separate strategic collaboration and clinical trial agreements with I-Mab for the development of multiple
immuno-oncology programs, including I-Mab’s proprietary CD73 antibody TJ004309 as well as up to five proprietary bispecific antibodies currently under
development by I-Mab.
In the TJ004309 Agreement, we are collaborating with I-Mab on developing TJ004309, and will bear the costs of filing an IND application and for
Phase 1 clinical trials, share costs equally for Phase 2 clinical trials, and we will bear 40% and I-Mab 60% of the costs for pivotal clinical trials. I-Mab will
also be responsible for the cost of certain non-clinical activities and the supply of TJ004309 and any reference drugs used in the development activities. We
also agreed with I-Mab for a specified period of time to not develop or license to or from a third party any monoclonal antibody targeting CD73 or any
other biologic for certain indications that a JSC, as set up under the TJ004309 Agreement, selects for TJ004309 development.
In the event that I-Mab licenses rights to TJ004309 to a third party, we would be entitled to receive escalating portions of royalty and non-royalty
consideration received by I-Mab with respect to territories outside of Greater China. In the event that I-Mab commercializes TJ004309, we would be
entitled to receive a royalty on net sales by I-Mab in North America ranging from the mid-single digits to low double digits, and in the EU and Japan in the
mid-single digits. The portions of certain third party royalty and non-royalty consideration and the royalty from net sales by I-Mab to which we would be
entitled escalate based on the phase of development and relevant clinical trial obligations we complete under the TJ004309 Agreement, ranging from a
high-single digit to a mid-teen percentage of non-royalty consideration as well as a double digit percentage of royalty consideration. In March 2020, I-Mab
issued a press release announcing a strategic partnership with KG Bio, whereby KG Bio received what the press release described as a right of first
negotiation outside North America for TJ004309 for up to $340 million in potential payments to I-Mab. On April 8, 2020, we issued a notice of dispute
regarding possible breach of the TJ004309 Agreement, which resulted in a binding arbitration proceeding under the Rules of Arbitration of the ICC before
the Tribunal. The latest developments in the dispute with I-Mab are discussed in more detail below following the discussion of the Bispecific Agreement.
The TJ004309 Agreement may be terminated by either party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or for safety reasons related to TJ004309. I-Mab may also terminate the TJ004309 Agreement if we cause certain delays in completing a Phase 1
clinical trial. In addition, I-Mab may terminate the TJ004309 Agreement for any reason within 90 days following the completion of the first Phase 1
clinical trial, in which case we would be entitled to a minimum termination fee of $9.0 million, or following the completion of the first Phase 2 clinical
trial, in which case we would be entitled to a pre-specified termination fee of $15.0 million and either a percentage of non-royalty consideration I-Mab may
receive as part of a license to a third party or an additional payment if TJ004309 is approved for marketing outside Greater China before a third party
license is executed, in addition to a double digit percentage of royalty consideration. In 2021, I-Mab sent us notices purporting to terminate the TJ004309
Agreement, which would result in I-Mab owing us a prespecified termination fee of $9.0 million. However, I-Mab does not have an option to terminate the
TJ004309 Agreement without cause until the ongoing Phase 1 clinical trial of TJ004309 is “Complete,” as that term is defined in the TJ004309 Agreement,
and we responded by disputing the basis for I-Mab’s termination. In March 2021, I-Mab filed a lawsuit in the Delaware Court of Chancery seeking an order
of specific performance requiring us to comply with I-Mab’s effort to terminate the agreement. We disagreed with I-Mab’s position and in May 2021, the
Delaware Court of Chancery stayed the lawsuit filed by I-Mab and subsequently this matter was remanded and included in the proceeding before the
Tribunal.
Pursuant to the Bispecific Agreement, we and I-Mab may mutually select through a JSC up to five of I-Mab’s BsAb product candidates within a five-
year period for development and commercialization in North America.
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For each product candidate selected by the JSC for development under the Bispecific Agreement, I-Mab will be responsible and bear the costs for
IND-enabling studies and establishing manufacturing for the product candidate, we will be responsible for and bear the costs of filing an IND and
conducting Phase 1 and Phase 2 clinical trials, and we will be responsible for and will share equally with I-Mab in the costs of conducting Phase 3 or
pivotal clinical trials, in each case within North America. Subject to I-Mab’s right to co-promote an approved product candidate, we will be responsible for
commercializing any approved product candidates in North America, and we will share profits and losses equally with I-Mab in North America. We would
also be entitled to receive tiered low single digit royalties on net sales of product candidates in the EU and Japan.
At any time prior to completing the first pivotal clinical trial for a product candidate or if I-Mab ceases to support development costs or pay its
portion of Phase 3 clinical trial costs for a product candidate or the JSC decides to cease development over our objections after initiating Phase 3 clinical
trials, we will have an option to obtain an exclusive license to such product candidate in all territories except Greater China and Korea and any other
territories in which I-Mab previously licensed rights to a third party subject to our right of first refusal for any licenses I-Mab may grant to third-parties.
If we exercise our licensing option, we would assume sole responsibility for developing and commercializing the product candidate in the licensed
territory, and in lieu of profit or loss sharing with I-Mab with respect to such product candidate, we would owe I-Mab pre-specified upfront and milestone
payments and royalties on net sales, with the payments and royalties escalating depending on the phase of development the product candidate reached at the
time we obtained the exclusive license as follows: (i) if before IND-enabling studies and the preparation of the CMC activities of the collaborative product,
we would owe I-Mab a one-time upfront payment of $10.0 million, development and regulatory based milestone payments totaling up to $90.0 million that
begin upon completion of a pivotal trial, sales milestones totaling up to $250.0 million, and royalties in the mid-single digits on annual net sales; (ii) if after
IND submission but before completion of a Phase 1a clinical trial of the collaborative product, we would owe I-Mab a one-time upfront payment of $25.0
million, development and regulatory based milestone payments totaling up to $125.0 million that begin upon completion of a pivotal trial, sales milestones
totaling up to $250.0 million, and royalties in the high single digits on annual net sales; (iii) if after completion of a Phase 1a clinical trial but before
completion of a Phase 2 proof of concept clinical trial for the collaborative product, we would owe I-Mab a one-time upfront payment of $50.0 million,
development and regulatory based milestone payments totaling up to $250.0 million that begin upon completion of a pivotal trial, sales milestones totaling
up to $250.0 million, and royalties in the low double digits on annual net sales; and (iv) if after completion of a Phase 2 proof of concept clinical trial and
before completion of a pivotal trial for the collaborative product, we would owe I-Mab a one-time upfront payment of $80.0 million, development and
regulatory based milestone payments totaling up to $420.0 million that begin upon completion of a pivotal trial, sales milestones totaling up to $250.0
million, and royalties in the high-teens on annual net sales.
Each party agreed that for a specified period of time, it would not develop or license to or from any third party any bispecific monoclonal antibody
targeting the same two biological targets as those of any selected product candidates under the Bispecific Agreement.
If development of any selected product candidates is terminated by a decision of the JSC, all rights to the product candidate will revert to I-Mab,
subject to our rights to obtain an exclusive license in certain circumstances. If development is terminated after submission of an IND and prior to initiating
Phase 3 clinical studies or after initiating Phase 3 clinical studies and with our concurrence, we would be entitled to tiered low single digit royalties on net
sales of the product candidate in North America, the EU and Japan.
The Bispecific Agreement may be terminated by either party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or with respect to any selected product candidate, for safety reasons related to that product candidate.
In March 2020, we learned that I-Mab had entered into two license and collaboration agreements with ABL Bio in July 2018. Under ABL Bio
License 1, I-Mab granted to ABL Bio exclusive, worldwide (excluding Greater China), royalty-bearing rights to develop and commercialize a BsAb using
certain monoclonal antibody sequences. Under ABL License 2, I-Mab and ABL agreed to collaborate to develop three PD-L1-based bispecific antibodies
by using ABL Bio’s proprietary BsAb technology and commercialize them in their respective territories, which, collectively, include China, Hong Kong,
Macau, Taiwan and South Korea, and other territories throughout the rest of the world if both parties agree to do so in such other territories during the
performance of the agreement.
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In June 2020, I-Mab commenced an arbitration proceeding under the Rules of Arbitration of the ICC before the Tribunal after we invoked
contractual dispute resolution provisions asserting that I-Mab had breached its contractual obligations concerning the TJ004309 Agreement and Bispecific
Agreement. We filed counterclaims in the arbitration seeking to recover over $200 million in damages from I-Mab based on I-Mab’s breaches of the two
strategic collaboration and clinical trial agreements. The Tribunal held a hearing on the merits in February 2022, and final post-hearing briefs were
submitted by us and I-Mab in May 2022. On November 8, 2022, the Tribunal invited the parties to submit additional, limited briefing on two discrete issues
by December 9, 2022. Following that submission, the parties submitted their respective cost submissions for attorney fees reimbursement in January 2023.
The Tribunal did not indicate when it expects to render its final decision; however, it did note that it was far along in its deliberations and preparation of a
final award. Under the applicable rules of the arbitration, the prevailing party may be awarded attorneys’ fees at the Tribunal’s discretion. As of the date of
this Annual Report, the TJ004309 Agreement and Bispecific Agreement disputes remain under consideration by the Tribunal, and we expect the Tribunal
to render its final decision in the first quarter of 2023. The claims under the arbitration are complex; accordingly, we cannot predict the outcome of the
arbitration, and we are unable to estimate the amount of recovery or damages, if any, that may be awarded by the Tribunal. The dispute with I-Mab has
caused, and could continue to cause, us to incur significant costs.
License Agreement with Case Western
In August 2006, we entered into a license agreement with Case Western, under which we obtained an exclusive, worldwide license to certain patents,
know-how and other intellectual property controlled by Case Western related to methoxyamine, which we refer to as the TRC102 Technology. Under the
agreement, as amended, we have the right to use, manufacture and commercialize products utilizing the TRC102 Technology for all mammalian
therapeutic uses, and to sublicense these rights.
Under the agreement, we are generally obligated to use our best efforts to commercialize the TRC102 Technology as soon as possible. We are also
required to meet specified diligence milestones, and if we fail to do so and do not cure such failure, Case Western may convert our license into a non-
exclusive license or terminate the agreement.
In consideration of the rights granted to us under the agreement, we paid a one-time upfront fee to Case Western. In addition, we may be required to
pay up to an aggregate of approximately $9.8 million in milestone payments, of which $0.7 million relates to the initiation of certain development activities
and approximately $9.1 million relates to the submission of certain regulatory filings and receipt of certain regulatory approvals. If products utilizing the
TRC102 Technology are successfully commercialized, we will be required to pay Case Western a single-digit royalty on net sales, subject to adjustments in
certain circumstances. Beginning on the earlier of a specified number of years from the effective date of the agreement and the anniversary of the effective
date following the occurrence of a specified event, we will be required to make a minimum annual royalty payment of $75,000, which will be credited
against our royalty obligations. In the event we sublicense any of our rights under the agreement relating to the TRC102 Technology, we will be obligated
to pay Case Western a portion of certain fees we may receive under the sublicense. Our royalty obligations will continue through the later of (i) the
expiration of any orphan drug marketing exclusivity for a product utilizing the TRC102 Technology, (ii) August 2026, or (iii) on a country-by-country basis
upon the expiration of the last valid claim under the TRC102 Technology or any patent we receive that is a derivative of the TRC102 Technology.
We may unilaterally terminate this agreement in its entirety, for any reason or for no reason, upon at least 30 days’ notice to Case Western. If we do
so, we will be required to pay Case Western a termination fee. If we fail to pay any amount required under the agreement and do not cure the default within
90 days of receiving notice, Case Western will have the right to convert our exclusive license to a non-exclusive license or to terminate the agreement
entirely. Either party may terminate the agreement in the event of the other party’s material breach of the agreement that remains uncured 60 days after
receiving notice of the breach.
Cooperative Research and Development Agreements with NCI
We are a party to a Cooperative Research and Development Agreement (CRADA) with the U.S. Department of Health and Human Services, as
represented by NCI, for the development of TRC102 for the treatment of cancer. We entered into the CRADA governing the development of TRC102
(TRC102 CRADA) in August 2012 with NCI’s Center for Cancer Research.
Under the CRADA, as amended, NCI conducts clinical trials and non-clinical studies of TRC102. Pursuant the TRC102 CRADA, we are required to
pay NCI $20,000 per year per Phase 1 clinical trial and $25,000 per year per Phase 2 clinical trial, as well as expenses incurred by NCI in connection with
carrying out its responsibilities under the TRC102 CRADA, up to an aggregate maximum per year of $200,000. We may also provide funding to support
assays and other studies, and if NCI supplies TRC102 for additional mutually approved clinical trials beyond the planned trials, we will reimburse NCI for
costs associated with manufacturing TRC102. In addition, we made a one-time payment of $20,000 for the initial IND filing and may be required to make
additional one-time payments of $10,000 each for additional IND filings. Funding for clinical trials beyond those contemplated by the TRC102 CRADA
will be determined in an amendment to the applicable CRADA.
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Under the CRADA, each party individually owns all inventions, data and materials produced solely by its employees in the course of performing
research activities pursuant to the CRADA. The parties jointly own any inventions and materials that are jointly produced by employees of both parties.
Subject to certain conditions, we have the option under the CRADA to negotiate commercialization licenses from the government to intellectual property
conceived or first reduced to practice in performance of the CRADA research plan that was developed solely by NCI employees or jointly by us and NCI
employees.
The TRC102 CRADA had an original five-year term and was subsequently amended to extend the term to August 7, 2023. The CRADA may be
terminated at any time by mutual written consent, and we or NCI may unilaterally terminate the CRADA for any reason or no reason by providing written
notice at least 60 days before the desired termination date.
Manufacturing
We do not own or operate, nor do we expect to own or operate, facilities for product manufacturing, storage, distribution or testing. We contract with
third parties or our collaboration partners for the manufacture of our product candidates and we intend to continue to do so in the future.
Envafolimab is manufactured by AlphaMab in China and fill finish is performed by a contract manufacturer in the United States. Pursuant to the
Envafolimab Collaboration Agreement, 3D Medicines and Alphamab have agreed to manufacture and supply, or to arrange for a third party manufacturer
to manufacture and supply, envafolimab to us at pre-negotiated prices that vary based on clinical or commercial use.
YH001 is manufactured by an experienced contract manufacturer in China. Pursuant to the YH001 Collaboration Agreement, Eucure and
Biocytogen have agreed to manufacture and supply, or to arrange for a third party manufacturer to manufacture and supply, YH001 to us at pre-negotiated
prices that vary based on clinical or commercial use pursuant to the terms of a clinical supply and quality agreement to be separately negotiated.
TRC102 drug substance is manufactured through a standard chemical synthesis and may be obtained from multiple manufacturers.
TJ004309 is supplied to us from a contract manufacturer contracted by I-Mab as I-Mab is responsible for the supply of TJ004309 and all related drug
supply activities under the terms of the TJ004309 Agreement.
Competition
The development and commercialization of new drugs is highly competitive, and we and our collaborators face competition with respect to each of
our product candidates in their target indications. Many of the entities developing and marketing potentially competing products have significantly greater
financial, technical and human resources and expertise than we do in research and development, manufacturing, preclinical testing, conducting clinical
trials, obtaining regulatory approvals and marketing. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more
resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified
scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our programs. Smaller or early-stage companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies. Our commercial opportunity will be reduced or eliminated if our competitors develop
and commercialize products that are more effective, have fewer side effects, are more convenient or are less expensive than any products that we may
develop.
If our product candidates are approved, they will compete with currently marketed drugs and therapies used for treatment of the following
indications, and potentially with drug candidates currently in development for the same indications.
The key competitive factors affecting the success of any approved product will include its efficacy, safety profile, price, method of administration
and level of promotional activity.
Oncology Therapies
There is no PD-1 or PD-L1 therapy approved by the FDA for the treatment of sarcoma. Keytruda (marketed by Merck) has a compendia listing for
the treatment of UPS, and is used off-label for the treatment of patients with UPS. If envafolimab is approved, it may nevertheless compete with currently
marketed PD-1 and PD-L1 inhibitors, including Opdivo (marketed by BMS), Keytruda (marketed by Merck), Imfinzi (marketed by AstraZeneca), and
Tecentriq (marketed by Roche) which are approved by the FDA in multiple indications other than soft tissue sarcoma. The global PD-1 and PD-L1
inhibitors market had an approximate value of over $30 billion in 2022.
There is no CTLA-4 therapy approved by the FDA for the treatment of soft tissue sarcoma. If YH001 is approved, it may nevertheless compete with
the currently marketed CTLA-4 inhibitor ipilimumab (Yervoy, marketed by BMS), which is approved by the FDA in multiple indications other than soft
tissue sarcoma. Other antibodies to CTLA-4 are being studied in clinical trials of cancer patients.
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We are developing TRC102 to be used in combination with alkylating chemotherapeutics (including Temodar) and antimetabolite chemotherapeutics
(including Alimta and Fludara) for the treatment of cancer. If TRC102 is approved, it could compete with other inhibitors of DNA repair. Tesaro, Inc. (now
GSK), Clovis Oncology and Astra Zeneca each market inhibitors of DNA repair that work by a mechanism of action that is distinct from that of TRC102.
In addition to the therapies mentioned above, there are many generic chemotherapeutics and other regimens commonly used to treat various types of
cancer, including soft tissue sarcoma and glioblastoma.
We are developing TJ004309 for the treatment of solid tumors. If TJ004309 is approved, it could compete with other anti-CD73 immunotherapies
including CD73 antibodies as well as adenosine receptor inhibitors already in clinical development sponsored by BMS, AstraZeneca, Arcus Biosciences
and Corvus Pharmaceuticals.
Commercialization
We hold North America commercialization rights in the field of sarcoma for envafolimab (subject to certain rights held by 3D Medicines and
Alphamab), North America commercialization rights of multiple human indications, including the Initial Indications or one or more of the Substitute
Indications, which may be substituted for Initial Indications at our discretion, for YH001, and worldwide commercialization rights for TRC102. If any of
our product candidates are approved in oncology indications, our plan is to build an oncology-focused specialty sales force in the United States to support
their commercialization and seek a partner(s) to support commercialization outside the United States to the extent we have commercial rights in other
territories. We believe that a specialty sales force will be sufficient to target key prescribing physicians in oncology. We currently do not have any sales or
marketing capabilities or experience as a company. We plan to establish the required capabilities within an appropriate time frame ahead of any product
approval and commercialization to support a product launch.
Intellectual Property
Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our protein therapeutics, novel biological
discoveries, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to
seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology,
inventions and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how,
continuing technological innovation and potential in-licensing opportunities to develop and maintain our proprietary position. Additionally, we expect to
benefit from a variety of statutory frameworks in the United States, Europe, Japan and other countries that relate to the regulation of biosimilar molecules
and orphan drug status. These statutory frameworks provide periods of non-patent-based exclusivity for qualifying molecules. See “Government
Regulation.”
Our patenting strategy is focused on our protein and small molecule therapeutics. We seek composition of matter and method of treatment patents for
each such protein or small molecule in key therapeutic areas. We also seek patent protection with respect to companion diagnostic methods and
compositions and treatments for targeted patient populations. We have sought patent protection alone or jointly with our collaborators, as dictated by our
collaboration agreements.
Individual patents extend for varying periods of time depending on the date of filing of the patent application or the date of patent issuance and the
legal term of patents in the countries in which they are obtained. Generally, patents issued from applications filed in the United States are effective for
twenty years from the earliest non-provisional filing date. In addition, in certain instances, a patent term can be extended to recapture a portion of the term
effectively lost as a result of the FDA regulatory review period; however, the restoration period cannot be longer than five years and the total patent term
including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of
applicable local law, but typically is also twenty years from the earliest international filing date. Our issued patents and pending applications with respect to
our protein therapeutic candidates (excluding licensed rights) will expire on dates ranging from 2027 to 2030, exclusive of possible patent term extensions.
However, the actual protection afforded by a patent varies on a product by product basis, from country to country and depends upon many factors,
including the type of patent, the scope of its coverage, the availability of extensions of patent term, the availability of legal remedies in a particular country
and the validity and enforceability of the patent.
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National and international patent laws concerning protein therapeutics remain highly unsettled. No consistent policy regarding the patent-eligibility
or the breadth of claims allowed in such patents has emerged to date in the United States, Europe or other countries. Changes in either the patent laws or in
interpretations of patent laws in the United States and other countries can diminish our ability to protect our inventions and enforce our intellectual property
rights. Accordingly, we cannot predict the breadth or enforceability of claims that may be granted in our patents or in third-party patents. The
biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Our ability to
maintain and solidify our proprietary position for our drugs and technology will depend on our success in obtaining effective claims and enforcing those
claims once granted. We do not know whether any of the patent applications that we may file or license from third parties will result in the issuance of any
patents. The issued patents that we own or may receive in the future, may be challenged, invalidated or circumvented, and the rights granted under any
issued patents may not provide us with sufficient protection or competitive advantages against competitors with similar technology. Furthermore, our
competitors may be able to independently develop and commercialize similar drugs or duplicate our technology, business model or strategy without
infringing our patents. Because of the extensive time required for clinical development and regulatory review of a drug we may develop, it is possible that,
before any of our drugs can be commercialized, any related patent may expire or remain in force for only a short period following commercialization,
thereby reducing any advantage of any such patent. The patent positions for our most advanced programs are summarized below:
Envafolimab Patent Coverage
Specific to the development of envafolimab for the treatment of sarcoma in North America, we hold an exclusive license from 3D Medicines and
Alphamab to any and all intellectual property rights, including patents, copyrights, trademarks and know-how, claiming or covering envafolimab. We also
hold a non-exclusive license for the conduct of clinical trials in the EU in support of the development of envafolimab for the treatment of sarcoma in North
America. 3D Medicines and Alphamab retain ownership of any and all intellectual property rights, including patents, copyrights, trademarks and know-
how, claiming or covering any pharmaceutical composition or preparation comprising envafolimab.
YH001 Patent Coverage
Eucure has an issued patent on the composition of matter and a pending application on the methods of use of YH001 in the United States. The terms
of the patent would expire in 2037, exclusive of any patent term extension. We hold an exclusive (including with respect to Eucure and its affiliates),
nontransferable, license to develop and commercialize YH001 in North America for the treatment, through administration of YH001 by intravenous or
subcutaneous means, of multiple human indications, including the Initial Indications or one or more of the Substitute Indications, which may be substituted
for Initial Indications at our discretion.
TRC102 Patent Coverage
We hold issued patents directed to combination of TRC102 and pemetrexed in the United States, Australia, Canada, Europe, Japan, Mexico, Norway,
Russia, Singapore, South Africa, South Korea, Ukraine, and the United Kingdom. We also have pending applications in other jurisdictions, including
Brazil, China, Hong Kong, and India. The expected expiration date for these patents is 2027, exclusive of possible patent term extensions.
We hold an issued patent on further combinations of TRC102 in Europe. The expected expiration date for these patents is 2031, exclusive of possible
patent term extensions.
TJ004309 Patent Coverage
Specific to the development of TJ004309 in North America, we hold a non-exclusive license from I-Mab to any and all intellectual property rights,
including patents, copyrights, trademarks and know-how, claiming or covering any pharmaceutical composition or preparation comprising or containing
TJ004309. I-Mab retains ownership of any and all intellectual property rights, including patents, copyrights, trademarks and know-how, claiming or
covering any pharmaceutical composition or preparation comprising or containing TJ004309.
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Trade Secrets, Trademarks and Know-How
In addition to patents, we rely upon unpatented trade secrets, trademarks and know-how and continuing technological innovation to develop and
maintain our competitive position. We seek to protect our proprietary information, in part, using confidentiality agreements with our commercial partners,
collaborators, employees and consultants and invention assignment agreements with our employees and consultants. These agreements are designed to
protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed
through a relationship with a third party. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade
secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees
and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and
inventions. In addition, we seek trademark protection in the United States and internationally where available and when we deem appropriate. Furthermore,
we are a party to a number of license agreements under which we are granted intellectual property rights to know-how that are important to our business.
U.S. Government Regulation
The preclinical studies and clinical testing, manufacture, labeling, storage, record keeping, advertising, promotion, export, marketing and sales,
among other things, of our product candidates and future products, are subject to extensive regulation by governmental authorities in the United States and
other countries. In the United States, pharmaceutical products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act (FFDCA), and
other laws, including, in the case of biologics, the Public Health Service Act (PHSA), in addition to the FDA’s implementing regulations. We expect
envafolimab to be regulated by the FDA as a biologic, which requires the submission of a BLA and approval by the FDA prior to being marketed in the
United States. We expect our small molecule product candidate TRC102 to be regulated as a drug and subject to New Drug Application, or NDA,
requirements, which are substantially similar to the BLA requirements discussed below. Manufacturers of our product candidates may also be subject to
state regulation. Failure to comply with FDA requirements, both before and after product approval, may subject us or our partners, contract manufacturers
and suppliers to administrative or judicial sanctions, including FDA refusal to approve applications, warning letters, product recalls, product seizures, total
or partial suspension of production or distribution, fines and/or criminal prosecution.
The steps required before a biologic may be approved for marketing of an indication in the United States generally include:
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completion of preclinical laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practices, or
GLPs, and other applicable regulations;
submission to the FDA of an IND, which must become effective before human clinical trials may commence;
completion of adequate and well-controlled human clinical trials in accordance with Good Clinical Practices, or GCPs, to establish that the
biological product is “safe, pure and potent,” which is analogous to the safety and efficacy approval standard for a chemical drug product for
its intended use;
submission to the FDA of a marketing application;
satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product is produced to
assess compliance with applicable current Good Manufacturing Practice requirements, or cGMPs; and
FDA review of the marketing application and issuance of a biologics license which is the approval necessary to market a biologic therapeutic
product.
Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation as well as animal studies to assess the potential safety
and efficacy of the biologic candidate. Preclinical studies must be conducted in compliance with FDA regulations regarding GLPs. The results of the
preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. Nonclinical testing may
continue after the IND is submitted. In addition to including the results of the preclinical testing, the IND will also include a protocol detailing, among
other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase
or phases of the clinical trial lends themselves to an efficacy determination. The IND will automatically become effective 30 days after receipt by the FDA,
unless the FDA within the 30-day time period places the IND on clinical hold because of its concerns about the drug candidate or the conduct of the trial
described in the clinical protocol included in the IND. The FDA can also place the IND on clinical hold at any time during drug development for safety
concerns related to the investigational drug or to the class of products to which it belongs. The IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed.
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All clinical trials must be conducted under the supervision of one or more qualified principal investigators in accordance with GCPs. They must be
conducted under protocols detailing the objectives of the applicable phase of the trial, dosing procedures, research subject selection and exclusion criteria
and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the
status of the clinical trials must be submitted to the FDA annually. Sponsors also must timely report to the FDA serious and unexpected adverse reactions,
any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator’s brochure, or any
findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug. An institutional review board, or IRB,
at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution, approve the
information regarding the trial and the consent form that must be provided to each research subject or the subject’s legal representative, and monitor the
trial until completed.
Clinical trials are typically conducted in three sequential phases, but the phases may overlap and different trials may be initiated with the same drug
candidate within the same phase of development in similar or differing patient populations. Phase 1 clinical trials may be conducted in a limited number of
patients, but are usually conducted in healthy volunteer subjects for indications other than oncology. The drug candidate is initially tested for safety and, as
appropriate, for absorption, metabolism, distribution, excretion, PD and PK.
Phase 2 usually involves trials in a larger, but still limited, patient population to evaluate preliminarily the efficacy of the drug candidate for specific,
targeted indications to determine dosage tolerance and optimal dosage and to identify possible short-term adverse effects and safety risks.
Phase 3 trials are undertaken to further evaluate clinical efficacy of a specific endpoint and to test further for safety within an expanded patient
population at geographically dispersed clinical trial sites. Phase 1, Phase 2, or Phase 3 testing might not be completed successfully within any specific time
period, if at all, with respect to any of our product candidates. Results from one trial are not necessarily predictive of results from later trials. Furthermore,
the FDA or the sponsor may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an
unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in
accordance with the IRB’s requirements or if the drug candidate has been associated with unexpected serious harm to patients.
The results of the preclinical studies and clinical trials, together with other detailed information, including information on the manufacture and
composition of the product, are submitted to the FDA as part of a marketing application requesting approval to market the drug candidate for a proposed
indication. Under the PDUFA, the fees payable to the FDA for reviewing a marketing application, as well as annual program fees for approved products,
can be substantial. The fees typically increase each year. Each marketing application submitted to the FDA for approval is reviewed for administrative
completeness and reviewability within 60 days following receipt by the FDA of the application. If the application is found complete, the FDA will file the
marketing application, triggering a full review of the application. The FDA may refuse to file any marketing application that it deems incomplete or not
properly reviewable at the time of submission. The FDA’s established goal is to review 90% of priority marketing applications within six months after the
application is accepted for filing and 90% of standard marketing applications within 10 months of the acceptance date, whereupon a review decision is to
be made. The FDA, however, may not approve a drug candidate within these established goals and its review goals are subject to change from time to time.
Further, the outcome of the review, even if generally favorable, may not be an actual approval but a “complete response letter” that describes additional
work that must be done before the application can be approved. Before approving a marketing application, the FDA may inspect the facility or facilities at
which the product is manufactured and will not approve the product unless the facility complies with cGMPs. The FDA may deny approval of a marketing
application if applicable statutory or regulatory criteria are not satisfied, or may require additional testing or information, which can extend the review
process. FDA approval of any application may include many delays or never be granted. If a product is approved, the approval may impose limitations on
the uses for which the product may be marketed, may require that warning statements be included in the product labeling, may require that additional
studies be conducted following approval as a condition of the approval, and may impose restrictions and conditions on product distribution, prescribing, or
dispensing in the form of a Risk Evaluation and Mitigation Strategy, or REMS, or otherwise limit the scope of any approval. The FDA must approve a
marketing application supplement or a new marketing application before a product may be marketed for other uses or before certain manufacturing or other
changes may be made. Further post-marketing testing and surveillance to monitor the safety or efficacy of a product is required. Also, product approvals
may be withdrawn if compliance with regulatory standards is not maintained or if safety or manufacturing problems occur following initial marketing. In
addition, new government requirements may be established that could delay or prevent regulatory approval of our product candidates under development.
The Biologics Price Competition and Innovation Act of 2009 (the BPCIA) created a pathway for licensure, or approval, of biological products that
are biosimilar to, and possibly interchangeable with, earlier biological products licensed under the PHSA. Also under the BPCIA, innovator manufacturers
of original reference biological products are granted 12 years of exclusivity before biosimilars can be approved for marketing in the United States.
Both before and after the FDA approves a product, the manufacturer and the holder or holders of the marketing application for the product are
subject to comprehensive regulatory oversight. For example, quality control and manufacturing procedures must conform, on an ongoing basis, to cGMP
requirements, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to
spend time, money and effort to maintain cGMP compliance.
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Additionally, the FDA strictly regulates marketing, labeling, advertising and promotion of products. The FDA and other agencies actively enforce the
laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant liability. However, physicians may, in their independent medical judgment, prescribe legally available products for off-label uses. The FDA does
not regulate the behavior of physicians in their choice of treatments but the FDA does restrict manufacturer’s communications on the subject of off-label
use of their products.
Other Healthcare Laws
Although we currently do not have any products on the market in the United States, we may be subject to additional healthcare regulation and
enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include,
without limitation, state and federal, fraud and abuse, including anti-kickback and false claims, privacy and security and physician sunshine laws and
regulations, many of which may become more applicable if our product candidates are approved and we begin commercialization. For additional details
regarding the federal, state and foreign healthcare laws that may affect our ability to operate, see “Risk Factors—Risks Related to Our Business and
Industry— “We are subject to extensive federal, state, and foreign regulation, and our failure to comply with these laws could harm our business.” If our
operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties,
including, without limitation, significant civil and criminal penalties, damages, fines, disgorgement, the curtailment or restructuring of our operations,
exclusion from participation in federal and state healthcare programs, imprisonment, and additional reporting requirements and oversight if we become
subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, any of which could adversely
affect our ability to operate our business and our financial results.
Orphan Drug Act
The United States Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting
fewer than 200,000 persons in the United States at the time of application for orphan drug designation (ODD). ODD must be requested before submitting a
BLA. ODD does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product that has ODD
subsequently receives the first FDA approval for the disease for which it has such designation, the holder of the approval is entitled to a seven-year
exclusive marketing period in the United States for that product except in very limited circumstances. For example, a drug that the FDA considers to be
clinically superior to, or different from, another approved orphan drug, even though for the same indication, may also obtain approval in the United States
during the seven-year exclusive marketing period. In addition, holders of exclusivity for orphan drugs are expected to assure the availability of sufficient
quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the drug.
Legislation similar to the Orphan Drug Act has been enacted outside the United States, including in the EU and Japan. The orphan legislation in the
EU is available for therapies addressing chronic debilitating or life-threatening conditions that affect five or fewer out of 10,000 persons or are financially
not viable to develop. The market exclusivity period is for ten years, although that period can be reduced to six years if, at the end of the fifth year,
available evidence establishes that the product is sufficiently profitable not to justify maintenance of market exclusivity. The market exclusivity may be
extended to 12 years if sponsors complete a pediatric investigation plan agreed upon with the relevant committee of the European Medicines Agency.
Orphan legislation in Japan similarly provides for ten years of marketing exclusivity for drugs that are approved for the treatment of rare diseases and
conditions.
Exclusivity
New biological products will benefit, if approved, from the data exclusivity provisions legislated in the United States, the EU and Japan. All three
regions effectively provide a period of data exclusivity to innovator biologic products. U.S. legislation provides a 12-year period of data exclusivity from
the date of first licensure of a reference biologic product. EU legislation provides a period of 10 to 11 years and Japan legislation provides a period of
8 years during which companies cannot be granted approval as generic drugs to approved biologic therapies. Protection from generic competition is also
available for new chemical entities, including potentially the small molecule TRC102, in the United States for 5 years, in the EU for 10 to 11 years and in
Japan for 8 years.
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Exclusivity in the European Union
The EU has led the way among the International Council for Harmonisation regions in establishing a regulatory framework for biosimilar products.
The marketing authorization of generic medicinal products and similar biological medicinal products are governed in the EU by Article 10(1) of Directive
2001/83/EC (2001). Unlike generic medicinal products, which only need to demonstrate bioequivalence to an authorized reference product, similar
biological medicinal products are required to submit preclinical and clinical data, the type and quantity of which is dictated by class and product specific
guidelines. In order to submit a marketing authorization for a similar biological medicinal product, the reference product must have been authorized for
marketing in the EU for at least 8 years. Biosimilars can only be authorized for use once the period of data exclusivity on the biological reference medicine
has expired. In general, this means that the biological reference medicine must have been authorized for at least 10 years before a similar biological
medicine can be made available by another company. The 10-year period can be extended to a maximum of 11 if, during the first 8 years of those 10 years,
the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their
authorization are held to bring a significant clinical benefit in comparison to existing therapies.
Many EU countries have banned interchangeability of biosimilars with their reference products to ensure adequate characterization of the safety
profile of the biosimilar and to enable comparison to that of reference product.
Exclusivity in Japan
In 2009, Japan’s Ministry of Health, Labour and Welfare, or MHLW, and Pharmaceuticals and Medical Device Agency, or PMDA, issued the first
Japanese guidance on biosimilars. The guideline (currently available only in Japanese), which shares common key features to EU guidelines, outlines the
nonclinical, clinical and CMC requirements for biosimilar applications and describes the review process, naming conventions and application fees.
Japan does not grant exclusivity to pharmaceutical products; however, the country does have a Post Marketing Surveillance, or PMS, system that
affects the timing of generic entry and, in effect, provides a period of market exclusivity to innovator products. This system allows safety data to be
acquired for each product. A PMS period is set for most of new drug approvals, and until this period is over, generic companies cannot submit their
applications for drug approvals as generic drugs. Recently, this period was extended to 8 years for all new drug approvals. Japan’s regulations do not allow
currently for interchangeability of biosimilars with their reference products.
Expedited Review and Approval
The FDA has various programs, including Fast Track, priority review, and accelerated approval, which are intended to expedite or simplify the
process for reviewing drugs and biologics, and/or provide for the approval of a drug or biologic on the basis of a surrogate endpoint. Even if a drug
qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period
for FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions,
those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a
process designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and fill unmet
medical needs. Breakthrough therapy designation is for products that are intended, alone or in combination with one or more other therapies, to treat a
serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the therapy may demonstrate substantial improvement over
existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For therapies
that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the
most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Therapies designated as
breakthrough therapies by the FDA may also be eligible for priority review and accelerated approval. Priority review is designed to give drugs that offer
major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared to a standard review
time of ten months. Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent
meetings with a sponsor of a Fast Track designated drug and expedite review of the application for a drug designated for priority review. Accelerated
approval provides for an earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet
medical need based on a surrogate endpoint. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute
measurement representing a clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of a drug candidate receiving
accelerated approval perform post-marketing clinical trials to confirm the clinically meaningful outcome as predicted by the surrogate marker trial.
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Pediatric Exclusivity and Pediatric Use
Under the Best Pharmaceuticals for Children Act, certain drugs may obtain an additional six months of exclusivity, if the sponsor submits
information requested in writing by the FDA, or a Written Request, relating to the use of the active moiety of the drug in children. The FDA may decline to
issue a Written Request for studies on unapproved or approved indications or where it determines that information relating to the use of a drug in a
pediatric population, or part of the pediatric population, may not produce health benefits in that population.
We have not received a Written Request for such pediatric studies, although we may ask the FDA to issue a Written Request for such studies in the
future. To receive the six-month pediatric market exclusivity, we would have to receive a Written Request from the FDA, conduct the requested studies in
accordance with a written agreement with the FDA or, if there is no written agreement, in accordance with commonly accepted scientific principles, and
submit reports of the studies. A Written Request may include studies for indications that are not currently in the labeling if the FDA determines that such
information will benefit the public health. The FDA will accept the reports upon its determination that the studies were conducted in accordance with and
are responsive to the original Written Request or commonly accepted scientific principles, as appropriate, and that the reports comply with the FDA’s filing
requirements.
In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric studies for most drugs and biologicals, for a new
active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs, BLAs and
supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must include the
evaluation of the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and support dosing and
administration for each pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric studies
for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug or biologic is ready for
approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the pediatric
studies begin. The FDA must send a non-compliance letter to any sponsor that fails to submit the required assessment, keep a deferral current or fails to
submit a request for approval of a pediatric formulation.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In
both domestic and foreign markets, sales and reimbursement of any approved products will depend, in part, on the extent to which third-party payors, such
as government health programs, commercial insurance and managed healthcare organizations provide coverage, and establish adequate reimbursement
levels, for such products. Third-party payors are increasingly challenging the prices charged for medical products and services and imposing controls to
manage costs. Third-party payors may limit coverage to specific products on an approved list, or also known as a formulary, which might not include all of
the FDA-approved products for a particular indication. Additionally, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate
the cost-effectiveness of our products. If third-party payors do not consider our products to be cost-effective compared to other therapies, the payors may
not cover our products after approved as a benefit under their plans or, if they do, the level of reimbursement may not be sufficient to allow us to sell our
products on a profitable basis.
The containment of healthcare costs also has become a priority of federal and state governments and the prices of drugs have been a focus in this
effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement
and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies
in jurisdictions with existing controls and measures, could further limit our net revenue and results.
Outside the United States, ensuring adequate coverage and payment for our products will face challenges. Pricing of prescription pharmaceuticals is
subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory
marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to
other available therapies. The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts. Third-party payors
are challenging the prices charged for medical products and services, and many third-party payors limit reimbursement for newly-approved health care
products. Recent budgetary pressures in many EU countries are also causing governments to consider or implement various cost-containment measures,
such as price freezes, increased price cuts and rebates. If budget pressures continue, governments may implement additional cost-containment measures.
Cost-control initiatives could decrease the price we might establish for products that we may develop or sell, which would result in lower product revenues
or royalties payable to us. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will
allow favorable reimbursement and pricing arrangements for any of our products.
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Healthcare Reform
There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biological products,
government control and other changes to the healthcare system of the United States. It is uncertain what legislative proposals will be adopted or what
actions federal, state or private payors for medical goods and services may take in response to any healthcare reform proposals or legislation. Adoption of
new legislation at the federal or state level could further limit reimbursement for pharmaceuticals, including our product candidates if approved. We cannot
predict the effect medical or healthcare reforms may have on our business, and no assurance can be given that any such reforms will not have a material
adverse effect. For additional details regarding health reform activity, see “Risk Factors—Risks Related to Commercialization of Product Candidates —
“Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.”
Foreign Regulation
In addition to regulations in the United States, we and our collaborators will be subject to a variety of foreign regulations governing clinical trials and
commercial sales and distribution of our product candidates. Whether or not we or our collaborators obtain FDA approval for a product candidate, we or
our collaborators must obtain approval from the comparable regulatory authorities of foreign countries or economic areas, such as the EU, before we or our
collaborators may commence clinical trials or market products in those countries or areas. The approval process and requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for
FDA approval.
Certain countries outside of the United States have a process that requires the submission of a clinical trial application much like an IND prior to the
commencement of human clinical trials. In Europe, for example, a clinical trial application, or CTA, must be approved by the competent national health
authority and by independent ethics committees in each country in which a company intends to conduct clinical trials. Once the CTA is approved in
accordance with a country’s requirements, clinical trial development may proceed in that country. In all cases, the clinical trials must be conducted in
accordance with good clinical practices, or GCPs and other applicable regulatory requirements.
Under EU regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure.
The centralized procedure is compulsory for medicinal products produced by biotechnology or those medicinal products containing new active substances
for specific indications such as the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, viral diseases and designated orphan medicines, and
optional for other medicines which are highly innovative. Under the centralized procedure, a marketing application is submitted to the European Medicines
Agency where it will be evaluated by the Committee for Medicinal Products for Human Use. A favorable opinion typically results in the grant by the
European Commission of a single marketing authorization that is valid for all EU member states within 67 days of receipt of the opinion. The initial
marketing authorization is valid for five years, but once renewed is usually valid for an unlimited period. The decentralized procedure provides for approval
by one or more “concerned” member states based on an assessment of an application performed by one member state, known as the “reference” member
state. Under the decentralized approval procedure, an applicant submits an application, or dossier, and related materials to the reference member state and
concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid
application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether to approve the
assessment report and related materials. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the
European Commission, whose decision is binding on all member states.
In China, the NMPA monitors and supervises the administration of pharmaceutical products, as well as medical devices and equipment. In order to
conduct clinical trials in China a clinical trial application must be submitted and approved by the NMPA. When clinical trials have been completed, an
applicant must apply to the NMPA for approval of a new drug application. The NMPA, the Center for Drug Evaluation (CDE), and the Drug Inspection
Institution will then conduct reviews and on-site inspections. The NMPA determines whether to approve the application according to the comprehensive
evaluation opinions produced by the reviews and on-site inspections. We or our collaborators must obtain approval of new drug applications before our
product candidates can be manufactured and sold in the Chinese market. In addition, all facilities and techniques used in the manufacture of products for
clinical use or for sale in China must be operated in conformity with good manufacturing practice guidelines as established by the NMPA. Failure to
comply with applicable requirements could result in the termination of manufacturing and significant fines.
Additional Regulation
We are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other present and potential federal, state or local regulations. These and other laws govern our use,
handling and disposal of various biological and chemical substances used in, and waste generated by our operations. Our research and development
involves the controlled use of hazardous materials, chemicals and viruses. Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed
our resources.
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Employees
As of December 31, 2022, we had a total of 18 full-time employees, 12 of whom are involved in research, development or manufacturing, and three
of whom have Ph.D., Pharm.D. or M.D. degrees. We have no collective bargaining agreements with our employees and we have not experienced any work
stoppages. We consider our relations with our employees to be good.
Corporate and Other Information
We were incorporated in the state of Delaware on October 28, 2004. Our principal executive offices are located at 4350 La Jolla Village Dr., Suite
800, San Diego, California 92122, and our telephone number is (858) 550-0780. Our corporate website address is www.traconpharma.com and we
regularly post copies of our press releases as well as additional information about us on our website. Information contained on or accessible through our
website is not a part of this Annual Report, and the inclusion of our website address in this Annual Report is an inactive textual reference only.
Access to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed
with or furnished to the Securities and Exchange Commission (SEC) may be obtained through the investor section of our website at
https://ir.traconpharma.com/. We do not charge for access to and viewing of these reports. Information in the investor section and on our website is not part
of this Annual Report on Form 10-K or any of our other securities filings. Our filings with the SEC may be accessed through the SEC’s website at
www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the
document in which the statement is included unless otherwise specified, and we do not assume or undertake any obligation to update any of those
statements or documents unless we are required to do so by law.
This Annual Report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and
trade names referred to in this Annual Report, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such
references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by,
any other companies.
Item 1A.
Risk Factors.
Certain factors may have a material adverse effect on our business, financial condition and results of operations, and you should carefully consider
them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other
information contained in this Annual Report as well as our other public filings with the Securities and Exchange Commission.
Risks Related to our Financial Position and Need for Additional Capital
We have incurred losses from operations since our inception and anticipate that we will continue to incur substantial operating losses for the
foreseeable future. We may never achieve or sustain profitability.
We are a clinical stage biopharmaceutical company with limited operating history. All the product candidates we are developing will require
substantial additional development time and resources before we or our partners would be able to apply for or receive regulatory approvals and begin
generating revenue from product sales. We have incurred losses from operations in each year since our inception, including net losses of $29.1 million and
$28.7 million for the twelve months ended December 31, 2022 and 2021, respectively. At December 31, 2022, we had an accumulated deficit of $236.9
million.
We expect to continue to incur substantial expenses as we expand our development activities and advance our clinical programs. To become and
remain profitable, we or our partners must succeed in developing product candidates, obtaining regulatory approval for them, and manufacturing,
marketing and selling those products for which we or our partners may obtain regulatory approval. We or they may not succeed in these activities, and we
may never generate revenue from product sales that is significant enough to achieve profitability. Because of the numerous risks and uncertainties
associated with pharmaceutical and biological product development, we are unable to predict the timing or amount of increased expenses or when, or if, we
will be able to achieve profitability. In addition, our expenses could increase if we are required by the FDA or comparable foreign regulatory authorities to
perform studies or trials in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any
product candidates. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become
or remain profitable would depress our market value and could impair our ability to raise capital, expand our business, develop other product candidates or
continue our operations.
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We will require substantial additional financing to achieve our goals, and failure to obtain additional financing when needed could force us to delay,
limit, reduce or terminate our drug development efforts. There is substantial doubt as to our ability to continue as a going concern.
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. We expect our current level of
research and development expenses to increase in 2023 primarily due to the continued enrollment of the ENVASARC trial and Phase 1/2 clinical trial of
YH001 in combination with envafolimab in certain sarcoma subtypes.
At December 31, 2022, we had cash and cash equivalents totaling $17.5 million, of which $0.1 million is pledged as collateral for our obligations
under our corporate headquarters facility lease. Based upon our current operating plan, we believe that our cash and cash equivalents as of December 31,
2022 will be sufficient to fund our operating expenses and capital requirements into mid-2023. We will need additional funding to complete the
development and commercialization of product candidates, including envafolimab and YH001. In addition, in December 2019 we entered into a
collaboration and clinical trial agreement with 3D Medicines and Alphamab and in October 2021, we entered into a collaborative development and
commercialization agreement with Eucure and Biocytogen. Under these agreements, we are responsible for various portions of the costs to conduct clinical
trials, among other development obligations. We will need additional funds to advance the development of these programs and meet our cost-sharing
obligations, and these requirements may be substantial depending on how many programs are selected for development and the stage of development each
program reaches. As more fully discussed in Note 1 to our consolidated financial statements included in this Annual Report, the uncertainties around our
ability to obtain additional funding raise substantial doubt regarding our ability to continue as a going concern for a period of 12 months following the date
these accompanying consolidated financial statements were issued.
Regardless of our expectations, changing circumstances beyond our control, including the effects of macroeconomic and geopolitical developments,
such as the COVID-19 pandemic, rising inflation rates and the ongoing conflict between Ukraine and Russia may cause us to consume capital more rapidly
than we currently anticipate. For example, our clinical trials may encounter technical, enrollment or other difficulties or we could encounter difficulties
obtaining clinical trial material or other supplies that could increase our development costs more than we expect. In addition, we may continue to incur
substantial legal expenses in connection with our on-going dispute with I-Mab, including in connection with enforcing and collecting any award from the
arbitration process. In any event, we will require additional capital prior to completing clinical development, filing for regulatory approval, or
commercializing any product candidates.
In December 2022, we entered into a non-recourse financing agreement (the Investment Agreement) with certain investors (collectively the
Investors) pursuant to which the Investors will pay us a maximum aggregate amount (Maximum Capital) equal to $30.0 million or a lesser amount based
on the amount awarded (the Award), if any, to us in connection with our ongoing arbitration proceeding with I-Mab (the Arbitration). Of the Maximum
Capital, (i) $3.5 million (the Initial Capital) was paid to us shortly after execution, (ii) 25% will be paid to us within 15 business days of issuance of an
Award, subject to the Award size exceeding a prespecified threshold and satisfaction of other conditions set forth in the Investment Agreement, and (iii) the
remainder will be paid to us in tranches over a multi-year period, subject again to the Award size exceeding a prespecified threshold and satisfaction of
other conditions set forth in the Investment Agreement. While the Investment Agreement provides us with access to additional capital under certain
circumstances, we cannot predict the outcome of the arbitration and are unable to estimate whether the Award will meet or exceed the prespecified
threshold required in the Investment Agreement. If the Award does not meet or exceed the prespecified threshold, we may not have access to additional
capital under the Investment Agreement.
In December 2020, as amended in March 2022, we entered into a Sales Agreement with JonesTrading pursuant to which we could sell from time to
time, at our option, up to an aggregate of $50.0 million of shares of our common stock through JonesTrading, as sales agent or principal, $45.7 million of
which remains available for sale as of December 31, 2022. While the Sales Agreement provides us with an additional option to raise capital through
issuances and sales of our common stock, there can be no guarantee that we will be able to sell shares under the Sales Agreement in the future, or that any
sales will generate sufficient proceeds to meet our capital requirements. In particular, JonesTrading is under no obligation to sell any shares of our common
stock that we may request to be sold under the Sales Agreement from time to time. If sales are made under the Sales Agreement, our existing stockholders
may experience dilution and such sales, or the perception that such sales are or will be occurring, may cause the trading price of our common stock to
decline.
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Attempting to secure additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to
develop product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at
all. As a result of macroeconomic and geopolitical developments, such as the COVID-19 pandemic and actions taken to slow its spread, ongoing military
conflict between Ukraine and Russia, actual or anticipated changes in interest rates, economic inflation and the responses by central banking authorities to
control such inflation, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If
the equity and credit markets deteriorate further, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. If we
are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinue the
development or commercialization of product candidates or otherwise significantly curtail, or cease, operations. If we are unable to pursue or are forced to
delay our planned drug development efforts due to lack of financing, it would have a material adverse effect on our business, financial condition, operating
results and prospects.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to product
candidates on unfavorable terms to us.
We may seek additional capital through a variety of means, including through equity offerings and debt financings. To the extent that we raise
additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or
other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or
restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional
funds through licensing or collaboration arrangements with third parties, we may have to relinquish valuable rights to product candidates, or grant licenses
on terms that are not favorable to us.
The RGC Loan Agreement contains restrictions that limit our flexibility in operating our business. We may be required to make a prepayment or repay
the outstanding indebtedness earlier than we expect if a prepayment event or an event of default occurs, including a material adverse change with
respect to us, which could have a materially adverse effect on our business.
In September 2022, as amended December 2022, we entered into a loan and security agreement (the RGC Loan Agreement) with Runway Growth
Finance Corp. (RGC or the Lender) that provides a term loan commitment in an aggregate principal amount of up to $35.0 million in three tranches: (i) a
Term A loan in an aggregate principal amount of $10.0 million, with the full amount funded on the closing of the RGC Loan Agreement and repaid in
January 2023 in connection with the execution of our arbitration financing arrangement; (ii) a Term B loan in an aggregate principal amount of up to $15.0
million to be funded in one or more disbursements at our request on or prior to June 30, 2024, subject to certain conditions being met; and (iii) a Term C
loan in an aggregate principal amount of up to $10.0 million that may be disbursed in a single disbursement in the lender’s sole discretion upon our request
at any time from closing of the RGC Loan Agreement through and including December 31, 2024. Pursuant to the December 2022 amendment (the RGC
Loan Amendment): (i) we repaid all amounts of principal and accrued but unpaid interest in respect of the Term A Loan (as defined in the RGC Loan
Agreement) on January 3, 2023 without the obligation for us to pay the final payment fee or the prepayment fee described in the RGC Loan Agreement; (ii)
on or before March 31, 2023, at our request, if we have raised at least $25.0 million in net cash proceeds from certain equity or debt transactions (including
amounts raised in connection with our arbitration financing arrangement) prior to making such request, Lender will loan to us an aggregate principal
amount of $10.0 million, with the full amount funded in a single disbursement; (iii) we will not issue an additional warrant to Lender in connection with the
loan, if any, described in clause (ii) above; and (iv) Lender’s security interest in specific collateral will be subordinated to the arbitration financing
investors’ security interest in the specific collateral. If the loan described in clause (ii) above is not made by March 31, 2023, the RGC Loan Agreement
will terminate on that date, and we will not be obligated to pay the prepayment fee described in the RGC Loan Agreement but the final payment fee
described in the RCG Loan Agreement will become immediately due and payable.
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The RGC Loan Agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our
ability to, among other things:
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convey, sell, lease or otherwise dispose of certain parts of our business or property;
merge or consolidate with another entity;
incur or assume certain debt;
incur certain types of liens on our assets;
make changes to certain collateral accounts or fall below a prespecified amount of liquidity;
pay dividends or make other distributions to our stockholders;
make certain loans or investments;
enter into material transactions with affiliates; and
voluntarily repay or prepay certain indebtedness.
The restrictive covenants of the RGC Loan Agreement could cause us to be unable to pursue business opportunities that we or our stockholders may
consider beneficial.
A breach of any of these covenants could result in an event of default under the RGC Loan Agreement. An event of default will also occur upon the
occurrence of, among other things, a material adverse effect on our business, operations, properties, assets or condition (financial or otherwise), which
could potentially include receipt of negative results in clinical trials, a material impairment in the perfection or priority of the lien in any collateral or value
of such collateral, or a material adverse effect on the prospect of our repayment of any portion of the amounts we owe under the RGC Loan Agreement or
in the ability of RGC to enforce its rights and remedies. In the case of a continuing event of default under the RGC Loan Agreement, RGC, on behalf of all
lenders, could elect to declare all amounts outstanding to be immediately due and payable, proceed against the collateral in which we granted a security
interest under the RGC Loan Agreement, or otherwise exercise the rights of a secured creditor. Amounts outstanding under the RGC Loan Agreement are
secured by substantially all of our assets, excluding intellectual property, which is subject to a negative pledge arrangement. Should an event of default or
continuing event of default occur or if RGC elects to exercise its rights or remedies in accordance with the RGC Loan Agreement, including accelerating
any payments or proceeding against any collateral, it would have a material adverse effect on our business, financial condition, results of operations and
prospects.
Risks Related to Clinical Development and Regulatory Approval of Product Candidates
If the response rate of envafolimab as a single agent or in combination with ipilimumab in UPS/MFS is not significantly higher than existing
therapies, our strategy of pursuing accelerated approval of envafolimab on ORR as the primary endpoint could delay or prevent the approval of
envafolimab in UPS/MFS.
We are initially developing envafolimab in refractory UPS/MFS, where the PD-(L)1 inhibitors given as single agents or in combination with
ipilimumab demonstrated response rates which were significantly higher than the response rate demonstrated by the approved treatment Votrient or
chemotherapy in UPS/MFS. If the response rate of envafolimab as a single agent or in combination with ipilimumab in UPS/MFS is not significantly
higher than Votrient or other chemotherapy, our strategy of pursuing accelerated approval of envafolimab on ORR as the primary endpoint will be unlikely
to succeed, which could delay or prevent the approval of envafolimab in UPS/MFS.
Our plan to develop envafolimab in combination with ipilimumab and YH001 in combination with envafolimab exposes us to additional risks.
We intend to develop envafolimab in combination with ipilimumab and to develop YH001 in combination with envafolimab, and may in the future
develop other product candidates in combination with other approved therapies or therapies in development. Patients may not be able to tolerate
envafolimab or any of our other product candidates in combination with ipilimumab, YH001 or other therapies or dosing of envafolimab in combination
with ipilimumab, YH001 or other therapies may have unexpected consequences. Even if any of our product candidates were to receive marketing approval
or be commercialized for use in combination with other existing therapies, we would continue to be subject to the risks that the FDA or other comparable
foreign regulatory authorities could revoke approval of the therapy used in combination with any of our product candidates, or safety, efficacy,
manufacturing or supply issues could arise with these existing therapies. In addition, it is possible that existing therapies with which our product candidates
are approved for use could themselves fall out of favor or be relegated to later lines of treatment. This could result in the need to identify other combination
therapies for our product candidates or our own products being removed from the market or being less successful commercially.
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Additionally, if the third-party providers of therapies or therapies in development used in combination with our product candidates are unable to
produce sufficient quantities for clinical trials or for commercialization of our product candidates, or if the cost of combination therapies are prohibitive,
our development and commercialization efforts would be impaired, which would have an adverse effect on our business, financial condition, results of
operations and prospects.
Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of
future trial results. Failure can occur at any stage of clinical development.
Clinical development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during
the clinical trial process. Even if product candidates demonstrate favorable results in ongoing or planned Phase 1 and 2 clinical trials, many product
candidates fail to show desired safety and efficacy traits in late-stage clinical trials despite having progressed through earlier trials. In addition to the
potential lack of safety or efficacy of product candidates, clinical trial failures may result from a multitude of factors including flaws in trial design,
manufacture of clinical trial material, dose selection and patient enrollment criteria, or differences in determination of progression events by investigators
compared to central radiographic reviewers. With respect to envafolimab and YH001, while results of trials conducted by others outside of the United
States have been promising, they may not be predictive of results in U.S. trials due to differences in trial design, target indications, patient populations,
availability of alternative treatments and other factors. Based upon the recommendation of the IDMC following an interim analysis of data from the
ENVASARC trial, we have proceeded in the trial using a dose of envafolimab that is twice the dose administered to the first patients in the trial. While
dosing at higher levels has shown promising results in other trials outside of the United States, we cannot be certain that we will observe similar results in
the ENVASARC trial, including whether the higher dose will result in tolerability issues that were not encountered with the lower dose. A number of
companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles,
notwithstanding promising results in earlier trials. Based upon negative or inconclusive results, we or our partners may decide, or regulators may require
us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and
regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. If patients drop out of our trials, miss
scheduled doses or follow-up visits or otherwise fail to follow trial protocols, or if our trials are otherwise disrupted due to COVID-19 actions taken to slow
its spread or adverse macroeconomic and geopolitical developments, such as the ongoing military conflict between Ukraine and Russia, the integrity of
data from our trials may be compromised or not accepted by the FDA or other regulatory authorities, which would represent a significant setback for the
applicable program.
If any product candidate is found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for it and our stock price would be
materially and adversely affected.
Interim, topline and preliminary data from preclinical studies and clinical trials may change as more data become available, and are subject to audit
and verification procedures that could result in material changes in the final data.
We and our collaboration partners publicly disclose from time to time, interim, topline or preliminary data from preclinical studies and clinical trials,
which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change as more data
become available. We and our collaboration partners may also announce topline data following the completion of a preclinical study or clinical trial, which
may be subject to change following a more comprehensive review of the data related to the particular study or trial. We and our collaboration partners also
make assumptions, estimations, calculations and conclusions as part of the analyses of data, and we may not have received or had the opportunity to fully
and carefully evaluate all data. In addition, the manner in which clinical data and results are reported may differ depending on the jurisdiction in which a
trial is conducted or between us and our collaboration partners. As a result, the interim, topline or preliminary results that we or our collaboration partners
report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been
received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different
from the previously published preliminary data. As a result, interim, topline and preliminary data should be viewed with caution until the final data are
available. Adverse differences between previous preliminary or interim data and future interim or final data could significantly harm our business
prospects.
From time to time, we or our collaboration partners may also disclose interim data from clinical trials. Interim data from clinical trials are subject to
the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available or as
patients from clinical trials continue other treatments for their disease. Adverse differences between preliminary or interim data and final data could
significantly harm our business prospects. Further, disclosure of interim data by us, our collaboration partners, or by our competitors could result in
volatility in the price of our common stock.
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Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may
interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the
particular product candidate or product, our company in general and our common stock. In addition, the information we or our collaboration partners
choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree
with what we or our collaboration partners determine to be material or otherwise appropriate information to include in such disclosure, and any information
we or our collaboration partners determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views,
activities or otherwise regarding a particular product candidate or our business. If the interim, topline, or preliminary data that is reported for our product
candidates differ from future or more comprehensive data, or if others, including regulatory authorities, disagree with the conclusions reached, our ability
to obtain approval for and commercialize our product candidates, our business, operating results, prospects or financial condition may be harmed.
Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to
obtain regulatory approval and commence product sales.
We may experience delays in clinical trials of product candidates. Our ongoing and planned clinical trials may not begin on time, have an effective
design, enroll a sufficient number of patients or be completed on schedule, if at all. Our clinical trials can be delayed for a variety of reasons, including:
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inability to raise funding necessary to initiate or continue a trial;
delays in obtaining regulatory approval to commence a trial;
delays in reaching agreement with the FDA on final trial design;
adverse findings in toxicology studies, including chronic toxicology studies;
imposition of a clinical hold for safety reasons or following an inspection of our clinical trial operations or trial sites by the FDA or other
regulatory authorities;
delays in reaching agreement on acceptable terms with prospective clinical trial sites;
delays in obtaining required institutional review board approval at each site;
delays in recruiting suitable patients to participate in a trial;
delays in enrollment caused by the availability of alternative treatments;
delays in having patients complete participation in a trial or return for post-treatment follow-up;
clinical sites dropping out of a trial to the detriment of enrollment;
time required to add new clinical sites; or
delays in our ability to acquire sufficient supply of clinical trial materials.
For example, the FDA may require additional or different data in order to move forward with a BLA submission for envafolimab for patients with
local advanced, unresectable or metastatic UPS and MFS, which could ultimately delay regulatory approval and could have a material adverse effect on our
business.
In addition, the COVID-19 pandemic has impacted clinical trials broadly, including our own with some sites pausing enrollment or not completing
all assessments specified in the protocol, and some patients choosing not to enroll or continue participating in ongoing trials. We and our collaborators may
continue to experience delays in site initiation and patient enrollment, failures to comply with trial protocols, delays in the manufacture of product
candidates for clinical testing, supply chain disruptions and other difficulties in starting or competing our clinical trials due to the COVID-19 pandemic and
other macroeconomic and geopolitical developments.
If initiation or completion of our ongoing or planned clinical trials are delayed for any of the above reasons or other reasons, our development costs
may increase, our approval process could be delayed and our ability to commercialize product candidates could be materially harmed, which could have a
material adverse effect on our business.
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Our product candidates or those of our partners may cause adverse events or have other properties that could delay or prevent their regulatory approval
or limit the scope of any approved label or market acceptance.
Adverse events (AEs) caused by product candidates or other potentially harmful characteristics of product candidates could cause us, our partners,
including Eucure, Biocytogen, 3D Medicines, Alphamab or the NCI, clinical trial sites or regulatory authorities to interrupt, delay or halt clinical trials and
could result in the denial of regulatory approval.
Envafolimab has produced AEs consistent with other inhibitors of the PD-L1 and PD-1 pathways, including rare fatal immune related toxicities.
Only a single related serious adverse event was reported in 36 patients in the ENVASARC interim efficacy data review in December 2022. Based on the
August 9, 2021 data cutoff from the YH001 Phase 1 dose escalation clinical trial being conducted in Australia, no dose limiting toxicities had occurred and
a single related serious adverse event of grade 3 colitis was reported, which led to treatment discontinuation. Phase 1 or Phase 2 clinical trials of TRC102
conducted to date have generated AEs related to the trial drug, some of which have been serious. The most common AE identified in our clinical trials of
TRC102 has been anemia. There can be no assurance that AEs associated with product candidates will not be observed. As is typical in drug development,
we have a program of ongoing toxicology studies in animals for clinical stage product candidates and cannot provide assurance that the findings from such
studies or any ongoing or future clinical trials will not adversely affect our clinical development activities.
Further, if any approved products cause serious or unexpected side effects after receiving market approval, a number of potentially significant
negative consequences could result, including:
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regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution;
regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
we may be required to change the way the product is administered or conduct additional clinical trials;
we could be sued and held liable for harm caused to patients; or
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially
increase the costs of commercializing product candidates.
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we
are ultimately unable to obtain regulatory approval for product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the
commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval
policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical
development and may vary among jurisdictions. For example, for certain oncology indications where the FDA has traditionally granted approval to
therapies that can demonstrate progression-free survival, the agency may later require us to demonstrate overall survival, which would greatly extend the
time and increase the capital required to complete clinical development. We have not obtained regulatory approval for any product candidate, and it is
possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.
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Product candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design, scope or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe
and effective for its proposed indication;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities
for approval;
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;
the data collected from clinical trials of product candidates may not be sufficient to support the submission of a BLA or a New Drug
Application (NDA), or other submission or to obtain regulatory approval in the United States or elsewhere;
the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third party
manufacturers with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may change significantly in a manner rendering
our clinical data insufficient for approval.
This lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain regulatory approval to
market product candidates, which would harm our business, results of operations and prospects significantly.
In addition, even if we were to obtain approval, regulatory authorities may approve any product candidates for fewer or more limited indications than
we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing
clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful
commercialization of that product candidate. Any of the foregoing scenarios could harm the commercial prospects for our product candidates or those of
our partners.
We have not previously submitted a marketing application, or any similar drug approval filing to the FDA or any comparable foreign authority for
any product candidate, and we cannot be certain that any product candidates will be successful in clinical trials or receive regulatory approval. Further,
product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for product
candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market one or more product candidates,
our revenue will be dependent, to a significant extent, upon the size of the markets in the territories for which we gain regulatory approval. If the markets
for patients or indications that we are targeting are not as significant as we estimate, we may not generate significant revenue from sales of such product
candidates, if approved.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could negatively impact our business.
The ability of the FDA to review and approve proposed clinical trials or new products can be affected by a variety of factors, including government
budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees,
and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent
years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political
process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new product
candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last
several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies,
such as the FDA, have had to furlough critical FDA employees and stop critical activities.
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Separately, in response to the global COVID-19 pandemic, in March 2020, the FDA announced its intention to postpone most foreign and domestic
inspections of manufacturing facilities. In July 2020, the FDA restarted on-site inspections on a risk-based basis. Regulatory authorities outside the United
States have and may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown
occurs, or if global health concerns prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory
activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions,
which could have a material adverse effect on our business.
We may attempt to secure approval from the FDA through the use of accelerated approval pathways. If we are unable to obtain such approval, we may
be required to conduct additional clinical trials beyond those that we contemplate, which could increase the expense of obtaining, and delay the receipt
of, necessary marketing approvals. Even if we receive accelerated approval from the FDA, if our confirmatory trials do not verify clinical benefit, or if
we do not comply with rigorous post-marketing requirements, the FDA may seek to withdraw accelerated approval.
We may in the future seek accelerated approval for one or more of our product candidates, including envafolimab in UPS/MFS. Under the
accelerated approval program, the FDA may grant accelerated approval to a product candidate designed to treat a serious or life-threatening condition that
provides meaningful therapeutic benefit over available therapies upon a determination that the product candidate has an effect on a surrogate endpoint or
intermediate clinical endpoint that is reasonably likely to predict clinical benefit. The FDA considers a clinical benefit to be a positive therapeutic effect
that is clinically meaningful in the context of a given disease, such as irreversible morbidity or mortality. For the purposes of accelerated approval, a
surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical
benefit, but is not itself a measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than an effect on
irreversible morbidity or mortality that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit. The
accelerated approval pathway may be used in cases in which the advantage of a new drug over available therapy may not be a direct therapeutic
advantage, but is a clinically important improvement from a patient and public health perspective. If granted, accelerated approval is usually contingent on
the sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug’s clinical benefit. If
such post-approval studies fail to confirm the drug’s clinical benefit, the FDA may withdraw its approval of the drug. In addition, the FDA currently
requires pre-approval of promotional materials for accelerated approval products, once approved.
If we decide to submit an application for accelerated approval for our product candidates, there can be no assurance that such submission or
application will be accepted or that any expedited development, review or approval will be granted on a timely basis, or at all. The FDA could require us
to conduct further studies prior to considering our application or granting approval of any type. A failure to obtain accelerated approval or any other form
of expedited development, review or approval for our product candidates would result in a longer time period to commercialization of such product
candidate, if any, could increase the cost of development of such product candidate and could harm our competitive position in the marketplace.
We may not receive fast track designation for our product candidates from the FDA, or fast track designation may not actually lead to a faster
development or regulatory review or approval process.
Fast track designation provides increased opportunities for sponsor meetings with the FDA during preclinical and clinical development, in addition
to the potential for rolling review once a marketing application is filed. A new drug or biologic is eligible for fast track designation if it is intended to treat a
serious or life-threatening disease or condition and the drug demonstrates the potential to address unmet medical needs for the disease or condition. While
the FDA did grant us fast track designation for the development of envafolimab for patients with locally advanced, unresectable or metastatic UPS and
MFS who have progressed on one or two prior lines of chemotherapy, it has broad discretion whether or not to grant this designation for our other product
candidates. Even if we believe another particular product candidate is eligible for this designation, we cannot assure you that the FDA will grant it. Further,
the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.
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We may be unsuccessful in our efforts to obtain orphan drug designations (ODDs) from the FDA for product candidates, and even if these designations
are obtained, we may not ultimately realize the potential benefits of ODD.
Regulatory authorities in some jurisdictions, including the United States, may designate drugs for relatively small patient populations as orphan
drugs. Under the Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is intended to treat a rare disease or condition, which is generally
defined as a patient population of fewer than 200,000 people in the United States, or a patient population of greater than 200,000 people in the United
States, but for which there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. Orphan drugs
do not require prescription drug user fees with a marketing application, may qualify the drug development sponsor for certain tax credits, and may be
eligible for a market exclusivity period of seven years.
In June 2021, we received ODD for envafolimab for the treatment of soft tissue sarcoma subtypes and in October 2020, the FDA granted ODD for
TRC102 for the treatment of patients with malignant glioma, including glioblastoma. Generally, if a drug with an ODD subsequently receives the first
marketing approval for the indication for which it has such designation, the drug may be entitled to a period of marketing exclusivity, which precludes the
FDA from approving another marketing application for the same drug for the same orphan designated indication for that time period. The applicable period
is seven years in the United States, which may be extended by six months, in the case of product candidates that have complied with the respective
regulatory agency’s agreed upon pediatric investigation plan. Orphan drug exclusivity may be lost if the FDA determines that the request for designation
was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or
condition. In addition, even after a drug is granted orphan exclusivity and approved, the FDA can subsequently approve another drug for the same
condition before the expiration of the seven-year exclusivity period if the FDA concludes that the later drug is clinically superior in that it is shown to be
safer, more effective or makes a major contribution to patient care. In addition, if an orphan designated product receives marketing approval for an
indication broader than or different from what is designated, such product may not be entitled to orphan exclusivity. Even though the FDA has granted
ODD, if we receive approval for a modified or different indication, our current orphan designations may not provide us with exclusivity.
ODD does not convey any advantage in, or shorten the duration of, the regulatory review or approval process. Also, regulatory approval for any
product candidate may be withdrawn, and other product candidates may obtain approval before us and receive orphan drug exclusivity, which could block
us from entering the market. For example, 3D Medicines has U.S. ODD for envafolimab for the treatment of BTC, an indication that is outside the scope of
our current license agreement with 3D Medicines.
Orphan drug exclusivity also may not effectively protect us from competition because different drugs can be approved for the same condition and
the same drug can be approved for different conditions before the expiration of any orphan drug exclusivity period.
If orphan drug exclusivity is lost and we were unable to successfully enforce any remaining patents covering our eligible product candidates, we
could be subject to generic competition earlier than we anticipate. In addition, if a subsequent drug is approved for marketing for the same or a similar
indication as any product candidates that receive marketing approval, we may face increased competition and lose market share regardless of orphan drug
exclusivity.
Although we intend to seek breakthrough therapy designation for envafolimab for the treatment of soft tissue sarcoma subtypes, such designation may
not be granted, and even if granted this may not lead to a faster development, regulatory review or approval process, and it does not increase the
likelihood that envafolimab will receive marketing approval in the United States.
A breakthrough therapy is defined as a therapy that is intended, alone or in combination with one or more other therapies, to treat a serious or life-
threatening disease or condition, and preliminary clinical evidence indicates that the therapy may demonstrate substantial improvement over existing
therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For therapies that
have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most
efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Therapies designated as
breakthrough therapies by the FDA may also be eligible for priority review and accelerated approval. Although we intend to seek breakthrough therapy
designation for envafolimab for the treatment of soft tissue sarcoma, we may not be granted such designation and even if designated this may not lead to a
faster development, regulatory review or approval process, and it does not increase the likelihood that envafolimab will receive marketing approval in the
United States. In addition, if granted breakthrough therapy designation, the FDA may later decide that envafolimab no longer meets the conditions for
qualification or decide that the time period for FDA review or approval will not be shortened.
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Obtaining and maintaining regulatory approval of product candidates in one jurisdiction does not mean that we will be successful in obtaining
regulatory approval of product candidates in other jurisdictions.
Obtaining and maintaining regulatory approval of product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain
regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the
regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in
foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary
among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including
additional preclinical studies or clinical trials, as studies or trials conducted in one jurisdiction may not be accepted by regulatory authorities in other
jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in
that jurisdiction. In some cases, the price that we would intend to charge for our products is also subject to approval.
Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs
for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international
markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product
candidates or those of our partners will be harmed.
Even if we receive regulatory approval of product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review,
which may result in significant additional expense, and we may be subject to penalties if we fail to comply with regulatory requirements or experience
unanticipated problems with product candidates.
Any product candidates for which we receive regulatory approvals will require surveillance to monitor the safety and efficacy of the product
candidate. The FDA may also require a Risk Evaluation and Mitigation Strategy (REMS) in order to approve product candidates, which could entail
requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods,
patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves product candidates, the
manufacturing processes, labeling, packaging, distribution, AE reporting, storage, advertising, promotion, import, export and recordkeeping for product
candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing
information and reports, establishment registration and drug listing, as well as continued compliance with regulatory requirements for current good
manufacturing practices (cGMPs) and current good clinical practices (cGCPs) for any clinical trials that we conduct post-approval. Although physicians, in
the practice of medicine, may prescribe an approved drug for unapproved indications, pharmaceutical companies are prohibited from promoting uses that
are not approved by the FDA as reflected in the product’s approved labeling. However, companies may share truthful and not misleading information that is
otherwise consistent with the labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses of
approved pharmaceutical products, and a company that is found to have improperly promoted off-label may be subject to significant liability. Later
discovery of previously unknown problems with product candidates, including AEs of unanticipated severity or frequency, or with our third party
manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
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restrictions on the marketing or manufacturing of product candidates, withdrawal of the product from the market, or voluntary or mandatory
product recalls;
fines, warning letters or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of
existing approvals;
product seizure or detention, or refusal to permit the import or export of product candidates; and
injunctions or the imposition of civil or criminal penalties.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or
delay regulatory approval of product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future
legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the
adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have
obtained and we may not achieve or sustain profitability.
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Risks Related to Our Reliance on Third Parties
We and our partners rely on third party manufacturers to make product candidates, and any failure by a third party manufacturer may delay or impair
our ability to complete clinical trials or commercialize our product candidates.
Manufacturing drugs and biologics is complicated and is tightly regulated by regulatory authorities, including the FDA and foreign equivalents. We
currently rely on third party manufacturers to supply us with drug substance for preclinical and clinical trials. Moreover, the market for contract
manufacturing services for drug products is highly cyclical, with periods of relatively abundant capacity alternating with periods in which there is little
available capacity. If our need for contract manufacturing services increases during a period of industry-wide tight capacity, we may not be able to access
the required capacity on a timely basis or on commercially viable terms, which could result in delays in initiating or completing clinical trials or our ability
to apply for or receive regulatory approvals.
We rely on other third parties for drug substance and to perform additional steps in the manufacturing process, including filling into vials, shipping
and storage. For our clinical stage pipeline programs, there can be no guarantee that lack of clinical supplies will not force us or our partners to delay or
terminate any ongoing or planned clinical trials.
We expect to continue to rely on third party manufacturers for any drug required for commercial supply and do not intend to build our own
manufacturing capability. Successfully transferring complicated manufacturing techniques to contract manufacturing organizations and scaling up these
techniques for commercial quantities is costly, time consuming and subject to potential difficulties and delays. With respect to envafolimab, pursuant to the
Envafolimab Collaboration Agreement, 3D Medicines and Alphamab have agreed to manufacture and supply, or to arrange for a third party manufacturer
to manufacture and supply, envafolimab to us at pre-negotiated prices that vary based on clinical or commercial use. With respect to YH001, Eucure has
agreed to manufacture and supply, or to arrange for a third party manufacturer to manufacture and supply, YH001 to us for clinical trials pursuant to the
terms of a clinical supply and quality agreement to be separately negotiated, but we cannot guarantee that we will successfully negotiate and enter into the
contemplated clinical supply and quality agreement or do so on commercially favorable terms.
We do not have any long-term supply agreements for the manufacture of product candidates and cannot guarantee that any third party manufacturer
would be willing to continue supplying drug product for clinical trials or commercial sale at a reasonable cost or at all. In addition, manufacturing
agreements are often subject to early termination by the third party manufacturer under certain circumstances.
The facilities used by our current or future third party manufacturers to manufacture our product candidates must be approved by the FDA pursuant
to inspections that will be conducted after we submit a BLA or an NDA to the FDA. While we work closely with our third party manufacturers on the
manufacturing process for product candidates, we generally do not control the implementation of the manufacturing process of, and are completely
dependent on, our third party manufacturers for compliance with cGMP regulatory requirements and for manufacture of both drug substances and finished
drug products. If our third party manufacturers or those of our collaborators cannot successfully manufacture material that conforms to applicable
specifications and the strict regulatory requirements of the FDA or other regulatory authorities, we may experience delays in initiating planned clinical
trials and we may not be able to secure or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of
our contract manufacturers or other third party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or
a comparable foreign regulatory authority does not approve these facilities for the manufacture of product candidates or if it withdraws any such approval
in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval
for or commercialize product candidates.
We depend in part on NCI and other third party sponsors to advance clinical development of TRC102. If these third party sponsors ceased their support
for our product candidates, our ability to advance clinical development of product candidates could be limited and we may not be able to pursue the
number of different indications for our product candidates that are currently being pursued.
NCI is currently sponsoring and funding multiple clinical trials involving TRC102. In addition, Case Western has sponsored and funded two separate
clinical trials involving TRC102. The advancement of TRC102 depends in part on the continued sponsorship and funding of clinical trials by these
organizations, as our resources and capital would not be sufficient to conduct these trials on our own. None of these third party sponsors are obligated to
continue sponsorship or funding of any clinical trials involving our product candidates and could stop their support at any time. If these third party sponsors
ceased their support for our product candidates, our ability to advance clinical development of product candidates could be limited and we may not be able
to pursue the number of different indications for our product candidates that are currently being pursued.
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Even if these third party sponsors continue to sponsor and fund clinical trials of our product candidates, our reliance on their support subjects us to
numerous risks. For example, we have limited control over the design, execution or timing of their clinical trials and limited visibility into their day-to-day
activities, including with respect to how they are providing and administering our product candidates. If a clinical trial sponsored by a third party has a
failure due to poor design of the trial, errors in the way the clinical trial is executed or for any other reason, or if the sponsor fails to comply with applicable
regulatory requirements or if there are errors in the reported data, it could represent a major set-back for the development and approval of our product
candidates, even if we were not directly involved in the trial and even if the clinical trial failure was not related to the underlying safety or efficacy of the
product candidate. In addition, these third party sponsors could decide to de-prioritize clinical development of our product candidates in relation to other
projects, which could adversely affect the timing of further clinical development. We are also subject to various confidentiality obligations with respect to
the clinical trials sponsored by third party sponsors, which could prevent us from disclosing current information about the progress or results from these
trials until the applicable sponsor publicly discloses such information or permits us to do so. This may make it more difficult to evaluate our business and
prospects at any given point in time and could also impair our ability to raise capital on our desired timelines.
We are dependent on 3D Medicines and Alphamab with respect to certain aspects of our development of envafolimab for the treatment of sarcoma in
North America and on Eucure and Biocytogen with respect to certain aspects of our development of YH001 for the treatment of certain sarcoma
subtypes in North America. The failure to maintain these collaboration and clinical trial agreements, the failure of 3D Medicines, Alphamab, Eucure
or Biocytogen to perform their obligations under the agreements, or the actions of 3D Medicines, Alphamab, Eucure or Biocytogen or their other
partners with respect to envafolimab and YH001 in other indications or outside North America could negatively impact our business.
Pursuant to the terms of our collaboration and clinical trial agreement with 3D Medicines and Alphamab, we were granted an exclusive license to
develop and commercialize envafolimab for sarcoma in North America. Pursuant to the terms of our collaborative development and commercialization
agreement with Eucure and Biocytogen, we were granted an exclusive (including with respect to Eucure and its affiliates), nontransferable, license to
develop and commercialize YH001 in North America for the treatment of multiple human indications, including the Initial Indications or one or more of
the Substitute Indications, which may be substituted for Initial Indications at our discretion. While we are generally responsible for clinical development,
3D Medicines and Alphamab are responsible for certain critical activities associated with envafolimab and Eucure and Biocytogen are responsible for
certain critical activities associated with YH001, including, as applicable, the manufacture and supply of envafolimab and YH001, CMC activities and
prosecution and enforcement of intellectual property rights. We have limited control over the amount and timing of resources that 3D Medicines,
Alphamab, Eucure and Biocytogen will dedicate to their respective efforts, and their failure to perform their obligations would impair our ability to develop
envafolimab for sarcoma in North America and YH001 for certain sarcoma subtypes in North America. In addition, we have very limited influence or
control over 3D Medicines’, Alphamab’s, Eucure’s or Biocytogen’s (or their respective other partners’) activities with respect to the development and
commercialization of envafolimab and YH001 in non-licensed indications or indications outside of North America, even though these activities could have
a significant impact on the development and commercialization of envafolimab for sarcoma in North America and YH001 for certain sarcoma subtypes in
North America. For example, Eucure may pursue clinical trials for YH001 in North America outside of the Initial Indications or Substitute Indications, and
also within the Initial Indications or Substitute Indications as part of a combination therapy of YH001 and an additional Eucure product, any of which could
have a significant impact on the development and commercialization of YH001 for sarcoma in North America. Additionally, adverse events in clinical
trials outside of the United States could cause the FDA to put clinical trials of envafolimab or YH001 in the United States on hold, and negative results of
clinical trials of envafolimab in other indications may cast doubt as to the likelihood of positive results of clinical trials in UPS/MFS or other sarcoma
indications.
We are subject to a number of other risks associated with these collaboration and clinical trial agreements, including:
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we and our corporate partners could disagree as to future development plans which could delay initiation of clinical trials or stop a future
clinical trial;
there may be disputes between us and our corporate partners, including disagreements regarding the terms of the collaboration and clinical
trial agreement, that may result in the delay of or failure to achieve development, regulatory and commercial objectives and/or costly
litigation or arbitration that diverts our management’s attention and resources;
our corporate partners may not provide us with timely and accurate information regarding development progress and activities outside of
sarcoma and North America, which could adversely impact our ability to report progress to our investors and may cause us to make ill-
informed decisions with respect to our own development efforts;
our corporate partners may not properly maintain or defend the intellectual property rights licensed to us in North America or may undertake
activities that invite litigation that could jeopardize or invalidate the intellectual property rights licensed to us or expose us to potential
litigation; and
our corporate partners are responsible for conducting CMC activities for envafolimab and YH001 and may not conduct such activities at the
quality level required to seek FDA approval.
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If we have disagreements with our corporate partners, if they do not perform their obligations under the collaboration and clinical trial agreements or
there are negative events with respect to envafolimab or YH001 outside of the licensed indications or North America, there could be material adverse
consequences to our ability to successfully develop and commercialize envafolimab and YH001 in North America or to the value of envafolimab and
YH001 to us.
Our ability to realize value from any product candidates developed under our agreements with I-Mab will depend in part on I-Mab’s activities and
willingness to fund future development and the timing and outcome of our dispute with I-Mab of which we cannot predict the outcome and could
materially adversely affect our ability to operate our business and financial results.
Pursuant to the terms of our strategic collaboration and clinical trial agreements with I-Mab, we are largely responsible for clinical development
activities and I-Mab is responsible for pre-clinical development and manufacturing activities. Consequently, our ability to realize value or generate any
revenues from the development of product candidates in collaboration with I-Mab will depend in part on I-Mab’s willingness and ability to successfully
complete pre-clinical development and manufacturing activities, in addition to funding agreed-upon portions of the costs of clinical development. We have
limited control over the amount and timing of resources that I-Mab will dedicate to its respective efforts, and have limited rights in the event that I-Mab
determines to cease development or manufacturing activities or funding for any product candidate under the collaboration. We could also encounter
disagreements with I-Mab over the timing and scope of development or manufacturing of any product candidates or payments owed under the collaboration
or which, if any, BsAb product candidates are selected for development. For example, in March 2020, I-Mab issued a press release announcing a strategic
partnership with Kalbe Genexine Biologics (KG Bio), whereby KG Bio received what the press release described as a right of first negotiation outside
North America for TJ004309 for up to $340 million in potential payments to I-Mab. In March 2020, we also learned that I-Mab had entered into two
license and collaboration agreements with ABL Bio in July 2018 (ABL Bio License 1 and ABL Bio License 2). Under ABL Bio License 1, I-Mab granted
to ABL Bio exclusive, worldwide (excluding Greater China), royalty-bearing rights to develop and commercialize a BsAb using certain monoclonal
antibody sequences. Under ABL License 2, I-Mab and ABL agreed to collaborate to develop three PD-L1-based bispecific antibodies by using ABL Bio’s
proprietary BsAb technology and commercialize them in their respective territories, which, collectively, include China, Hong Kong, Macau, Taiwan and
South Korea, and other territories throughout the rest of the world if both parties agree to do so in such other territories during the performance of the
agreement.
In June 2020, I-Mab commenced an arbitration proceeding under the Rules of Arbitration of the ICC before the Tribunal after we invoked
contractual dispute resolution provisions asserting that I-Mab had breached its contractual obligations concerning two strategic collaboration and clinical
trial agreements with us entered into in November 2018. Those strategic collaboration and clinical trial agreements relate to the development of TJ004309
and five of I-Mab’s proprietary bispecific antibody product candidates to be nominated by I-Mab within a five-year period for development and
commercialization in North America. We filed counterclaims in the arbitration seeking to recover over $200 million in damages from I-Mab based on I-
Mab’s breaches of the two strategic collaboration and clinical trial agreements. In 2021, I-Mab sent us notices purporting to terminate the TJ004309
Agreement, which would result in I-Mab owing us a prespecified termination fee of $9.0 million. However, I-Mab does not have an option to terminate the
TJ004309 Agreement without cause until the ongoing Phase 1 clinical trial of TJ004309 is “Complete,” as that term is defined in the TJ004309 Agreement,
and we responded by disputing the basis for I-Mab’s termination. In March 2021, I-Mab filed a lawsuit in the Delaware Court of Chancery seeking a
variety of relief including an order of specific performance requiring us to comply with I-Mab’s purported termination of the TJ004309 Agreement. In May
2021, the Delaware Court of Chancery stayed the lawsuit in favor of arbitration. The Tribunal held a hearing on the merits in February 2022, and final post-
hearing briefs were submitted by us and I-Mab in May 2022. On November 8, 2022, the Tribunal invited the parties to submit additional, limited briefing
on two discrete issues by December 9, 2022. Following that submission, the parties submitted their respective cost submissions for attorney fees
reimbursement in January 2023. The Tribunal did not indicate when it expects to render its final decision; however, it did note that it was far along in its
deliberations and preparation of a final award. We expect the Tribunal to render its final decision in the first quarter of 2023. Under the applicable rules of
the arbitration, the prevailing party may be awarded attorneys’ fees at the Tribunal’s discretion. The claims under the arbitration are complex; accordingly,
we cannot predict the outcome of the arbitration, which could materially adversely affect our ability to operate our business and our financial results, and
we are unable to estimate the amount of recovery or damages, if any, that may be awarded by the Tribunal. The dispute with I-Mab has caused, and could
continue to cause, us to incur significant costs, as well as distract our management over an extended period. Until these disputes are concluded, we will be
unable to provide a timeline as to when or if we will file an IND for a BsAb under the Bispecific Agreement. Furthermore, our ability to license bispecific
product candidates from I-Mab may be more limited than we previously believed.
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We may not be successful in establishing and maintaining additional collaborations, which could adversely affect our ability to develop and
commercialize our existing product candidates or to leverage our clinical development capabilities.
A part of our strategy is to strategically evaluate and, as deemed appropriate, enter into additional licensing and collaboration agreements, including
potentially with major biotechnology or pharmaceutical companies. In particular, we are actively seeking additional corporate partnerships in which we
would share in the cost and risk of clinical development and commercialization of innovative product candidates of third parties. We face significant
competition in seeking appropriate partners, and the negotiation process is time-consuming and complex. In order for us to successfully partner our product
candidates, potential partners must view these product candidates as having the requisite potential to demonstrate safety and efficacy and as being
economically valuable in light of the terms that we are seeking and other available products for licensing by other companies. With respect to additional
partnerships whereby we would develop third party product candidates, we will need to identify promising product candidates where the owner of the
development and commercial rights could benefit from our clinical development capabilities. Under our collaboration and clinical trial agreement with I-
Mab for TJ004309, we are prohibited from developing other biologic product candidates targeting the same indications for which TJ004309 is being
developed, which increases our reliance on the success of I-Mab’s activities with respect to TJ004309 and could limit our ability to collaborate with others
with respect to biologic product candidates in certain indications. Even if we are successful in our efforts to establish new collaborations, the terms that we
agree upon may not be favorable to us, and we may not be able to maintain such collaborations if, for example, development or approval of a product
candidate is delayed or sales of an approved product are disappointing. Any inability or delay in entering into new collaboration agreements related to our
product candidates, in particular in foreign countries where we do not have and do not intend to establish significant capabilities, could delay the
development and commercialization of our product candidates and reduce their market potential. If we are unable to enter into additional collaborations
that leverage our clinical development capabilities, we may be forced to reduce these capabilities, which could lower the value of our company and make it
less likely that third parties will seek to collaborate with us to develop their product candidates.
We rely on third parties to conduct preclinical studies and clinical trials of product candidates, and if they do not properly and successfully perform
their obligations to us, we may not be able to obtain regulatory approvals for product candidates.
We do not have our own capabilities to perform preclinical testing of product candidates, and therefore rely entirely on third party contractors and
laboratories to conduct these studies for us. In addition, while we intend to continue designing, monitoring and managing our clinical trials of product
candidates using our clinical operations and regulatory team, we still depend upon independent investigators and collaborators, such as universities and
medical institutions, to conduct our clinical trials at their sites under agreements with us. We will compete with many other companies for the resources of
these third-party contractors, laboratories, investigators and collaborators, and the initiation and completion of our preclinical studies and clinical trials may
be delayed if we encounter difficulties in engaging these third parties or need to change service providers during a preclinical study or clinical trial.
We control only certain aspects of the activities conducted for us by the third parties on which we currently rely and on which we will rely in the
future for our preclinical studies and clinical trials. Nevertheless, we are responsible for ensuring that each of our clinical trials and certain of our
preclinical studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on third parties does not
relieve us of our regulatory responsibilities. With respect to clinical trials, we and these third parties are required to comply with cGCPs, which are
regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory
authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail
to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign
regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon
inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials must
be conducted with product candidates produced under cGMPs and will require a large number of test patients. Our failure or any failure by these third
parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the
regulatory approval process. Moreover, our business may be implicated if any of these third parties violates federal or state health care laws, including,
among others, fraud and abuse, false claims, privacy and security, and physician payment transparency laws. Any third parties conducting our preclinical
studies and clinical trials are not and will not be our employees and, except for remedies available to us under our agreements with such third parties, we
cannot control whether or not they devote sufficient time and resources to our ongoing preclinical and clinical development programs. These third parties
may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug
development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or
obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the
failure to adhere to our protocols or regulatory requirements or for other reasons, our preclinical studies and clinical trials may be extended, delayed or
terminated and we may not be able to complete development of, obtain regulatory approval of or successfully commercialize product candidates. As a
result, our financial results and the commercial prospects for our product candidates or those of our partners would be harmed, our costs could increase and
our ability to generate revenue could be delayed.
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Switching or adding third parties to conduct our preclinical studies and clinical trials involves substantial cost and requires extensive management
time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, delays may occur, which can
materially impact our ability to meet our desired development timelines.
Risks Related to Our Intellectual Property
If we are unable to obtain or protect intellectual property rights related to our product candidates, we may not be able to compete effectively.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our
product candidates. If we do not adequately protect our intellectual property, competitors may be able to use our technologies which could do harm to our
business and affect our ability to be profitable. In particular, our success depends in large part on our ability to obtain and maintain patent protection in the
United States and other countries with respect to our product candidates. Additionally, we may not be able to file and prosecute all necessary or desirable
patent applications at a reasonable cost or in a timely manner. The patent applications that we own or in-license may fail to result in issued patents with
claims that cover our product candidates in the United States or in other countries. We may also fail to identify patentable aspects of our research and
development before it is too late to obtain patent protection. Any disclosure or misappropriation by third parties of our confidential proprietary information
could enable competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in our market.
The patent position of biotechnology companies is generally uncertain because it involves complex legal and factual considerations in a legal
framework that is constantly evolving. The standards applied by the United States Patent and Trademark Office (USPTO) and foreign patent offices in
granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or
the scope of claims allowable in biotechnology patents. There is a substantial amount of prior art in the biotechnology and pharmaceutical fields, including
scientific publications, patents and patent applications. There is no assurance that all potentially relevant prior art relating to our patents and patent
applications has been found. We may be unaware of prior art that could be used to invalidate an issued patent or prevent our pending patent applications
from issuing as patents. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may challenge their
validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents
and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates or prevent others from
designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact
on our business.
If patent applications we hold or have in-licensed with respect to our product candidates fail to issue, if their breadth or strength of protection is
threatened, or if they fail to provide meaningful exclusivity for our product candidates, it could dissuade companies from collaborating with us. We cannot
offer any assurances about which, if any, patents will issue, the breadth of any such patents or whether any issued patents will be found invalid and
unenforceable or will be threatened by third parties. Any successful challenge to these patents or any other patents owned by or licensed to us could deprive
us of rights necessary for the successful commercialization of any product candidate that we may develop. Since patent applications in the United States
and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file
any patent application related to a product candidate.
For applications filed before March 16, 2013, or patents issuing from such applications, an interference proceeding can be provoked by a third party,
or instituted by the USPTO to determine who was the first to invent any of the subject matter covered by the claims of our applications and patents. As of
March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent
applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO before us could therefore
be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. The change to “first-to-file”
from “first-to-invent” is one of the changes to the patent laws of the United States resulting from the Leahy-Smith America Invents Act, or the Leahy-
Smith Act, signed into law on September 16, 2011. Among some of the other significant changes to the patent laws are changes that limit where a patentee
may file a patent infringement suit and provide opportunities for third parties to challenge any issued patent in the USPTO. It is not yet clear, what, if any,
impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the
uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have
a material adverse effect on our business and financial condition.
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Patents granted by the European Patent Office may be opposed by any person within nine months from the publication of their grant and, in addition,
may be challenged before national courts at any time. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately
protect our intellectual property or prevent others from designing around our claims. Furthermore, due to the patent laws of a country, or the decisions of a
patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all our product candidates or methods involving these
product candidates in the parent patent application.
In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various
extensions may be available; however, the life of a patent and the protection it affords is limited. If we encounter delays in obtaining regulatory approvals,
the period of time during which we could market a product candidate under patent protection could be reduced. Even if patents covering our product
candidates are obtained, once the patent life has expired for a product, we may be open to competition from generic and biosimilar products.
Obtaining and enforcing patents is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent
applications or maintain and/or enforce patents that may issue based on our patent applications, at a reasonable cost or in a timely manner, including delays
as a result of the COVID-19 pandemic impacting our or our licensors’ operations.
Any loss of patent protection could have a material adverse impact on our business. We may be unable to prevent competitors from entering the
market with a product that is similar to or the same as our products.
We depend on our licensors to prosecute and maintain patents and patent applications that are material to our business. Any failure by our licensors to
effectively protect these intellectual property rights could adversely impact our business and operations.
Specific to the development of YH001 in North America, we hold an exclusive (including with respect to Eucure and its affiliates), nontransferable,
license to develop and commercialize YH001 in North America for the treatment, through administration of YH001 by intravenous or subcutaneous means,
of multiple human indications, including the Initial Indications or one or more of the Substitute Indications, which may be substituted for Initial Indications
at our discretion. As it relates to the development of envafolimab for the treatment of sarcoma in North America, we hold an exclusive license from 3D
Medicines and Alphamab to any and all intellectual property rights, including patents, copyrights, trademarks and know-how, claiming or covering
envafolimab. We also hold a non-exclusive license for the conduct of clinical trials in the EU in support of the development of envafolimab for the
treatment of sarcoma in North America. Regarding the development of TJ004309 in North America, we hold a non-exclusive license from I-Mab to any
and all intellectual property rights, including patents, copyrights, trademarks and know-how, claiming or covering any pharmaceutical composition or
preparation comprising or containing TJ004309.
As a licensee of third parties, we rely on these third parties to file and prosecute patent applications and maintain patents and otherwise protect the
licensed intellectual property under some of our license agreements. We have not had and do not have primary control over these activities for certain of
our patents or patent applications and other intellectual property rights. We cannot be certain that such activities by third parties have been or will be
conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights. Pursuant
to the terms of the license agreements with some of our licensors, the licensors may have the right to control enforcement of our licensed patents or defense
of any claims asserting the invalidity of these patents and even if we are permitted to pursue such enforcement or defense, we will require the cooperation
of our licensors. We cannot be certain that our licensors will allocate sufficient resources or prioritize their or our enforcement of such patents or defense of
such claims to protect our interests in the licensed patents. Even if we are not a party to these legal actions, an adverse outcome could harm our business
because it might prevent us from continuing to license intellectual property that we may need to operate our business.
Third party claims of intellectual property infringement or misappropriation may prevent or delay our development and commercialization efforts.
Our commercial success depends in part on us and our partners not infringing the patents and proprietary rights of third parties. There is a substantial
amount of litigation and other proceedings, both within and outside the United States, involving patent and other intellectual property rights in the
biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, reexamination and review proceedings
before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third
parties exist in the fields in which we and our partners are developing and may develop our product candidates. As the biotechnology and pharmaceutical
industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of
third parties.
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Third parties may assert that we are employing their proprietary technology without authorization. There may be third party patents or patent
applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product
candidates, that we failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be
filed outside the United States remain confidential until issued as patents. Except for the preceding exceptions, patent applications in the United States and
elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering
our product candidates or methods of use of our product candidates could have been filed by others without our knowledge. Additionally, pending patent
applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our product candidates or the use
or manufacture of our product candidates.
The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement,
we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the
patent claims are invalid, and we may not be able to do this. Proving that a patent is invalid is difficult. For example, in the United States, proving
invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Also, in proceedings
before courts in Europe, the burden of proving invalidity of the patent usually rests on the party alleging invalidity. Third parties could bring claims against
us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent
infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
If any third party patents were held by a court of competent jurisdiction to cover aspects of our materials, formulations, methods of manufacture or
methods for treatment, the holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate
until such patent expired or unless we or our partner obtain a license. These licenses may not be available on acceptable terms, if at all. Even if we or our
partner were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property.
Ultimately, we or our partner could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a
result of actual or threatened patent infringement claims, we or our partner are unable to enter into licenses on acceptable terms.
Parties making claims against us or our partner may obtain injunctive or other equitable relief, which could effectively block our or our partner’s
ability to further develop and commercialize one or more of our product candidates. Defending against claims of patent infringement or misappropriation of
trade secrets could be costly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such
litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time
and attention of our management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement
against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our
infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.
Third parties may submit applications for patent term extensions in the United States and/or supplementary protection certificates in the EU member
states seeking to extend certain patent protection which, if approved, may interfere with or delay the launch of one or more of our products.
We may face a claim of misappropriation if a third party believes that we inappropriately obtained and used trade secrets of such third party. If we
are found to have misappropriated a third party’s trade secrets, we may be prevented from further using such trade secrets, limiting our ability to develop
our product candidates, and we may be required to pay damages.
During the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on
motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of
our product candidates or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.
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We may become involved in lawsuits to protect or enforce our inventions, patents or other intellectual property or the patent of our licensors, which
could be expensive and time consuming.
Competitors may infringe our intellectual property, including our patents or the patents of our licensors. In addition, one or more of our third party
collaborators may have submitted, or may in the future submit, a patent application to the USPTO without naming a lawful inventor that developed the
subject matter in whole or in part while under an obligation to execute an assignment of rights to us. As a result, we may be required to file infringement or
inventorship claims to stop third party infringement, unauthorized use, or to correct inventorship. This can be expensive, particularly for a company of our
size, and time-consuming. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us
alleging that we infringe their intellectual property rights. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or
is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology
or that the factors necessary to grant an injunction against an infringer are not satisfied.
An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated, held unenforceable
or interpreted narrowly and could put our patent applications at risk of not issuing.
Interference, derivation or other proceedings brought at the USPTO or any foreign patent authority may be necessary to determine the priority or
patentability of inventions with respect to our patent applications or those of our licensors or collaborators. Litigation or USPTO proceedings brought by us
may fail. An unfavorable outcome in any such proceedings could require us to cease using the related technology or to attempt to license rights to it from
the prevailing party, or could cause us to lose valuable intellectual property rights. Our business could be harmed if the prevailing party does not offer us a
license on commercially reasonable terms, if any license is offered at all. Even if we are successful, domestic or foreign litigation or USPTO or foreign
patent office proceedings may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or
collaborators, to prevent misappropriation of our trade secrets, confidential information or proprietary rights, particularly in countries where the laws may
not protect such rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is
a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the
course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or
developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be
significantly harmed.
We have in-licensed a portion of our intellectual property, and, if we fail to comply with our obligations under these arrangements, we could lose such
intellectual property rights or owe damages to the licensor of such intellectual property.
We are a party to a number of license agreements that are important to our business, and we may enter into additional license agreements in the
future. YH001 and associated intellectual property have been licensed from Eucure and Biocytogen, envafolimab and associated intellectual property have
been licensed from 3D Medicines and Alphamab, and TJ004309 and associated intellectual property have been licensed from I-Mab.
Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty and
other obligations on us. If there is any conflict, dispute, disagreement or issue of non-performance between us and our licensing partners regarding our
rights or obligations under the license agreements, including any such conflict, dispute or disagreement arising from our failure to satisfy payment or
diligence obligations under any such agreement, we may owe damages, our licensor may have a right to terminate the affected license, and our and our
partners’ ability to utilize the affected intellectual property in our drug development efforts, and our ability to enter into collaboration or marketing
agreements for a product candidate, may be adversely affected.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our
intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some
foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States and in some cases may even
force us to grant a compulsory license to competitors or other third parties. Consequently, we may not be able to prevent third parties from practicing our
inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other
jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and
further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United
States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent
them from competing.
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Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection,
particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing
products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and
divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate; and the
damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights
around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and
foreign intellectual property laws.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications will be due to be paid to the
USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and applications. The
USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar
provisions during the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance
with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application,
resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to use our technologies and
this circumstance would have a material adverse effect on our business.
Risks Related to Commercialization of Product Candidates
Even if we obtain regulatory approval of product candidates, the products may not gain market acceptance among physicians, patients, hospitals,
cancer treatment centers, third party payors and others in the medical community.
Factors that will influence whether product candidates are accepted in the market include:
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the clinical indications for which product candidates are approved, if any;
physicians, hospitals, cancer treatment centers and patients considering product candidates as a safe and effective treatment;
the potential and perceived advantages of product candidates over alternative treatments;
the prevalence and severity of any side effects;
product labeling or product insert requirements of the FDA or other regulatory authorities;
limitations or warnings contained in the labeling approved by the FDA or other regulatory authorities;
the timing of market introduction of product candidates as well as competitive products;
the cost of treatment in relation to alternative treatments;
the availability of coverage and adequate reimbursement by governmental and commercial third party payors;
the willingness of patients to pay out-of-pocket in the absence of coverage by governmental and commercial third party payors;
relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies; and
the effectiveness of our sales and marketing efforts.
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If, for any of these or other reasons, product candidates fail to achieve market acceptance among physicians, patients, hospitals, cancer treatment
centers, third party payors or others in the medical community, we will not be able to generate significant revenue. Even if our products achieve market
acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably
received than our products, are more cost effective or render our products obsolete.
Off-label use of approved drugs could adversely impact peak sales of our product candidates if approved, including Keytruda’s off-label use in
UPS/MFS.
While no PD-(L)1 treatments are currently FDA approved in UPS/MFS or any other sarcoma subtype, Keytruda (pembrolizumab, marketed by
Merck & Co.) has a compendia listing in UPS and is reimbursed for off-label use in UPS. The off-label use of Keytruda in UPS/MFS may adversely affect
the peak net sales of envafolimab in UPS/MFS and other sarcoma subtypes, if envafolimab is approved by the FDA and commercialized in the United
States. Similarly, while no CTLA-4 therapy is approved by the FDA for the treatment of soft tissue sarcoma, if YH001 is approved, it may nevertheless
compete with the currently marketed CTLA-4 inhibitor ipilimumab (Yervoy, marketed by Bristol Myers Squibb), which is approved by the FDA in
multiple indications other than soft tissue sarcoma.
We face intense competition and rapid technological change and the possibility that our competitors may develop therapies that are more advanced or
effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize product candidates.
We face competition both in the United States and internationally, including from major multinational pharmaceutical companies, biotechnology
companies and universities and other research institutions.
Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and
experienced marketing and manufacturing organizations. Competition may increase further as a result of advances in the commercial applicability of
technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an
exclusive basis, products that are more effective or less costly than any product candidate that we may develop, or achieve earlier patent protection,
regulatory approval, product commercialization and market penetration than we do. Additionally, technologies developed by our competitors may render
our potential product candidates uneconomical or obsolete, and we may not be successful in marketing product candidates against competitors.
Under the terms of our license agreement with Case Western, we obtained an exclusive, worldwide license to certain patents, know-how and other
intellectual property controlled by Case Western related to TRC102. Despite our exclusive license, Case Western retained the right to grant non-exclusive
licenses to third parties in the same field of use as our exclusive license as a means to settle any intellectual property disputes Case Western may have in the
future with such third parties. While Case Western has not made us aware of any present intent to exercise this right, there can be no guarantee that Case
Western will not do so in the future or that it would not grant such a non-exclusive license to a competitor of ours seeking to develop and commercialize a
product that is identical to TRC102 in the same field of use that we are pursuing. If this were to occur, and we did not have other intellectual property
outside of the Case Western license agreement to prevent competitive products for the same indications, we may face competition much earlier than we
currently anticipate and the value of TRC102 may decline substantially.
Even if we are successful in achieving regulatory approval to commercialize a product candidate faster than our competitors, we may face
competition from “biosimilars” due to the changing regulatory environment. In the United States, the Biologics Price Competition and Innovation Act
created an abbreviated approval pathway for biological products that are demonstrated to be “highly similar,” or “biosimilar,” to or “interchangeable” with
an FDA-approved biological product. This pathway could allow competitors to reference data from biological products already approved after 12 years
from the time of approval. Future FDA standards or criteria for determining biosimilarity and interchangeability, and FDA discretion to determine the
nature and extent of product characterization, non-clinical testing and clinical testing on a product-by-product basis, may further facilitate the approval of
biosimilar products and their ability to compete with our product candidates or those of our partners. In addition, companies may be developing biosimilars
in other countries that could compete with our products. If competitors are able to obtain marketing approval for biosimilars referencing our products, our
products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences. Any such event or further
changes in the law could decrease the period for which we have exclusivity and consequently negatively impact our business and competitive position.
Expiration or successful challenge of our applicable patent rights could also trigger competition from other products, assuming any relevant exclusivity
period has expired.
Finally, as a result of the expiration or successful challenge of our patent rights, we could face litigation with respect to the validity and/or scope of
patents relating to our competitors’ products. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for
any products that we may develop and commercialize.
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Coverage and reimbursement may be limited or unavailable in certain market segments for product candidates, which could make it difficult for us to
sell product candidates profitably.
Successful sales of our product candidates, if approved, depend on the availability of coverage and adequate reimbursement from third party payors.
In addition, because our product candidates and those of our partners represent new approaches to the treatment of cancer, we cannot accurately estimate
the potential revenue from these product candidates.
Patients who are provided medical treatment for their conditions generally rely on third party payors to reimburse all or part of the costs associated
with their treatment. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial
payors are critical to new product acceptance.
Government authorities and other third party payors, such as commercial health insurers and health maintenance organizations, decide which drugs and
treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third party payor may depend upon a number of factors,
including, but not limited to, the third party payor’s determination that use of a product is:
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a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective; and
neither experimental nor investigational.
In the United States, no uniform policy of coverage and reimbursement for products exists among third party payors. Therefore, coverage and
reimbursement for products can differ significantly from payor to payor. Obtaining coverage and reimbursement approval of a product from a government
or other third party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data
to each payor separately for the use of our products, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain
coverage for a given product, the resulting reimbursement rates might not be adequate for us to achieve or sustain profitability or may require co-payments
that patients find unacceptably high. Patients are unlikely to use product candidates unless coverage is provided and reimbursement is adequate to cover a
significant portion of the cost of product candidates. Further, coverage policies and third-party payor reimbursement rates may change at any time.
Therefore, even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less
favorable coverage policies and reimbursement rates may be implemented in the future.
We intend to seek approval to market product candidates in both the United States and in selected foreign jurisdictions. If we obtain approval in one
or more foreign jurisdictions for product candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries,
particularly those in the EU, the pricing of biologics is subject to governmental control. In these countries, pricing negotiations with governmental
authorities can take considerable time after obtaining marketing approval of a product candidate. In addition, market acceptance and sales of product
candidates will depend significantly on the availability of coverage and adequate reimbursement from third party payors for product candidates.
Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.
Third party payors, whether domestic or foreign, or governmental or commercial, and governments are developing increasingly sophisticated
methods of controlling healthcare costs. In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory
changes to the health care system that could impact our ability to sell our products profitably. In particular, in 2010, the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the ACA, was enacted in the United States. Since its enactment,
there have been executive, judicial and Congressional challenges to certain aspects of the ACA. For example, legislation enacted in 2017, informally titled
the Tax Cuts and Jobs Act of 2017 (Tax Act) includes a provision which repealed, effective January 1, 2019, the tax-based shared responsibility payment
imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the
“individual mandate.” Additionally, on June 17, 2021 the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the ACA is
unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Further, prior to the U.S. Supreme Court ruling, on January 28,
2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the
ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit
access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and
policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. In addition, on August 16, 2022,
President Biden signed the Inflation Reduction Act of 2022 (the IRA) into law, which among other things, extends enhanced subsidies for individuals
purchasing health insurance coverage in ACA marketplaces through plan year 2025. The IRA also eliminates the
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“donut hole” under the Medicare Part D program beginning in 2025 by significantly lowering the beneficiary maximum out-of-pocket cost and through a
newly established manufacturer discount program. It is possible that the ACA will be subject to judicial or Congressional challenges in the future. It is
unclear how any such challenges and the healthcare reform measures of the Biden administration will impact the ACA and our business.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act
of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with
recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering
the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per
fiscal year, which went into effect in April 2013 and, due to subsequent legislative changes to the statute will remain in effect until 2031 unless additional
Congressional action is taken. However, COVID-19 pandemic relief legislation suspended the 2% Medicare sequester from May 1, 2020 through March
31, 2022. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 4% in the final fiscal year of this
sequester. In January 2013, former U.S. President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years.
There has been heightened governmental scrutiny over pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics.
Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things,
bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program
reimbursement methodologies for products. In July 2021, the Biden administration released an executive order, “Promoting Competition in the American
Economy,” with multiple provisions aimed at prescription drugs. In response to Biden’s executive order, on September 9, 2021, the Department of Health
and Human Services, or HHS, released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform and sets out
a variety of potential legislative policies that Congress could pursue to advance these principles. In addition, the IRA, among other things, (1) directs HHS
to negotiate the price of certain single-source drugs and biologics covered under Medicare and (2) imposes rebates under Medicare Part B and Medicare
Part D to penalize price increases that outpace inflation. These provisions will take effect progressively starting in fiscal year 2023, although they may be
subject to legal challenges. It is currently unclear how the IRA will be implemented but is likely to have a significant impact on the pharmaceutical
industry. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and
transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors,
which may adversely affect our future profitability. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the
government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or
impose price controls may adversely affect:
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the demand for product candidates, if we obtain regulatory approval;
our ability to set a price that we believe is fair for our products;
our ability to obtain market acceptance in the medical community;
our ability to generate revenue and achieve or maintain profitability;
the level of taxes that we are required to pay; and
the availability of capital.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in
which we may do business in the future, or the effect any future legislation or regulation will have on us.
If we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with international operations
could materially adversely affect our business.
If any product candidates are approved for commercialization, we expect that we or our partners will be subject to additional risks related to entering
into international business relationships, including:
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different regulatory requirements for drug approvals in foreign countries;
different payor reimbursement regimes, governmental payors or patient self-pay systems and price controls;
reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements, including the significant sanctions and export controls imposed
against Russia, Russian banks and certain Russian individuals by the United States, United Kingdom and EU, along with others;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to
doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons,
floods and fires.
If we or our partners outside of the United States are unable to successfully manage these risks associated with international operations, the market
potential for our product candidates or those of our partners outside the United States will be limited and our results of operations may be harmed.
Risks Related to Our Business and Industry
If we fail to develop, acquire or in-license other product candidates or products, our business and prospects will be limited.
We do not have internal new drug discovery capabilities or a technology platform with which to develop novel product candidates. Unless we
develop or acquire these capabilities or a technology platform, our only means of expanding our product pipeline will be to acquire or in-license product
candidates that complement or augment our current targets, or that otherwise fit into our development or strategic plans on terms that are acceptable to us.
In addition, part of our corporate strategy is to leverage our existing internal clinical development and regulatory capabilities by entering into collaborations
where we conduct development activities related to third party product candidates in exchange for commercialization and payment rights, such as our
collaborations with Eucure and Biocytogen with respect to YH001, 3D Medicines and Alphamab with respect to envafolimab, and I-Mab with respect to
TJ004309 and potential BsAb candidates. Identifying, selecting and acquiring or licensing promising product candidates requires substantial technical,
financial and human resources. Efforts to do so may not result in the actual development, acquisition or license of a particular product candidate, potentially
resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. With respect to TJ004309, if I-Mab
licenses rights to TJ004309 to a third party, while we would be entitled to receive varying portions of royalty and non-royalty payments from I-Mab, we
would have no further rights to develop, commercialize or realize value from TJ004309. With respect to envafolimab, 3D Medicines and Alphamab retain
certain rights to reacquire the rights for sarcoma in North America in connection with an arm’s length sale to a third party of the rights to develop and
commercialize envafolimab in North America for all indications. While we and 3D Medicines and Alphamab must negotiate in good faith and agree to fair
compensation be paid to us for the value of and opportunity represented by the reacquired rights, we cannot guarantee that any compensation paid to us
would adequately cover our investments in the program, the present value of the rights to us or our opportunity costs as a result of having advanced the
program prior to reacquisition. Also, in the event that envafolimab is first approved in North America for sarcoma and within three years of the
commercial launch of envafolimab in North America for sarcoma 3D Medicines and Alphamab replace us as the party responsible for commercialization,
and we do not co-market envafolimab for sarcoma in North America, then 3D Medicine and Alphamab will be required to compensate us for our costs
associated with preparing for and conducting commercial activities. However, we may not be able to agree with 3D Medicines and Alphamab on adequate
compensation and cannot guarantee that any agreed-upon compensation would adequately cover our investments in commercializing envafolimab in North
America or our lost opportunity costs in pursuing commercialization. If we are unable to retain existing product candidates and add additional product
candidates to our pipeline, we may not be able to execute on an important part of our business strategy and our long-term business and prospects will be
limited.
We and our partners are subject to extensive federal, state, and foreign regulation, and our failure to comply with healthcare laws could harm our
business.
Although we do not currently have any products on the market, we and our partners are subject to healthcare regulation and enforcement by the
federal government and the states and foreign jurisdictions in which we conduct our business. The healthcare laws that may affect our ability to operate
include:
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the federal anti-kickback statute, which applies to our business activities, including our research, marketing practices, educational programs,
pricing policies and relationships with healthcare providers, by prohibiting, among other things,
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knowingly and willfully soliciting, receiving, offering or providing any remuneration (including any bribe, kickback or rebate) directly or
indirectly, overtly or covertly, in cash or in kind, intended to induce or in return for the purchase or recommendation of any good, facility item
or service reimbursable, in whole or in part, under a federal healthcare program, such as the Medicare or Medicaid programs;
federal civil and criminal false claims laws, including the federal False Claims Act, and federal civil monetary penalty law that prohibit,
among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other governmental
healthcare programs that are false or fraudulent, or making a false statement to avoid, decrease or conceal an obligation to pay money to the
federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal laws that prohibit, among
other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making
false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, imposes
certain regulatory and contractual requirements on covered entities, and their business associates that create, receive, maintain or transmit
individually identifiable health information for or on their behalf, as well as their covered subcontractors, regarding the privacy, security and
transmission of individually identifiable health information;
federal “sunshine” requirements imposed by the ACA on certain manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to
CMS information regarding any payments and other transfers of value provided to physicians (defined to include doctors, dentists,
optometrists, podiatrists and chiropractors), other healthcare professionals (such as nurse practitioners and physicians assistants), and teaching
hospitals, as well as ownership and investment interests held by such physicians and their immediate family members; and
state or foreign law equivalents of each of the above federal laws that may apply to items or services reimbursed by any third party payor,
including commercial insurers; state laws that require pharmaceutical companies to comply with the industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to
healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments
and other transfers of value to physicians and other healthcare providers or marketing expenditures; state laws that require the reporting of
information relating to drug and biologic pricing; state and local laws that require the registration of pharmaceutical sales representatives; and
state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus complicating compliance efforts.
It is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform
legislation has strengthened certain of these laws. For example, the ACA, among other things, amended the intent requirement of the federal anti-kickback
and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them to
have committed a violation. Moreover, the ACA provides that the government may assert that a claim including items or services resulting from a violation
of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.
We are also subject to laws and regulations governing data privacy and the protection of health-related and other personal information. These laws
and regulations govern our processing of personal data, including the collection, access, use, analysis, modification, storage, transfer, security breach
notification, destruction and disposal of personal data. There are foreign and state law versions of these laws and regulations to which we are currently
and/or may in the future, be subject. For example, the collection and use of personal health data in the EU is governed by the General Data Protection
Regulation, or the EU GDPR. The EU GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to
whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification
and the use of third party processors in connection with the processing of personal data. The EU GDPR also imposes strict rules on the transfer of personal
data out of the EU to the United States, provides an enforcement authority and imposes large monetary penalties for noncompliance. The EU GDPR
requirements apply not only to third party transactions, but also to transfers of information within our company, including employee information. The EU
GDPR and similar data privacy laws of other jurisdictions place significant responsibilities on us and create potential liability in relation to personal data
that we or our third party vendors process, including in clinical trials conducted in the United States and EU. In addition, we expect that there will continue
to be new proposed laws, regulations and industry standards relating to privacy and data protection in the United States, the EU and other jurisdictions,
and we cannot determine the impact such future laws, regulations and standards may have on our business.
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Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and
divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or
any other governmental regulations that apply to us, we may be subject to penalties, including without limitation, significant administrative, civil and
criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, imprisonment, exclusion from governmental health care
programs, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve
allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to
operate our business and our financial results.
We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability.
The use of product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product
liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or
otherwise coming into contact with our product candidates or those of our partners. If we cannot successfully defend against product liability claims, we
could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
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impairment of our business reputation;
withdrawal of clinical trial participants;
costs due to related litigation;
distraction of management’s attention from our primary business;
substantial monetary awards to patients or other claimants;
the inability to commercialize product candidates; and
decreased demand for product candidates, if approved for commercial sale.
We currently carry product liability insurance covering our clinical trials with limits we believe are customary for other companies in our field and
stage of development. Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer.
Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. If we obtain marketing approval for product candidates, we intend to expand our
insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially
reasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated
adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed
our insurance coverage, could adversely affect our results of operations and business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2022, we had federal and California NOL carryforwards of $194.3 million and $144.5 million, respectively. The federal and
California NOL carryforwards will begin to expire in 2030 and 2033, respectively, if not utilized. The federal NOL generated after 2017 of $111.1 million
will carryforward indefinitely, but the deductibility of such federal NOLs is limited to 80% of taxable income. As of December 31, 2022, we also had
federal research and development and Orphan Drug tax credit carryforwards of $13.7 million and California research and development tax credit
carryforwards of $3.0 million. The federal research and development and Orphan Drug tax credit carryforwards will begin expiring in 2031 and 2036,
respectively, if not utilized. The California research credit will carry forward indefinitely under current law. Under Sections 382 and 383 of Internal
Revenue Code of 1986, as amended (Code), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and
other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change”
occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar
rules may apply under state tax laws. We believe we have experienced certain ownership changes in the past and have reduced our deferred tax assets
related to NOLs and research and development tax credit carryforwards accordingly. In the event we experience one or more ownership changes as a result
of future transactions in our stock, then we may be further limited in our ability to use our NOLs and other tax assets to reduce taxes owed on the net
taxable income that we earn in the event that we attain profitability. Any such limitations on the ability to use our NOLs and other tax assets could
adversely impact our business, financial condition and operating results in the event that we attain profitability. In addition, at the state level, there may be
periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
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New or future changes to tax laws could materially adversely affect us.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our
business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified
or applied adversely to us. For example, the Tax Act enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue
Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future
legislation. For example, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) modified certain provisions of the Tax Act and the
recently enacted IRA, includes provisions that will impact the U.S. federal income taxation of corporations, including imposing a minimum tax on the book
income of certain large corporations and an excise tax on certain corporate stock repurchases that would be imposed on the corporation repurchasing such
stock. In addition, it is uncertain if and to what extent various states will conform to the Tax Act, the CARES Act, the IRA or any newly enacted federal tax
legislation. The impact of such legislation and any future changes in tax laws on holders of our common stock is also uncertain and could be adverse.
If we fail to attract and keep senior management and key clinical operations and regulatory personnel, we may be unable to successfully develop
product candidates and execute our business strategy.
We are highly dependent on members of our senior management, including Charles Theuer, M.D., Ph.D., our President and Chief Executive Officer.
Our clinical development strategy and ability to directly manage or oversee our on-going and planned clinical trials are also dependent on the members of
our clinical operations and regulatory team. The loss of the services of any of these persons could impede the development of product candidates and our
ability to execute our business strategy. We may be particularly impacted by the unexpected loss of employees due to our small employee base and limited
ability to quickly shift responsibilities to other employees in our organization. We do not maintain “key person” insurance for any of our executives or other
employees.
Recruiting and retaining other qualified employees for our business, including scientific, quality assurance and technical personnel, will also be
critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue, making recruitment and retention
competitive. This competition has become exacerbated by the increase in employee resignations currently taking place throughout the United States as a
result of the COVID-19 pandemic, which is commonly referred to as the “great resignation.” We may also experience employee turnover as a result of the
ongoing “great resignation.” As a result, competition for skilled personnel is intense, particularly in the San Diego, California area, and the turnover rate
can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for
individuals with similar skill sets. The inability to recruit or loss of the services of any executive or key employee could impede the progress of our
development and strategic objectives. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee cash
compensation, which would affect our operating costs and our margins, or equity compensation, which would affect our outstanding share count and cause
dilution to existing shareholders.
Unfavorable U.S. and global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the U.S. and global economies, the U.S. and global financial markets
and adverse macroeconomic and geopolitical developments. U.S. and global market and economic conditions have been, and continue to be, disrupted and
volatile due to many factors, including the ongoing COVID-19 pandemic, material shortages and related supply chain challenges, geopolitical
developments such as the conflict between Ukraine and Russia, and higher inflation rates and the responses by central banking authorities to control such
inflation, among others. General business and economic conditions that could affect business, financial condition or results of operations include
fluctuations in economic growth, debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor and
consumer confidence, and the strength of the economies in which we, our collaborators, our manufacturers and our suppliers operate.
A severe or prolonged global economic downturn could result in a variety of risks to our business. For example, inflation rates, particularly in the
United States, have increased recently to levels not seen in years, and increased inflation may result in increases in our operating costs (including our labor
costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital on acceptable terms, if at all. In addition, the U.S. Federal
Reserve has raised, and may again raise, interest rates in response to concerns about inflation, which coupled with reduced government spending and
volatility in financial markets may have the effect of further increasing economic uncertainty and heightening these risks. Risks of a prolonged global
economic downturn are particularly true in Europe, which is undergoing a continued severe economic crisis. A weak or declining economy could also
strain our suppliers and manufacturers, possibly resulting in supply and clinical trial disruption. Any of the foregoing could harm our business and we
cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
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Additionally, financial markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022. In response to
the invasion, the United States, United Kingdom and EU, along with others, imposed significant new sanctions and export controls against Russia, Russian
banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future. The full economic and social
impact of the sanctions imposed on Russia (as well as possible future punitive measures that may be implemented), as well as the counter measures
imposed by Russia, in addition to the ongoing military conflict between Ukraine and Russia, which could conceivably expand into the surrounding region,
remains uncertain; however, both the conflict and related sanctions have resulted and could continue to result in disruptions to trade, commerce, pricing
stability, credit availability and/or supply chain continuity in both Europe and globally, and has introduced significant uncertainty into global markets. In
particular, the Russia-Ukraine conflict has contributed to rapidly rising costs of living (driven largely by higher energy prices) in Europe and other
advanced economies. Further, a weak or declining economy could strain our suppliers, manufacturers and collaborators, possibly resulting in additional
supply disruption for our product candidates and delays to our clinical trials. As a result, our business and results of operations may be adversely affected
by the ongoing conflict between Ukraine and Russia, particularly to the extent it escalates to involve additional countries, further economic sanctions or
wider military conflict. If economic conditions in Europe and other key markets for our business and the business of our suppliers, manufacturers and
collaborators remain uncertain or deteriorate further, including as a result of the COVID-19 pandemic or otherwise, we could experience adverse effects on
our business, financial condition or results of operations.
Risks Related to Our Common Stock
The market price of our common stock may be highly volatile, and our stockholders may not be able to resell their shares at a desired market price and
could lose all or part of their investment.
Even though our common stock trades on the Nasdaq Capital Market, we cannot assure you that an active, liquid trading market for our shares will
develop or persist. Our stockholders may not be able to sell their shares quickly or at a recently reported market price if trading in our common stock is not
active. The trading price of our common stock has been, and is likely to continue to be, volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
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adverse results or delays in clinical trials;
inability to obtain additional funding;
any delay in submitting a BLA or an NDA for any product candidates and any adverse development or perceived adverse development with
respect to the FDA’s review of that marketing application;
failure to successfully develop and commercialize product candidates;
changes in laws or regulations applicable to product candidates;
changes in the structure of healthcare payment systems;
inability to obtain adequate product supply for product candidates, or the inability to do so at acceptable prices;
adverse regulatory decisions;
introduction of new products or technologies by our competitors;
failure to meet or exceed product development or financial projections we provide to the public;
failure to meet or exceed the estimates and projections of the investment community;
the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
announcements of significant acquisitions, collaborations, joint ventures or capital commitments by us or our competitors;
failure to maintain our collaboration and clinical trial agreements;
failure of 3D Medicines or Alphamab to perform their obligations under our collaboration and clinical trial agreements, or the actions of 3D
Medicines or Alphamab or their other partners with respect to envafolimab in other indications or outside North America;
failure of Eucure and Biocytogen to perform their obligations under our collaborative development and commercialization agreement, or the
actions of Eucure or Biocytogen or their other partners with respect to YH001 in other indications or outside North America, or within North
America in combination with other Eucure product candidates;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection
for our technologies;
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the results of our dispute with I-Mab;
additions or departures of key scientific or management personnel;
significant lawsuits, including patent or stockholder litigation;
changes in the market valuations of similar companies;
the impact of macroeconomic and geopolitical events, such as general political, health and economic conditions, including the COVID-19
pandemic, economic slowdowns, recessions, inflation, rising interest rates and tightening of credit markets on our business;
sales of our common stock by us or our stockholders in the future, in particular any sales by significant stockholders or our affiliates; and
trading volume of our common stock.
In addition, the stock market in general, and the Nasdaq Capital Market in particular, have experienced extreme price and volume fluctuations, and
we have in the past experienced volatility that has been unrelated or disproportionate to our operating performance. From January 1, 2022 through March 3,
2023, the closing price of our common stock has ranged between $1.22 and $3.00 per share. Broad market and industry factors may negatively affect the
market price of our common stock, regardless of our actual operating performance.
If we fail to continue to meet all applicable listing requirements, our common stock may be delisted from the Nasdaq Capital Market, which could have
an adverse impact on the liquidity and market price of our common stock.
Our common stock is currently listed on the Nasdaq Capital Market, which has qualitative and quantitative listing criteria. If we are unable to meet
all of the Nasdaq continued listing requirements and at least one of the Nasdaq continued listing standards in the future, including if the closing bid price
for our common stock falls below $1.00 per share for 30 consecutive trading days, or if we are unable to maintain at least $2.5 million in stockholders’
equity or a market capitalization of at least $35 million, Nasdaq could determine to delist our common stock. For example, on December 30, 2022, we
received a letter from the Nasdaq Stock Market LLC (Nasdaq) notifying us that for 30 consecutive business days prior to the date of such letter, the market
value of our common stock was less than $35.0 million, which did not meet the requirement for continued listing on the Nasdaq Capital Market, as required
by Nasdaq Listing Rule 5550(b)(2) (the “Market Value Rule”).
On January 20, 2023, Nasdaq notified us that we had regained compliance with the Market Value Rule because the market value of our common
stock was $35.0 million or greater for the ten consecutive business days from January 5, 2023 to January 19, 2023. Although we have regained compliance
with Nasdaq continued listing requirements, if we fail to satisfy another Nasdaq requirement for continued listing, Nasdaq staff could provide notice that
our common stock may become subject to delisting. If that were to happen, we may not be able to regain compliance. If we cannot regain compliance after
any such notice and if our common stock is delisted by Nasdaq, it could lead to a number of negative implications, including an adverse effect on the price
of our common stock, increased volatility in our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities
laws and greater difficulty in obtaining financing. In addition, delisting of our common stock could deter broker-dealers from making a market in or
otherwise seeking or generating interest in our common stock, could result in a loss of current or future coverage by certain sell-side analysts and might
deter certain institutions and persons from investing in our securities at all. Delisting could also cause a loss of confidence of our collaborators, vendors,
suppliers and employees, which could harm our business and future prospects.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in
additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital
by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other
equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to
our existing stockholders, and new investors could gain rights superior to our existing stockholders.
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We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the
development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Additionally,
the RGC Loan Agreement contains covenants that restrict our ability to pay dividends or make other distributions. Any return to stockholders will therefore
be limited to the appreciation of their stock.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others,
even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
These provisions include:
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authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
limiting the removal of directors by the stockholders;
creating a staggered board of directors;
prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
eliminating the ability of stockholders to call a special meeting of stockholders; and
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted
upon at stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult
for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are
subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range
of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested
stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us.
Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary
information.
In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how
that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our development processes
that involve proprietary know-how or information that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our
proprietary processes, in part, by entering into confidentiality agreements with our employees, consultants, and outside scientific advisors, contractors and
collaborators. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, or outside scientific advisors might
intentionally or inadvertently disclose our trade secret information to competitors. In addition, competitors may otherwise gain access to our trade secrets or
independently develop substantially equivalent information and techniques.
General Risk Factors
We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, policies and other obligations related to data
privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines
and penalties; disruptions of our business operations, reputational harm; loss of revenue or profits; and other adverse business consequences.
In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of,
transmit, and share (collectively, process) personal data and other sensitive information, including proprietary and confidential business data, trade secrets,
intellectual property, data we collect about trial participants in connection with clinical trials, sensitive third-party data, business plans, transactions, and
financial information (collectively, sensitive data) .
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Our data processing activities may subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry
standards, external and internal privacy and security policies, contractual requirements, and other obligations relating to data privacy and security.
In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification
laws, personal data privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), and other similar laws (e.g., wiretapping
laws). For example, the California Consumer Privacy Act of 2018(CCPA), applies to personal information of consumers, business representatives, and
employees, and requires businesses to provide specific disclosures in privacy notices and honor requests of California residents to exercise certain privacy
rights. The CCPA provides for civil penalties for noncompliance (up to $7,500 per violation) and allows private litigants affected by certain data breaches
to recover significant statutory damages. In addition, it the California Privacy Rights Act of 2020 (CPRA), expands the CCPA’s requirements, including by
adding a new right for individuals to correct their personal information and establishing a new regulatory agency to implement and enforce the law.
Other states, such as Virginia and Colorado, have also passed comprehensive privacy laws, and similar laws are being considered in several other
states, as well as at the federal and local levels. These developments may further complicate compliance efforts, and increase legal risk and compliance
costs for us and the third parties upon which we rely.
Outside the United States, an increasing number of laws, regulations, and industry standards may govern data privacy and security. For example, the
European Union’s General Data Protection Regulation (EU GDPR) and the United Kingdom’s GDPR (UK GDPR) impose strict requirements for
processing personal data
For example, under the EU GDPR, companies may face temporary or definitive bans on data processing and other corrective actions; fines of up to
20 million Euros or 4% of annual global revenue, whichever is greater; or private litigation related to processing of personal data brought by classes of data
subjects or consumer protection organizations authorized at law to represent their interests.
In addition, we may be unable to transfer personal data from Europe and other jurisdictions to the United States or other countries due to data
localization requirements or limitations on cross-border data flows. Europe and other jurisdictions have enacted laws requiring data to be localized or
limiting the transfer of personal data to other countries. In particular, the European Economic Area (EEA) and the United Kingdom (UK) have
significantly restricted the transfer of personal data to the United States and other countries whose privacy laws it believes are inadequate. Other
jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws. Although there are currently
various mechanisms that may be used to transfer personal data from the EEA and UK to the United States in compliance with law, such as the EEA and
UK’s standard contractual clauses, these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures
to lawfully transfer personal data to the United States. If there is no lawful manner for us to transfer personal data from the EEA, the UK, or other
jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences,
including the interruption or degradation of our operations, the need to relocate part of or all of our business or data processing activities to other
jurisdictions at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with
partners, vendors and other third parties, and injunctions against our processing or transferring of personal data necessary to operate our
business. Additionally, companies that transfer personal data out of the EEA and UK to other jurisdictions, particularly to the United States, are subject to
increased scrutiny from regulators, individual litigants, and activities groups. Some European regulators have ordered certain companies to suspend or
permanently cease certain transfers of personal data out of Europe for allegedly violating the GDPR’s cross-border data transfer limitations.
Obligations related to data privacy and security are quickly changing becoming increasingly stringent, and creating regulatory uncertainty
Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent or in conflict among jurisdictions.
Preparing for and complying with these obligations requires us to devote significant resources and may necessitate changes to our services, information
technologies, systems, and practices and to those of any third parties that process personal data on our behalf.
We may at times fail (or be perceived to have failed) in our efforts to comply with our data privacy and security obligations. Moreover, despite our
efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations. If we or the third parties upon which we rely fail, or are
perceived to have failed, to address or comply with applicable data privacy and security obligations, we could face significant consequences, including but
not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections and similar); litigation (including class-action
claims); additional reporting requirements and/or oversight; bans on processing personal data; and orders to destroy or not use personal data. Any of these
events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers; interruptions
or stoppages in our business operations (including clinical trials); inability to process personal data or to operate in certain jurisdictions; limited ability to
develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or substantial changes to our
business model or our operations.
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If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse
consequences resulting from such compromise, including but not limited to interruptions to our operations such as our clinical trials; regulatory
investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; and other
adverse consequences..
In the ordinary course of our business, we and the third parties upon which we rely, process sensitive data, and, as a result, we and the third parties
upon which we rely face a variety of evolving threats, including, but not limited to ransomware attacks, which could cause security incidents. Cyber-
attacks, malicious internet-based activity, online and offline fraud, and other similar activities threaten the confidentiality, integrity, and availability of our
sensitive data and information technology systems, and those of the third parties upon which we rely. Such threats are prevalent and continue to rise, are
increasingly difficult to detect, and come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized
criminal threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors.
Some actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical
reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon
which we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyber-attacks, that could materially disrupt our systems and
operations, supply chain, and ability to produce, sell and distribute our services.
We and the third parties upon which we rely are subject to a variety of evolving threats, including but not limited to social-engineering attacks
(including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions),
denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, ransomware attacks, supply-chain attacks,
software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures,
earthquakes, fires, floods, and other similar threats. In particular, severe ransomware attacks are becoming increasingly prevalent and can lead to significant
interruptions in our operations, loss of sensitive data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative
impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting
such payments. Remote work has become more common and has increased risks to our information technology systems and data, as more of our employees
utilize network connections, computers, and devices outside our premises or network, including working at home, while in transit and in public locations.
Additionally, future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities,
as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Furthermore, we may
discover security issues that were not found during due diligence of such acquired or integrated entities, and it may be difficult to integrate companies into
our information technology environment and security program.
Third party sites that take part in clinical trials we sponsor or third parties that are also sponsoring clinical trials involving our product candidates or
those of our partners, such as NCI and Case Western, face similar threats and any security breach of their systems could adversely affect us. Security
breaches could be particularly harmful to our business due to our reliance on internal clinical development functions and systems to conduct our clinical
trials. For example, for clinical trials that we conduct, we rely on third party hosted software to manage the resulting clinical data. While the third party
vendor is obligated to back up our clinical data on its servers, we do not independently back up our clinical data, and a loss of our clinical data by the third
party vendor could result in delays in our development programs, cause us to breach our obligations to our third party collaborators, and significantly
increase our costs to recover or reproduce the data.
Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or
accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive data or our information technology
systems, or those of the third parties upon which we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon
which we rely) to provide our clinical development activities.
We may expend significant resources or modify our business activities (including our clinical trial activities) to try to protect against security
incidents. Additionally, certain data privacy and security obligations may require us to implement and maintain specific security measures or industry-
standard or reasonable security measures to protect our information technology systems and sensitive data.
While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be
effective. We take steps to detect and remediate vulnerabilities , but we may not be able to detect and remediate all vulnerabilities because the threats and
techniques used to exploit the vulnerability change frequently and are often sophisticated in nature. Therefore, such vulnerabilities could be exploited but
may not be detected until after a security incident has occurred. These vulnerabilities pose material risks to our business. Further, we may experience
delays in developing and deploying remedial measures designed to address any such identified vulnerabilities.
Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and
the disclosure or the failure to comply with such requirements could lead to adverse consequences.
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If we (or a third party upon which we rely) experience a security incident or are perceived to have experienced a security incident, we may
experience adverse consequences, such as government enforcement actions (for example, investigations, fines, penalties, audits, and inspections);
additional reporting requirements and/or oversight; restrictions on processing sensitive data (including personal data); litigation (including class claims);
indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of
data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our services, deter new
customers from using our services, and negatively impact our ability to grow and operate our business.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts
are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance
coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will
continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
In addition to experiencing a security incident, third parties may gather, collect, or infer sensitive information about us from public sources, data
brokers, or other means that reveals competitively sensitive details about our organization and could be used to undermine our competitive advantage or
market position.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or
prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the
trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure
controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their
implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the
Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial
statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our
reported financial information, which could have a negative effect on the trading price of our common stock.
Other business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, and those of our contractors, consultants and collaborators, could be subject to earthquakes, power shortages, telecommunications
failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or
business interruptions, for which we are predominantly self-insured. To the extent our collaborators are unable to comply with their obligations under our
agreements with them or they are otherwise unable to complete or are delayed in completing development activities due to business disruptions, our ability
to advance development in the United States may become impaired. In addition, NCI may be affected by government shutdowns in the United States or
withdrawn funding, which may lead to suspension or termination of ongoing NCI-sponsored clinical development of our product candidates. The
occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. In
addition, our ability and the ability of our partners to obtain clinical supplies of product candidates could be disrupted if the operations of our third party
manufacturers are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters are located in San Diego,
California near major earthquake faults and fire zones. The ultimate impact on us and our general infrastructure of being located near major earthquake
faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event
of a major earthquake, fire or other natural disaster.
We are at risk of securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This
risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such
litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
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Our employees, independent contractors, principal investigators, consultants, vendors and commercial partners may engage in misconduct or other
improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors and commercial partners may
engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or
unauthorized activities that violate:
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FDA regulations, including those laws that require the reporting of true, complete and accurate information to the FDA;
manufacturing standards;
federal and state fraud and abuse laws and other healthcare laws;
laws governing the conduct of business abroad; or
laws that require the reporting of true and accurate financial information or data.
Additionally, these parties may fail to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the
healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws may restrict or
prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.
Misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and
serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take
to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and we
are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of
significant civil, criminal and administrative penalties, damages, monetary fines, imprisonment, possible exclusion from participation in Medicare,
Medicaid and other U.S. federal healthcare programs, contractual damages, integrity oversight and reporting obligations, reputational harm, diminished
profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of
operations.
We may encounter difficulties in managing our growth and expanding our operations successfully.
As we seek to advance product candidates through clinical trials and commercialization, we will need to expand our development, regulatory,
manufacturing, marketing and sales capabilities or contract with additional third parties to provide these capabilities for us. As our operations expand, we
expect that we will need to manage additional relationships with partners, consultants, suppliers and other third parties. Future growth will impose
significant added responsibilities on members of our management, including having to divert a disproportionate amount of its attention away from day-to-
day operating activities to implement and manage future growth. Our future financial performance and our ability to commercialize product candidates and
to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development
efforts and clinical trials effectively and hire, train and integrate additional management, administrative and, if necessary, sales and marketing personnel.
We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.
If our third party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for
damages.
Our development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials, by our third party
manufacturers. Our manufacturers are subject to federal, state and local laws and regulations in the United States and abroad governing the use,
manufacture, storage, handling and disposal of medical and hazardous materials. Although we believe that our manufacturers’ procedures for using,
handling, storing and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or
injury resulting from medical or hazardous materials. As a result of any such contamination or injury, we may incur liability, including through obligations
to indemnify our third party manufacturers, or local, city, state or federal authorities may curtail the use of these materials and interrupt our business
operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not
have any insurance for liabilities arising from medical or hazardous materials. Compliance with applicable environmental laws and regulations is
expensive, and current or future environmental regulations may impair our development and production efforts or those of our third party manufacturers,
which could harm our business, prospects, financial condition or results of operations.
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Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
Our principal executive offices are located at 4350 La Jolla Village Drive, Suite 800, San Diego, California 92122 in a facility we lease
encompassing 6,724 square feet of office space pursuant to our August 2021 lease amendment. Our lease expires in April 2027.
Item 3.
Legal Proceedings.
Except with respect to our dispute and related proceedings with I-Mab referenced below, we are not currently a party to any material legal
proceedings. From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. Regardless of
outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. For a
description of our dispute and related proceedings with I-Mab, see the section entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in Item 7 of this Annual Report.
Item 4.
Mine Safety Disclosures.
Not applicable.
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Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the Nasdaq Capital Market under the ticker symbol “TCON”.
PART II
Holders of Common Stock
As of March 3, 2023, there were approximately 107 holders of record of our common stock. Certain shares of our common stock are held in “street”
name and thus the actual number of beneficial owners of such shares is not known or included in the foregoing number.
Dividend Policy
We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings, if any,
to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. In addition, pursuant
to our RGC Loan Agreement, we are prohibited from paying cash dividends or making any distributions or payments in respect of our equity interests,
subject to limited exceptions. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will
depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other
factors our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 11 of Part III of this Annual Report.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Recent Sales of Unregistered Securities.
None.
Item 6.
Reserved.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial
statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, timing
of future events and future financial performance, includes forward-looking statements that are based upon current beliefs, plans and expectations and
involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that
could cause our actual results and the timing of selected events to differ materially from those described in or implied by the forward-looking statements
contained in the following discussion and analysis. We undertake no obligation to update these forward-looking statements to reflect events or
circumstances after the date of this Annual Report or to reflect actual outcomes. Please also see the section within Part I of this Annual Report entitled
“Forward-Looking Statements.”
Overview
We are a biopharmaceutical company focused on the development and commercialization of novel targeted therapeutics for cancer and utilizing our
cost efficient, contract research organization (CRO) independent product development platform to partner with other life science companies to develop and
commercialize innovative products in the United States.
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In December 2019, we entered into a collaboration and clinical trial agreement (the Envafolimab Collaboration Agreement) with 3D Medicines Co.,
Ltd. (3D Medicines) and Jiangsu Alphamab Biopharmaceuticals Co., Ltd. (Alphamab) for the development of envafolimab, also known as KN035, an
investigational PD-L1 single-domain antibody (sdAb) administered by rapid subcutaneous injection for the treatment of sarcoma in North America. The
ENVASARC Phase 2 pivotal trial (the ENVASARC trial) is enrolling a total of 160 patients at 600mg of envafolimab, with 80 patients enrolling at 600mg
of envafolimab every three weeks in cohort C, and 80 patients enrolling at 600mg of envafolimab every three weeks in combination with Yervoy® at
1mg/kg every three weeks for four doses in cohort D, in the sarcoma subtypes of undifferentiated pleomorphic sarcoma (UPS) and myxofibrosarcoma
(MFS). Nine of 80 responses by blinded independent central review (BICR) in either cohort are needed to satisfy the primary objective of the trial which is
to statistically exceed the known 4% objective response rate (ORR) of Votrient® (pazopanib), the only U.S. Food and Drug Administration (FDA)-
approved treatment for patients with refractory UPS or MFS. Achieving the primary endpoint of exceeding the known 4% ORR could be the basis for
accelerated approval of envafolimab by the FDA as a single agent and/or in combination with Yervoy. The trial will provide at least 86% power to
demonstrate the lower bound of the 95% confidence interval is greater than 5% in each cohort, which would be greater than the 4% ORR of Votrient
reported in soft tissue sarcoma in its package insert. Votrient is the only approved treatment for refractory soft tissue sarcoma, which includes UPS and
MFS.
In August and October 2022, we announced that the ENVASARC trial will proceed as planned after the independent data monitoring committee
(IDMC) reviewed three and twelve weeks of safety data, respectively, from more than 20 patients enrolled in the trial as of June 30, 2022. The safety data
reviewed included data from more than 10 patients enrolled into cohort C of treatment with single agent envafolimab at 600mg every three weeks and more
than 10 patients enrolled into cohort D of treatment with envafolimab at 600mg every three weeks in combination with Yervoy (ipilimumab).
In December 2022, we announced the IDMC recommended continued accrual as planned in both cohorts at the first planned interim efficacy
analysis. The IDMC reviewed interim safety and efficacy data from 18 patients enrolled into each cohort who completed a minimum of 12 weeks of
efficacy evaluations (two on-treatment scans). The double-digit ORR assessed by BICR in each cohort exceeded the prespecified futility rule that required
at least one response among the initial 18 patients enrolled at 600mg into each cohort. Envafolimab monotherapy (cohort C) and in combination with
Yervoy (cohort D) was well tolerated, with only a single related serious adverse event reported in 36 patients. A second interim efficacy analysis is planned
following the 12-week efficacy scan in the 92nd dosed patient, to allow for determination of the preliminary ORR, which we expect in the third quarter of
2023. There must be at least three responses among the initial 46 patients enrolled at 600mg into each cohort to continue enrollment in that cohort per the
futility rule of the trial.
In September 2022, we announced that the FDA had granted us fast track designation for the development of envafolimab for patients with locally
advanced, unresectable or metastatic UPS and MFS who have progressed on one or two prior lines of chemotherapy. We are also eligible to apply for
breakthrough therapy designation based on data from the ENVASARC clinical trial. We expect to complete enrollment by the end of 2023, have final
response assessment data including duration of response in all patients from the ENVASARC trial in mid-2024, and, assuming positive data, to submit a
biologics license application (BLA) to the FDA seeking accelerated approval in 2024. At any time that we reach nine responses in each cohort and meet the
endpoint, we expect to discuss the submission process with the FDA.
Our other clinical stage oncology product candidates include YH001, which is a monospecific investigational cytotoxic T-lymphocyte-associated
protein 4 (CTLA-4) antibody, that we licensed from Eucure (Beijing) Biopharma Co., Ltd. (Eucure) and Biocytogen Pharmaceuticals (Beijing) Co., Ltd.
(Biocytogen) in October 2021, TRC102, which is a small molecule that has been studied in Phase 1 and Phase 2 trials for the treatment of mesothelioma,
lung cancer, glioblastoma and solid tumors, and TJ004309, which is a CD73 antibody in Phase 1 clinical development for the treatment of solid tumors,
that we licensed from I-Mab Biopharma (I-Mab) in November 2018.
YH001 is an investigational humanized CTLA-4 IgG1 monoclonal antibody that completed dosing in two Phase 1 trials sponsored by Eucure for the
treatment of various cancer indications. CTLA-4 is a protein expressed on T-cells and expressed at high levels specifically on regulatory T-cells that act as a
checkpoint to inhibit effector T-cell immune responses to cancer cells. The CTLA-4 inhibitor Yervoy (ipilimumab) marketed by BMS has been approved as
a single agent in melanoma and approved in combination with other therapies in multiple indications including non-small cell lung cancer, renal cell
carcinoma (RCC) and microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) cancer. Data from the Phase 1 dose escalation trial in
Australia of YH001 in combination with the PD-1 antibody, toripalimab, were presented at the American Society of Clinical Oncology 2022 Annual
Meeting. YH001 was well tolerated up to 4 mg/kg when combined with toripalimab in the 24 patients as of the December 31, 2021 data cut-off date. The
Phase 1 dose escalation trial in China of YH001 as a single agent, recently completed enrollment and determined a recommended Phase 2 dose. We expect
data to be presented in the second half of 2023. No CTLA-4 therapy is approved by the FDA for the treatment of soft tissue sarcoma.
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In August 2022, we announced that the FDA had approved the Investigational New Drug (IND) application for the initiation of a Phase 1/2 clinical
trial of YH001 in combination with envafolimab and doxorubicin, an approved treatment for soft tissue sarcoma, for the treatment of sarcoma patients and
in December 2022, we initiated dosing in the Phase 1/2 clinical trial. The Phase 1/2 trial will assess the safety and efficacy of the triplet combination of
YH001, envafolimab and doxorubicin in the common sarcoma subtypes of leiomyosarcoma and dedifferentiated liposarcoma, and we expect Phase 1 data
in the second half of 2023. In addition, the trial will assess the safety and efficacy of the doublet combination of YH001 and envafolimab in patients with
the rare sarcoma subtypes of alveolar soft part sarcoma and chondrosarcoma. Additionally, we plan to initiate trials of YH001 as a single agent or in
combination with immunotherapies in other tumor types.
TRC102 is a small molecule in clinical development to reverse resistance to specific chemotherapeutics by inhibiting DNA base excision repair
(BER). In initial clinical trials of more than 100 patients, TRC102 has shown good tolerability and we believe promising anti-tumor activity in combination
with alkylating and antimetabolite chemotherapy for the treatment of cancer patients. TRC102 has been studied in Phase 1 or Phase 2 trials in
mesothelioma patients in combination with the approved chemotherapeutic Alimta® (pemetrexed), in glioblastoma, ovarian cancer, lung and colorectal
cancer patients in combination with the approved chemotherapeutic Temodar® (temozolomide) and in lung cancer patients in combination with the
approved chemotherapeutics Alimta and cisplatin as well as external beam radiation (i.e., chemoradiation). All current TRC102 trials are sponsored and
funded by the National Cancer Institute (NCI). We retain global rights to develop and commercialize TRC102 in all indications. In October 2020, we
received orphan drug designation (ODD) from the FDA for TRC102 for the treatment of patients with malignant glioma, including glioblastoma. O6-
methylguanine DNA methyltransferase (MGMT) deficiency is observed in about one-third of glioblastoma patients, and a prior study of Temodar and
TRC102 reported at the Society for Neuro-Oncology in 2018 demonstrated that two MGMT deficient glioblastoma patients had prolonged survival when
treated with Temodar and TRC102 after progressing previously on Temodar and radiation therapy. A December 2020 publication in Cancer Cell also
demonstrated Temodar and TRC102 were active in MGMT deficient patients with colorectal cancer. Based on these data, we believe a trial in first line
glioblastoma patients of Temodar, radiation therapy and TRC102 is warranted and are discussing further development with investigators at this time. In
addition, based on data presented at the ASCO 2020 virtual meeting that the combination of chemoradiation and TRC102 produced objective responses in
all 15 evaluable patients with advanced localized lung cancer treated in a Phase 1 trial, in January 2022, the NCI initiated a randomized Phase 2 trial of
chemoradiation with or without TRC102, followed by consolidative durvalumab treatment. The primary objective is to improve the 56% one-year
progression free survival (PFS) rate with current standard of care to 75% with current standard of care plus TRC102. The trial began enrollment in June
2022 and is expected to be complete in 2025.
TJ004309, also known as TJD5 or uliledlimab, is a novel humanized antibody against CD73 expressed on stromal cells and tumors that converts
extracellular adenosine monophosphate (AMP) to the immunosuppressive metabolite adenosine. We are developing TJ004309 in collaboration with I-Mab
under a strategic collaboration and clinical trial agreement that we entered into in November 2018 (the TJ004309 Agreement). In July 2019, we began
enrollment in a Phase 1 clinical trial to assess safety and preliminary efficacy of TJ004309 as a single agent and when combined with the PD-L1
checkpoint inhibitor Tecentriq® in patients with advanced solid tumors, and in June 2021 we presented data from the ongoing Phase 1 trial at the ASCO
2021 virtual meeting. In a poster presentation titled “The safety, pharmacokinetics (PK), pharmacodynamics (PD) and clinical efficacy of uliledlimab
(TJ004309), a differentiated CD73 antibody, in combination with atezolizumab in patients with advanced cancer,” uliledlimab was found to be well-
tolerated up to 20mg/kg every three weeks and 15mg/kg once weekly as a monotherapy and in combination therapy with atezolizumab 1200mg every three
weeks and no dose limiting toxicity (DLT) was observed and the maximum tolerated dose (MTD) was not reached. There was one complete response in a
PD-(L)1 naïve patient, two partial responses (PRs) with one PR in a PD-(L)1 naïve patient and one PR in a PD-(L)1 refractory patient, and three cases of
stable disease (SD) following treatment with uliledlimab and atezolizumab.
We entered into a separate strategic collaboration and clinical trial agreement (the Bispecific Agreement) which allows for the development of up to
five of I-Mab’s proprietary bispecific antibody (the BsAb) product candidates to be nominated by I-Mab within a five-year period for development and
commercialization in North America, with the option to opt-in and acquire product rights outside of Greater China and Korea prior to completing the first
pivotal clinical trial for any bispecific product candidate.
In March 2020, I-Mab issued a press release announcing a strategic partnership with Kalbe Genexine Biologics (KG Bio), whereby KG Bio received
what the press release described as a right of first negotiation outside North America for TJ004309 for up to $340 million in potential payments to I-Mab.
In March 2020, we also learned that I-Mab had entered into two license and collaboration agreements with ABL Bio in July 2018 (ABL Bio License 1 and
ABL Bio License 2). Under ABL Bio License 1, I-Mab granted to ABL Bio exclusive, worldwide (excluding Greater China), royalty-bearing rights to
develop and commercialize a BsAb using certain monoclonal antibody sequences. Under ABL License 2, I-Mab and ABL agreed to collaborate to develop
three PD-L1-based bispecific antibodies by using ABL Bio’s proprietary BsAb technology and commercialize them in their respective territories, which,
collectively, include China, Hong Kong, Macau, Taiwan and South Korea, and other territories throughout the rest of the world if both parties agree to do
so in such other territories during the performance of the agreement.
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In June 2020, I-Mab commenced an arbitration proceeding under the Rules of Arbitration of the International Chamber of Commerce (the ICC)
before an arbitration tribunal seated in New York City (the Tribunal) after we invoked contractual dispute resolution provisions asserting that I-Mab had
breached its contractual obligations concerning two strategic collaboration and clinical trial agreements with us entered into in November 2018. Those
strategic collaboration and clinical trial agreements relate to the development of TJ004309 and five of I-Mab’s proprietary bispecific antibody product
candidates to be nominated by I-Mab within a five-year period for development and commercialization in North America. We filed counterclaims in the
arbitration seeking to recover over $200 million in damages from I-Mab based on I-Mab’s breaches of the two strategic collaboration and clinical trial
agreements. In 2021, I-Mab sent us notices purporting to terminate the TJ004309 Agreement, which would result in I-Mab owing us a prespecified
termination fee of $9.0 million. However, I-Mab does not have an option to terminate the TJ004309 Agreement without cause until the ongoing Phase 1
clinical trial of TJ004309 is “Complete,” as that term is defined in the TJ004309 Agreement, and we responded by disputing the basis for I-Mab’s
termination. In March 2021, I-Mab filed a lawsuit in the Delaware Court of Chancery seeking a variety of relief including an order of specific performance
requiring us to comply with I-Mab’s purported termination of the TJ004309 Agreement. In May 2021, the Delaware Court of Chancery stayed the lawsuit
in favor of arbitration. The Tribunal held a hearing on the merits in February 2022, and final post-hearing briefs were submitted by us and I-Mab in May
2022. On November 8, 2022, the Tribunal invited the parties to submit additional, limited briefing on two discrete issues by December 9, 2022. Following
that submission, the parties submitted their respective cost submissions for attorney fees reimbursement in January 2023. The Tribunal did not indicate
when it expects to render its final decision; however, it did note that it was far along in its deliberations and preparation of a final award. We expect the
Tribunal to render its final decision in the first quarter of 2023.
Under the applicable rules of the arbitration, the prevailing party may be awarded attorneys’ fees at the Tribunal’s discretion. The claims under the
arbitration are complex; accordingly, we cannot predict the outcome of the arbitration, and we are unable to estimate the amount of recovery or damages, if
any, that may be awarded by the Tribunal. The dispute with I-Mab has caused, and could continue to cause, us to incur significant costs.
The following table summarizes key information regarding ongoing and planned development of our clinical stage product candidates:
Envafolimab
Soft Tissue Sarcoma (UPS and MFS)
Pivotal Phase 2
Interim Data – Q3 2023
Final Data – mid-2024
Envafolimab + YH001
Multiple Soft Tissue Sarcoma Subtypes
Phase 1/2 (planned)
Second half of 2023 and 2024
TRC102
Lung Cancer
Randomized Phase 2
2025
Phase
Data Expected
We utilize a CRO-independent product development platform that emphasizes capital efficiency. Our experienced clinical operations, data
management, quality assurance, product development and regulatory affairs groups manage significant aspects of our clinical trials with internal resources.
We use these internal resources to reduce the costs associated with utilizing CROs to conduct clinical trials. In our experience, this model has resulted in
capital efficiencies and improved communication with clinical trial sites, which can expedite patient enrollment and improve the quality of patient data as
compared to a CRO-managed model. We have leveraged this platform in all of our sponsored clinical trials. We have also leveraged our product
development platform to diversify our product pipeline without payment of upfront license fees through license agreements with Eucure and Biocytogen,
3D Medicines and Alphamab, I-Mab, and Janssen. We continue to evaluate life science companies that would benefit from a rapid and capital-efficient U.S.
drug development solution that includes U.S. and European Union (EU) clinical development expertise. We believe we will continue to be recognized as a
preferred U.S. clinical development partner through a cost- and risk-sharing partnership structure, which may include U.S. commercialization.
Our goal is to be a leader in the development of targeted therapies for patients with cancer and other diseases of high unmet medical need.
Since our inception in 2004, we have devoted substantially all of our resources to research and development efforts relating to our product
candidates, including conducting clinical trials, in-licensing related intellectual property, providing general and administrative support for these operations,
and protecting our intellectual property. To date, we have not generated any revenue from product sales and instead, have funded our operations from the
sales of equity securities, payments received in connection with our collaboration agreements, and commercial bank debt. At December 31, 2022, we had
cash and cash equivalents totaling $17.5 million, of which $0.1 million is pledged as collateral for our obligations under our corporate headquarters facility
lease.
We do not own or operate, nor do we expect to own or operate, facilities for product manufacturing, storage, distribution or testing. We contract with
third parties or our collaboration partners for the manufacture of our product candidates and we intend to continue to do so in the future.
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We have incurred losses from operations in each year since our inception. Our net losses were $29.1 million and $28.7 million for the fiscal years
ended December 31, 2022 and 2021, respectively. At December 31, 2022, we had an accumulated deficit of $236.9 million.
We expect to continue to incur significant expenses and operating losses for at least the next several years. Our net losses may fluctuate significantly
from quarter to quarter and year to year. We expect our current level of research and development expenses to increase in 2023 as we:
•
•
•
•
continue to enroll the ENVASARC trial and Phase 1/2 clinical trial of YH001 in combination with envafolimab in certain sarcoma subtypes;
continue our research and development efforts;
in-license additional product candidates for development and commercialization; and
seek regulatory approvals for product candidates that successfully complete clinical trials.
We do not expect to generate any revenues from product sales until we successfully complete development and obtain regulatory approval for one or
more product candidates, which we expect will take a number of years. If we obtain regulatory approval for any product candidates, we expect to incur
significant commercialization expenses related to product sales, marketing, and distribution. Accordingly, we will need to raise substantial additional
capital. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and
clinical development efforts, developments under our collaboration agreements, including whether and when we receive milestone and other potential
payments, the outcome of our dispute with I-Mab, and the timing and nature of the regulatory approval process for product candidates. We anticipate that
we will seek to fund our operations through public or private equity or debt financings or other sources. Debt financing, if available, may involve covenants
further restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not
favorable to us or our stockholders. Further, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable
terms or at all. As a result of the COVID-19 pandemic and actions taken to slow its spread, as well as adverse macroeconomic and geopolitical
developments, such as the ongoing military conflict between Ukraine and Russia, actual and anticipated changes in interest rates, economic inflation and
the responses by central banking authorities to control such inflation, the global credit and financial markets have experienced extreme volatility and
disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in
unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or equity
financing more difficult, more costly and more dilutive. Our failure to raise capital or enter into such other arrangements when needed would have a
negative impact on our financial condition and ability to develop product candidates.
Collaboration and License Agreements
Collaboration Agreement with 3D Medicines and Alphamab
In December 2019, we, 3D Medicines, and Alphamab entered into the Envafolimab Collaboration Agreement for the development of envafolimab,
an investigational PD-L1 sdAb, or nanobody, administered by rapid subcutaneous injection, for the treatment of sarcoma in North America.
Pursuant to the Envafolimab Collaboration Agreement, we were granted an exclusive license to develop and commercialize envafolimab for the
treatment of sarcoma in North America. We are responsible for conducting and will bear the costs of any Phase 1, Phase 2, and Phase 3 or post-approval
clinical trial in North America for envafolimab in the indications of refractory and first line treatment of sarcoma. 3D Medicines and Alphamab are
responsible for conducting and will bear the costs of investigational new drug (IND)-enabling studies (other than those specific to the sarcoma indication)
and the preparation of the chemistry, manufacturing and controls (CMC) activities sections of an IND application for envafolimab. 3D Medicines and
Alphamab have agreed to manufacture and supply, or to arrange for a third-party manufacturer to manufacture and supply, envafolimab to us at pre-
negotiated prices that vary based on clinical or commercial use. 3D Medicines and Alphamab retained the right to develop envafolimab in all territories
outside of North America as well as within North America for all indications other than sarcoma.
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We will be responsible for commercializing envafolimab for sarcoma in North America, including booking of sales revenue, unless (a) envafolimab
is first approved in North America for an indication other than sarcoma and launched in North America, or (b) envafolimab is first approved in North
America for sarcoma and subsequently approved in North America for an additional non-orphan indication and sold commercially by 3D Medicines and/or
Alphamab, or licensee, in which case 3D Medicines and Alphamab will be responsible for commercializing envafolimab for sarcoma in North America,
including booking of sales revenue. If 3D Medicines and Alphamab become responsible for commercialization under the Envafolimab Collaboration
Agreement, we have the option to co-market envafolimab for sarcoma in North America. In the event that envafolimab is first approved in North America
for sarcoma and within three years of the commercial launch of envafolimab in North America for sarcoma 3D Medicines and Alphamab replace us as the
party responsible for commercialization, and we elect and 3D Medicines and Alphamab agree for us to not co-market envafolimab for sarcoma in North
America, then 3D Medicines and Alphamab will be required to compensate us for our costs associated with preparing for and conducting commercial
activities.
If we have the responsibility for commercialization under the Envafolimab Collaboration Agreement, we will owe 3D Medicines and Alphamab
tiered double digit royalties on net sales of envafolimab for sarcoma in North America ranging from the teens to mid-double digits. If 3D Medicines and
Alphamab have responsibility for commercialization under the Envafolimab Collaboration Agreement, we will be entitled to (a) tiered double digit
royalties on net sales of envafolimab for sarcoma in North America ranging from the teens to mid-double digits if we have elected to not co-market
envafolimab in sarcoma or (b) a 50% royalty on net sales of envafolimab for sarcoma in North America if we have chosen to co-market envafolimab in
sarcoma. Payment obligations under the Envafolimab Collaboration Agreement continue on a country-by-country basis until the last to expire licensed
patent covering envafolimab expires.
3D Medicines and Alphamab retain the right to reacquire the rights to envafolimab for sarcoma in North America in connection with an arm’s length
sale to a third party of the rights to develop and commercialize envafolimab in North America for all indications, provided that the sale may not occur prior
to completion of a pivotal trial of envafolimab in sarcoma without our written consent and the parties must negotiate in good faith and agree to fair
compensation be paid to us for the value of and opportunity represented by the reacquired rights.
Each party agreed that during the term of the Envafolimab Collaboration Agreement, it would not develop or license from any third party a
monospecific inhibitor to PD-L1 or PD-1 in sarcoma.
The term of the Envafolimab Collaboration Agreement continues until the later of the date the parties cease further development and
commercialization of envafolimab for sarcoma in North America or the expiration of all payment obligations. The Envafolimab Collaboration Agreement
may be terminated earlier by a party in the event of an uncured material breach by the other party or bankruptcy of the other party, or for safety reasons
related to envafolimab. In the event we elect, or a joint steering committee (JSC) determines, to cease further development or commercialization of
envafolimab, or if we fail to use commercially reasonable efforts to develop (including progress in clinical trials) and commercialize envafolimab and do
not cure such failure within a specified time period, then our rights and obligations under the Envafolimab Collaboration Agreement will revert to 3D
Medicines and Alphamab.
Collaboration Agreement with Eucure and Biocytogen
In October 2021, we, Eucure and Biocytogen entered into a collaborative development and commercialization agreement (the YH001 Collaboration
Agreement) for the development of YH001, a monospecific investigational CTLA-4 antibody. Pursuant to the YH001 Collaboration Agreement, we were
granted an exclusive (including with respect to Eucure and its affiliates), nontransferable, license to develop and commercialize YH001 in North America
for the treatment, through administration of YH001 by intravenous or subcutaneous means, of multiple human indications, including sarcoma,
microsatellite stable colorectal cancer, RCC, and K-ras positive non-small cell lung cancer (collectively, the Initial Indications) or one or more of bladder
cancer, endometrial cancer, and melanoma as substitute indications, which may be substituted for Initial Indications at our discretion (each upon such
substitution, a Substitute Indication). We are responsible for, and will bear the costs of, preparing and filing all regulatory submissions and conducting any
Phase 1, Phase 2, Phase 3, or post-approval clinical trials in North America for YH001 in the Initial Indications and potentially the Substitute Indications,
while Eucure is responsible for conducting, and will bear the costs of, the preparation of CMC activities for YH001. Eucure has agreed to manufacture and
supply, or to arrange for a third-party manufacturer to manufacture and supply, YH001 to us for clinical trials pursuant to the terms of a clinical supply and
quality agreement that will be separately negotiated and agreed in good faith between the parties.
Eucure may pursue clinical trials for YH001 in North America outside of the Initial Indications or Substitute Indications, and also within the Initial
Indications or Substitute Indications as part of a combination therapy of YH001 and an additional Eucure product. During a specified period, we have the
option, subject to Eucure’s prior written approval, to expand the license to include the development and commercialization of YH001 for the treatment,
through administration by intravenous or subcutaneous means, of all human and veterinary therapeutic indications in North America for a payment to
Eucure in the low single digit millions (the Company Option).
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Pursuant to the YH001 Collaboration Agreement, we granted Eucure an irrevocable, perpetual, royalty-free, exclusive license, with the right to grant
sublicenses to develop, register, sell, offer to sell, have sold, market and distribute YH001 in all territories outside of North America as well as within North
America for all indications other than the Initial Indications and the Substitute Indications.
We will be responsible for commercializing YH001 in North America, including booking of sales revenue in the Initial and Substitute Indications.
We will owe Eucure escalating double digit royalties on net sales of YH001 in North America ranging from the mid-twenties to mid-double digits;
provided that until the end of the first full calendar year following the first commercial sale of YH001, royalties will range from the lower double digits to
the mid-double digits. If sales of YH001 exceed a pre-determined sales threshold in the first full year of sales following first commercial sale, we will owe
a milestone to Eucure in the high single digit millions. Payment obligations under the YH001 Collaboration Agreement continue on a country-by-country
basis until the latest of (i) expiration of the last to expire licensed patent covering YH001, (ii) expiration of marketing or regulatory exclusivity covering
YH001 and (iii) 10 years from the first commercial sale of YH001 in such country in North America. Eucure has agreed to manufacture and supply, or to
arrange for a third-party manufacturer to manufacture and supply, YH001 to us at cost plus a low double-digit markup for commercial sales pursuant to the
terms of a commercial supply and quality agreement that will be separately negotiated and agreed in good faith between the parties within 180 days prior to
the anticipated first commercial sale in North America.
Pursuant to the YH001 Collaboration Agreement, each party agreed that during the term of the YH001 Collaboration Agreement, it would not
develop, manufacture, commercialize or license from any third party a monospecific inhibitor to CTLA-4.
The term of the YH001 Collaboration Agreement continues until the earlier of (i) the date that the parties cease further development and
commercialization of YH001 in North America or (ii) on a country-by-county basis, the expiration of the royalty obligations in such country. The YH001
Collaboration Agreement may be terminated earlier by a party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or for safety reasons related to YH001. In the event of a termination of the YH001 Collaboration Agreement, other than by us as a result of Eucure’s
material uncured breach or bankruptcy, (i) our license shall terminate and (ii) we would be obligated to grant Eucure an irrevocable, perpetual, royalty-free,
non-exclusive license with the right to grant sublicenses under its rights in all development data and intellectual property to develop, register, sell, offer to
sell, have sold, market and distribute YH001 in North America. In the event of a termination of the YH001 Collaboration Agreement by us as a result of
Eucure’s material uncured breach or bankruptcy, the license shall continue in the Initial Indications in North America, provided that (i) such license shall
remain exclusive during the royalty term and non-exclusive thereafter; (ii) we shall have the right to have YH001 manufactured for its development and
commercialization requirements in the Initial Indications in North America; and (iii) the license shall terminate in the event of an uncured material breach
by us of any provision (including payment obligations) that survives termination of the YH001 Collaboration Agreement. In the event the YH001
Collaboration Agreement terminates for safety reasons related to YH001, by mutual agreement of the parties or by Eucure in the event of an uncured
material breach or bankruptcy by us, then our rights and obligations under the YH001 Collaboration Agreement will revert to Eucure. In the event Eucure
does not approve the Company Option, we may terminate the YH001 Collaboration Agreement for convenience with a 30-day notice to Eucure, provided
that such termination is given within 12 months of the effective date of the YH001 Collaboration Agreement (the Company Option Termination). In the
event of a Company Option Termination, Eucure would be obligated to reimburse us for all costs and expenses that we incurred in performing the
development activities.
Collaboration Agreements with I-Mab Biopharma
In November 2018, we entered into two separate strategic collaboration and clinical trial agreements with I-Mab for the development of multiple
immuno-oncology programs, including I-Mab’s proprietary CD73 antibody TJ004309 as well as up to five proprietary bispecific antibodies currently under
development by I-Mab.
In the TJ004309 Agreement, we are collaborating with I-Mab on developing TJ004309, and will bear the costs of filing an IND application and for
Phase 1 clinical trials, share costs equally for Phase 2 clinical trials, and we will bear 40% and I-Mab 60% of the costs for pivotal clinical trials. I-Mab will
also be responsible for the cost of certain non-clinical activities and the supply of TJ004309 and any reference drugs used in the development activities. We
also agreed with I-Mab for a specified period of time to not develop or license to or from a third party any monoclonal antibody targeting CD73 or any
other biologic for certain indications that a JSC, as set up under the TJ004309 Agreement, selects for TJ004309 development.
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In the event that I-Mab licenses rights to TJ004309 to a third party, we would be entitled to receive escalating portions of royalty and non-royalty
consideration received by I-Mab with respect to territories outside of Greater China. In the event that I-Mab commercializes TJ004309, we would be
entitled to receive a royalty on net sales by I-Mab in North America ranging from the mid-single digits to low double digits, and in the EU and Japan in the
mid-single digits. The portions of certain third party royalty and non-royalty consideration and the royalty from net sales by I-Mab to which we would be
entitled escalate based on the phase of development and relevant clinical trial obligations we complete under the TJ004309 Agreement, ranging from a
high-single digit to a mid-teen percentage of non-royalty consideration as well as a double digit percentage of royalty consideration. In March 2020, I-Mab
issued a press release announcing a strategic partnership with KG Bio, whereby KG Bio received what the press release described as a right of first
negotiation outside North America for TJ004309 for up to $340 million in potential payments to I-Mab. On April 8, 2020, we issued a notice of dispute
regarding possible breach of the TJ004309 Agreement, which resulted in a binding arbitration proceeding under the Rules of Arbitration of the ICC before
the Tribunal. The latest developments in the dispute with I-Mab are discussed in more detail below following the discussion of the Bispecific Agreement.
The TJ004309 Agreement may be terminated by either party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or for safety reasons related to TJ004309. I-Mab may also terminate the TJ004309 Agreement if we cause certain delays in completing a Phase 1
clinical trial. In addition, I-Mab may terminate the TJ004309 Agreement for any reason within 90 days following the completion of the first Phase 1
clinical trial, in which case we would be entitled to a minimum termination fee of $9.0 million, or following the completion of the first Phase 2 clinical
trial, in which case we would be entitled to a pre-specified termination fee of $15.0 million and either a percentage of non-royalty consideration I-Mab may
receive as part of a license to a third party or an additional payment if TJ004309 is approved for marketing outside Greater China before a third party
license is executed, in addition to a double digit percentage of royalty consideration. In 2021, I-Mab sent us notices purporting to terminate the TJ004309
Agreement, which would result in I-Mab owing us a prespecified termination fee of $9.0 million. However, I-Mab does not have an option to terminate the
TJ004309 Agreement without cause until the ongoing Phase 1 clinical trial of TJ004309 is “Complete,” as that term is defined in the TJ004309 Agreement,
and we responded by disputing the basis for I-Mab’s termination. In March 2021, I-Mab filed a lawsuit in the Delaware Court of Chancery seeking an order
of specific performance requiring us to comply with I-Mab’s effort to terminate the agreement. We disagreed with I-Mab’s position and in May 2021, the
Delaware Court of Chancery stayed the lawsuit filed by I-Mab and subsequently this matter was remanded and included in the proceeding before the
Tribunal.
Pursuant to the Bispecific Agreement, we and I-Mab may mutually select through a JSC up to five of I-Mab’s BsAb product candidates within a five-
year period for development and commercialization in North America.
For each product candidate selected by the JSC for development under the Bispecific Agreement, I-Mab will be responsible and bear the costs for
IND-enabling studies and establishing manufacturing for the product candidate, we will be responsible for and bear the costs of filing an IND and
conducting Phase 1 and Phase 2 clinical trials, and we will be responsible for and will share equally with I-Mab in the costs of conducting Phase 3 or
pivotal clinical trials, in each case within North America. Subject to I-Mab’s right to co-promote an approved product candidate, we will be responsible for
commercializing any approved product candidates in North America, and we will share profits and losses equally with I-Mab in North America. We would
also be entitled to receive tiered low single digit royalties on net sales of product candidates in the EU and Japan.
At any time prior to completing the first pivotal clinical trial for a product candidate or if I-Mab ceases to support development costs or pay its
portion of Phase 3 clinical trial costs for a product candidate or the JSC decides to cease development over our objections after initiating Phase 3 clinical
trials, we will have an option to obtain an exclusive license to such product candidate in all territories except Greater China and Korea and any other
territories in which I-Mab previously licensed rights to a third party subject to our right of first refusal for any licenses I-Mab may grant to third-parties.
77
If we exercise our licensing option, we would assume sole responsibility for developing and commercializing the product candidate in the licensed
territory, and in lieu of profit or loss sharing with I-Mab with respect to such product candidate, we would owe I-Mab pre-specified upfront and milestone
payments and royalties on net sales, with the payments and royalties escalating depending on the phase of development the product candidate reached at the
time we obtained the exclusive license as follows: (i) if before IND-enabling studies and the preparation of the CMC activities of the collaborative product,
we would owe I-Mab a one-time upfront payment of $10.0 million, development and regulatory based milestone payments totaling up to $90.0 million that
begin upon completion of a pivotal trial, sales milestones totaling up to $250.0 million, and royalties in the mid-single digits on annual net sales; (ii) if after
IND submission but before completion of a Phase 1a clinical trial of the collaborative product, we would owe I-Mab a one-time upfront payment of $25.0
million, development and regulatory based milestone payments totaling up to $125.0 million that begin upon completion of a pivotal trial, sales milestones
totaling up to $250.0 million, and royalties in the high single digits on annual net sales; (iii) if after completion of a Phase 1a clinical trial but before
completion of a Phase 2 proof of concept clinical trial for the collaborative product, we would owe I-Mab a one-time upfront payment of $50.0 million,
development and regulatory based milestone payments totaling up to $250.0 million that begin upon completion of a pivotal trial, sales milestones totaling
up to $250.0 million, and royalties in the low double digits on annual net sales; and (iv) if after completion of a Phase 2 proof of concept clinical trial and
before completion of a pivotal trial for the collaborative product, we would owe I-Mab a one-time upfront payment of $80.0 million, development and
regulatory based milestone payments totaling up to $420.0 million that begin upon completion of a pivotal trial, sales milestones totaling up to $250.0
million, and royalties in the high-teens on annual net sales.
Each party agreed that for a specified period of time, it would not develop or license to or from any third party any bispecific monoclonal antibody
targeting the same two biological targets as those of any selected product candidates under the Bispecific Agreement.
If development of any selected product candidates is terminated by a decision of the JSC, all rights to the product candidate will revert to I-Mab,
subject to our rights to obtain an exclusive license in certain circumstances. If development is terminated after submission of an IND and prior to initiating
Phase 3 clinical studies or after initiating Phase 3 clinical studies and with our concurrence, we would be entitled to tiered low single digit royalties on net
sales of the product candidate in North America, the EU and Japan.
The Bispecific Agreement may be terminated by either party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or with respect to any selected product candidate, for safety reasons related to that product candidate.
In March 2020, we learned that I-Mab had entered into two license and collaboration agreements with ABL Bio in July 2018. Under ABL Bio
License 1, I-Mab granted to ABL Bio exclusive, worldwide (excluding Greater China), royalty-bearing rights to develop and commercialize a BsAb using
certain monoclonal antibody sequences. Under ABL License 2, I-Mab and ABL agreed to collaborate to develop three PD-L1-based bispecific antibodies
by using ABL Bio’s proprietary BsAb technology and commercialize them in their respective territories, which, collectively, include China, Hong Kong,
Macau, Taiwan and South Korea, and other territories throughout the rest of the world if both parties agree to do so in such other territories during the
performance of the agreement.
In June 2020, I-Mab commenced an arbitration proceeding under the Rules of Arbitration of the ICC before the Tribunal after we invoked
contractual dispute resolution provisions asserting that I-Mab had breached its contractual obligations concerning the TJ004309 Agreement and Bispecific
Agreement. We filed counterclaims in the arbitration seeking to recover over $200 million in damages from I-Mab based on I-Mab’s breaches of the two
strategic collaboration and clinical trial agreements. In 2021, I-Mab sent us notices purporting to terminate the TJ004309 Agreement, which would result in
I-Mab owing us a prespecified termination fee of $9.0 million. However, I-Mab does not have an option to terminate the TJ004309 Agreement without
cause until the ongoing Phase 1 clinical trial of TJ004309 is “Complete,” as that term is defined in the TJ004309 Agreement, and we responded by
disputing the basis for I-Mab’s termination. However, we believe we “completed” the TJ004309 Phase 1 trial in November 2022. In March 2021, I-Mab
filed a lawsuit in the Delaware Court of Chancery seeking a variety of relief including an order of specific performance requiring us to comply with I-
Mab’s purported termination of the TJ004309 Agreement. In May 2021, the Delaware Court of Chancery stayed the lawsuit in favor of arbitration. The
Tribunal held a hearing on the merits in February 2022, and final post-hearing briefs were submitted by us and I-Mab in May 2022. On November 8, 2022,
the Tribunal invited the parties to submit additional, limited briefing on two discrete issues by December 9, 2022. Following that submission, the parties
submitted their respective cost submissions for attorney fees reimbursement in January 2023. The Tribunal did not indicate when it expects to render its
final decision; however, it did note that it was far along in its deliberations and preparation of a final award. Under the applicable rules of the arbitration,
the prevailing party may be awarded attorneys’ fees at the Tribunal’s discretion. As of the date of this Annual Report, the TJ004309 Agreement and
Bispecific Agreement disputes remain under consideration by the Tribunal, and we expect the Tribunal to render its final decision in the first quarter of
2023. The claims under the arbitration are complex; accordingly, we cannot predict the outcome of the arbitration, and we are unable to estimate the
amount of recovery or damages, if any, that may be awarded by the Tribunal. The dispute with I-Mab has caused, and could continue to cause, us to incur
significant costs.
78
License Agreement with Case Western
Under our license agreement with Case Western, we may be required to pay up to an aggregate of approximately $9.8 million in milestone payments,
of which $0.7 million relates to the initiation of certain development activities ($0.2 million of which has been paid) and approximately $9.1 million relates
to the submission of certain regulatory filings and receipt of certain regulatory approvals. If products utilizing certain intellectual property licensed from
Case Western (the TRC102 Technology) are successfully commercialized, we will be required to pay Case Western a single-digit royalty on net sales,
subject to adjustments in certain circumstances. Beginning on the earlier of a specified number of years from the effective date of the agreement and the
anniversary of the effective date following the occurrence of a specified event, we will be required to make a minimum annual royalty payment of $75,000,
which will be credited against our royalty obligations. In the event we sublicense any of our rights under the agreement relating to the TRC102 Technology,
we will be obligated to pay Case Western a portion of certain fees we may receive under the sublicense. Our royalty obligations will continue on a country-
by-country basis through the later of the expiration of the last valid claim under the TRC102 Technology or 14 years after the first commercial sale of a
product utilizing the TRC102 Technology in a given country.
Financial Operations Overview
Revenue
We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing of any additional collaboration agreements and
recognition of associated upfront and milestone payments, and the extent to which any of our products are approved and successfully commercialized by us
or our partners. If we or our partners fail to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate
future revenues, our results of operations and our financial position could be adversely affected.
Research and Development Expenses
Research and development expenses consist of costs associated with the preclinical and clinical development of product candidates. These costs
consist primarily of:
•
•
•
•
•
•
salaries and employee-related expenses, including stock-based compensation and benefits for personnel in research and development
functions;
costs incurred under clinical trial agreements with investigative sites;
costs to acquire preclinical study and clinical trial materials;
costs associated with conducting our preclinical, development and regulatory activities, including fees paid to third party professional
consultants, service providers and our scientific advisory board;
payments related to licensed products and technologies; and
facilities, depreciation and other expenses, including allocated expenses for rent and maintenance of facilities.
Research and development costs, including third party costs reimbursed in connection with our collaboration agreements, are expensed as incurred.
We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when
the service has been performed or when the goods have been received.
The following table summarizes our research and development expenses by product candidate for the periods indicated:
Third-party research and development expenses:
Envafolimab
YH001
TRC102
TJ004309
Total third-party research and development expenses
Unallocated expenses
Total research and development expenses
79
2022
Years Ended December 31,
2021
(in thousands)
2020
$
$
7,570
390
379
320
8,659
5,229
13,888
$ 5,704
3
142
825
6,674
4,472
$ 11,146
$
$
1,107
—
197
1,553
2,857
5,341
8,198
Unallocated expenses consist primarily of our internal personnel and facility related costs.
We expect our current level of research and development expenses to increase in 2023 primarily due to the continued enrollment of the ENVASARC
trial and Phase 1/2 clinical trial of YH001 in combination with envafolimab in certain sarcoma subtypes.
We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical
trials of product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development
timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to
which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and
future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. We
will need to raise substantial additional capital in the future. In addition, we cannot forecast which product candidates may be subject to future
collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital
requirements.
The costs of clinical trials to us and the timing of such costs may vary significantly based on factors such as:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the extent to which costs for comparator drugs are borne by third parties;
per patient trial costs;
the number of sites included in the trials;
the countries in which the trials are conducted;
the length of time required to enroll eligible patients;
the number of patients that participate in the trials;
the number of doses that patients receive;
the drop-out or discontinuation rates of patients;
potential additional safety monitoring or other studies requested by regulatory agencies;
the duration of patient participation in the trials and follow-up;
the effects of macroeconomic and geopolitical developments;
the phase of development of the product candidate;
the efficacy and safety profile of the product candidate; and
the extent to which costs are borne by third parties such as the NCI.
80
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance and administration, corporate
development and administrative support functions, including stock-based compensation expenses and benefits. Other significant general and administrative
expenses include legal services, including those associated with the TJ004309 Agreement and Bispecific Agreement arbitration, insurance, occupancy
costs, accounting services, and the cost of various consultants.
We anticipate that our general and administrative expenses will decrease in 2023; however, there may be increases to the extent we have to expend
additional legal fees in connection with enforcing and collecting any arbitration award from I-Mab.
Other Income (Expense)
Other income (expense) primarily consists of interest related to our loan agreements with SVB, which was terminated in June 2022, and RGC offset
in part by interest income from our cash equivalents and investing activities.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported revenues
and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in
these estimates could occur in the future. We base our estimates on our historical experience and on various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ
materially from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in the notes to our consolidated financial statements appearing elsewhere in this
Annual Report, we believe that the following accounting policies related to revenue recognition, expense accruals, and stock-based compensation are most
critical to understanding and evaluating our reported financial results.
Revenue Recognition
We did not recognize any revenue during the year ended December 31, 2022. Our revenue during the year ended December 31, 2021 was derived
from our 2021 license and supply agreement with Enviro and Kairos. The terms of this arrangement included payments to us for the following: a non-
refundable, up-front license fee; equity ownership in Enviro; financing milestone payments; and royalties on net sales of the licensed product. In
accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, we perform the following five steps in
determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of these agreements: (i) identification of the
contract(s) with a customer; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in
the context of the contract; (iii) measurement of the transaction price, including any constraint on variable consideration; (iv) allocation of the transaction
price to the performance obligations; and (v) recognition of revenue when, or as, we satisfy each performance obligation. We only apply the five-step
model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the
customer. Once a contract is determined to be within the scope of Accounting Standards Codification 606, Revenue from Contracts with Customers, at
contract inception, we assess the goods or services promised within the contract to determine those that are performance obligations and assess whether
each promised good is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation
when, or as, the performance obligation is satisfied.
As part of the accounting for these types of arrangements, we develop assumptions that require judgment to determine the stand-alone selling price
for each performance obligation identified in the contract. We use key assumptions to determine the stand-alone selling price, which may include
development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success.
81
Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the other performance obligations
identified in the arrangement, we recognize revenues allocated to the license when the license is transferred to the customer and the customer is able to use
and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance
obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method
of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period
and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments: At the inception of each arrangement that includes development, commercialization, and regulatory milestone payments, we
evaluate whether the achievement of the milestones is considered probable and estimate the amount to be included in the transaction price using the most
likely amount method. Performance milestone payments represent a form of variable consideration. If it is probable that a significant revenue reversal
would not occur, the associated milestone payment is included in the transaction price. Achievement of milestones that are not within our control or the
licensee, such as regulatory approvals, are not considered probable until the approvals are achieved. The transaction price is then allocated to each
performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the
contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development milestones and any
related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis,
which would affect revenues and earnings in the period of adjustment.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical
development or commercial supply at the customer’s discretion are generally considered options. We assess if these options provide a material right to the
licensee and if so, they are accounted for as separate performance obligations at the outset of the arrangement.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed
to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance
obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty
revenue resulting from any of our out-licensing arrangements.
We receive payments from our collaborators based on billing schedules established in each contract. Up-front payments and fees may require
deferral of revenue recognition to a future period until we perform our obligations under the collaboration arrangements. Amounts are recorded as accounts
receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at
contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one
year or less.
Clinical Trial Expense Accruals
As part of the process of preparing our consolidated financial statements, we are required to estimate expenses resulting from our obligations under
contracts with vendors, clinical sites, and consultants in connection with conducting clinical trials. The financial terms of these contracts vary and may
result in payment flows that do not match the periods over which materials or services are provided under such contracts.
Our objective is to reflect the appropriate trial expenses in our consolidated financial statements by recording those expenses in the period in which
services are performed and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression
and the timing of various aspects of the trial. We determine accrual estimates taking into account discussion with applicable personnel and outside service
providers as to the progress or state of consummation of trials. During the course of a clinical trial, we adjust the clinical expense recognition if actual
results differ from our estimates. We make estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that
time. Our clinical accruals are dependent upon accurate reporting by third-party vendors. Although we do not expect our estimates to differ materially from
amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed
may vary and may result in reporting amounts that are too high or too low for any particular period. For the three years ended December 31, 2022, there
were no material adjustments to our prior period estimates of accrued expenses for clinical trials.
82
Other Company Information
Net Operating Loss and Research and Development Tax Credit Carryforwards
As of December 31, 2022, we had federal and California NOL carryforwards of $194.3 million and $144.5 million, respectively. The federal and
California NOL carryforwards will begin to expire in 2030 and 2033, respectively, if not utilized. The federal NOL generated after 2017 of $111.1 million
will carryforward indefinitely, but the deductibility of such federal NOLs is limited to 80% of taxable income. As of December 31, 2022, we also had
federal research and development and Orphan Drug tax credit carryforwards of $13.7 million and California research and development tax credit
carryforwards of $3.0 million. The federal research and development and Orphan Drug tax credit carryforwards will begin expiring in 2031 and 2036,
respectively, if not utilized. The California research credit will carry forward indefinitely under current law.
Pursuant to Sections 382 and 383 of the Code, our annual use of our NOL and research and development credit carryforwards may be limited in the
event that a cumulative change in ownership of more than 50% occurs within a three-year period. We completed a Section 382/383 analysis regarding the
limitation of our NOL and research and development credit carryforwards as of December 31, 2018 and did not identify a cumulative change in ownership
of more than 50% within the proceeding three-year period. Future ownership changes, including changes during the year ended December 31, 2022, may
limit our ability to utilize our remaining NOL and research and development tax credit carryforwards. As of December 31, 2022, we had a full valuation
allowance against our deferred tax assets.
Results of Operations
This section discusses our results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. For a
discussion and analysis of the year ended December 31, 2021 compared to the year ended December 31, 2020 please refer to the section titled
Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2021 filed with the SEC on March 15, 2022.
Comparison of the Years Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the years ended December 31, 2022 and 2021:
License revenue
Research and development expenses
General and administrative expenses
Total other expense
Years Ended December 31,
2022
2021
(in thousands)
Change
$
— $
346 $
13,888
14,006
(1,241)
11,146
17,547
(320)
(346)
2,742
(3,541)
(921)
License revenue. License revenue was $0.3 million for the year ended December 31, 2021 and related to revenue recognized under the Enviro
license agreement with no corresponding revenue in the comparable period in 2022.
Research and development expenses. Research and development expenses were $13.9 million and $11.1 million for the years ended
December 31, 2022 and 2021, respectively. The increase of $2.7 million was primarily due to the continued enrollment of the ENVASARC trial. We expect
research and development expenses to continue to increase in future periods primarily due to our continued enrollment of the ENVASARC trial and Phase
1/2 clinical trial of YH001 in combination with envafolimab in certain sarcoma subtypes.
General and administrative expenses. General and administrative expenses were $14.0 million and $17.5 million for the years ended
December 31, 2022 and 2021, respectively. The decrease of $3.5 million was primarily due to legal expenses incurred in 2021 in connection with the
arbitration proceeding of our dispute with I-Mab regarding the TJ004309 Agreement and Bispecific Agreement. We expect continued decreases from legal
expenses in future periods as we and I-Mab submitted our arbitration post-hearing briefs in May 2022. However, there may be increases to the extent we
must expend additional legal fees in connection with enforcing and collecting any arbitration award from I-Mab.
Other expense. Other expense was $1.2 million and $0.3 million for the years ended December 31, 2022 and 2021, respectively. The increase of $0.9
million was primarily due to noncash interest expense incurred associated with the RGC Loan Agreement and the impairment of our investment in a
privately held company which was received as partial consideration under the 2021 Enviro license agreement.
83
Liquidity and Capital Resources
Our sources of cash liquidity include our cash and cash equivalents. We believe that our cash and cash equivalents as of December 31, 2022 will be
sufficient to fund the current requirements of working capital and other financial commitments, including our long-term debt and operating lease
obligations, into mid-2023. Based on our current business plan, we believe that there is substantial doubt as to whether our existing cash and cash
equivalents will be sufficient to meet our obligations as they become due within one year from the date the consolidated financial statements are issued.
We may fund our future liquidity needs by selling shares of our common stock under our existing Capital on DemandTM sales agreement with
JonesTrading Institutional Services LLC (JonesTrading). In addition, we periodically consider various other financing alternatives, including debt
financings, in order to meet our liquidity needs and may, from time to time, seek to take advantage of favorable interest rate environments, if any, or other
market conditions.
We have incurred losses and negative cash flows from operations since our inception. As of December 31, 2022, we had an accumulated deficit of
$236.9 million, and we expect to continue to incur net losses for the foreseeable future. We expect our current level of research and development expenses
to increase in 2023 primarily due to the continued enrollment of the ENVASARC trial and Phase 1/2 clinical trial of YH001 in combination with
envafolimab in certain sarcoma subtypes. Given we do not anticipate any revenues from product sales in the foreseeable future, we will need additional
capital to fund our operations, which we may seek to obtain through one or more equity offerings, debt financings, government or other third-party funding,
and licensing or collaboration arrangements.
As of the date of this Annual Report, the TJ004309 Agreement and Bispecific Agreement dispute with I-Mab remain under consideration by the
Tribunal, and we expect their final decision in the first quarter of 2023. The claims under the arbitration are complex; accordingly, we cannot predict the
outcome of the arbitration, and we are unable to estimate the amount of recovery or damages, if any, that may be awarded by the Tribunal. If the Tribunal
does decide to award us certain amounts in the arbitration and we were able to recover some or all of that award, such award and subsequent recovery may
materially increase our liquidity.
Arbitration Financing Investment Agreement
In December 2022, we entered into a non-recourse financing agreement (the Investment Agreement) with certain investors (collectively the
Investors) pursuant to which the Investors will pay us a maximum aggregate amount (Maximum Capital) equal to $30.0 million or a lesser amount based
on the amount awarded (Award), if any, to us in connection with our ongoing arbitration proceeding with I-Mab (the Arbitration). Of the Maximum Capital,
(i) $3.5 million (Initial Capital) was paid to us shortly after execution, (ii) 25% will be paid to us within 15 business days of issuance of an Award, subject
to the Award size exceeding a prespecified threshold and satisfaction of other conditions set forth in the Investment Agreement, and (iii) the remainder will
be paid to us in tranches over a multi-year period, subject again to the Award size exceeding a prespecified threshold and satisfaction of other conditions set
forth in the Investment Agreement.
Subject to and contingent on our actual recovery of proceeds from an Award or any contemporaneously resolved settlements with I-Mab and
following the payment of applicable attorney’s fees (the Proceeds), we shall pay the Investors an amount (Repayment Amount) equal to the sum of (i) all
amounts paid by the Investors to or on behalf of us pursuant to the Investment Agreement, plus (ii) a low sub-single digit to low single digit multiple
calculated on each tranche of Maximum Capital actually paid by the Investors to or on behalf of us with the applicable multiple being based on the timing
of payment from us and whether certain events relating to the Arbitration occur, plus (iii) a mid-teen percentage annual rate of return on the amounts set
forth in clauses (i) and (ii) that begins to accrue if the amounts are not paid by us to the Investors within a multi-month period specified in the Investment
Agreement. If the amount of Proceeds are less than the Repayment Amount, then we shall only be required to pay to the Investors the Proceeds recovered
(other than in circumstances in which we accept a settlement offer that resolves the Arbitration for an amount less than the Repayment Amount without the
prior written consent of the Investors), and in the circumstance in which there are no Proceeds then we shall not be required to pay the Investors any
Repayment Amounts and the Investors shall have no right of recourse or right of action against us.
The Investment Agreement contains customary representations, warranties and covenants and also includes customary events of default, including
payment defaults, breaches of representations or covenants and a bankruptcy default. The Investment Agreement also contains customary covenants that
require us to, among other things, (i) use commercially reasonable efforts to pursue its claims in connection with the Arbitration and recover amounts
awarded to it in connection with an Award, (ii) pay costs and expenses in connection with enforcing an Award, (iii) keep the Investors informed regarding
the Arbitration and its collection and enforcement efforts and (iv) not incur liens (other than permitted liens) on or transfer any portion of its assets related
to its claims in connection with the Arbitration, any Award, the Proceeds and related assets.
84
We may terminate the obligation of the Investors to pay all or certain tranches of the Maximum Capital by providing advance written notice to the
Investors as set forth in the Investment Agreement. If we fail to pay amounts owed to the Investors when due, such overdue amounts bear interest at a
default rate set forth in the Investment Agreement. Upon certain remedy events, including our breach of the Investment Agreement, the Investors may
exercise all of their rights and remedies as set forth in the Investment Agreement and under applicable law, including, without limitation, termination of
their obligations to pay additional amounts under the Investment Agreement. Pursuant to the Investment Agreement, we will also grant to the Investors a
security interest in our interest in our claims in connection with the Arbitration, any Award, the Proceeds and related assets (Specific Collateral), as further
described in the Investment Agreement, as security for the payment of our obligations under the Investment Agreement.
As of December 31, 2022, the $3.5 million Initial Capital was funded. The arbitration financing arrangement is a non-recourse financing agreement
whereby repayment of all capital amounts funded under the Investment Agreement, including the Initial Capital, and the amount that which is required to
be repaid is contingent upon our actual recovery of proceeds from an Award. In the event in which there is no recovery of proceeds from an Award, we are
not required to repay the $3.5 million Initial Capital.
Runway Growth Finance Corp. Loan and Security Agreement
In September 2022, as amended December 2022, we entered into a loan and security agreement (the RGC Loan Agreement) with Runway Growth
Finance Corp. (RGC or the Lender) that provides a term loan commitment in an aggregate principal amount of up to $35.0 million in three tranches: (i) a
Term A loan in an aggregate principal amount of $10.0 million, with the full amount funded on the closing of the RGC Loan Agreement and repaid in
January 2023 in connection with the execution of our arbitration financing arrangement; (ii) a Term B loan in an aggregate principal amount of up to $15.0
million to be funded in one or more disbursements at our request on or prior to June 30, 2024, subject to certain conditions being met; and (iii) a Term C
loan in an aggregate principal amount of up to $10.0 million that may be disbursed in a single disbursement in the lender’s sole discretion upon our request
at any time from closing of the RGC Loan Agreement through and including December 31, 2024. Pursuant to the December 2022 amendment (the RGC
Loan Amendment): (i) we repaid all amounts of principal and accrued but unpaid interest in respect of the Term A Loan (as defined in the RGC Loan
Agreement) on January 3, 2023 without the obligation for us to pay the final payment fee or the prepayment fee described in the RGC Loan Agreement; (ii)
on or before March 31, 2023, at our request, if we have raised at least $25.0 million in net cash proceeds from certain equity or debt transactions (including
amounts raised in connection with our arbitration financing arrangement) prior to making such request, Lender will loan to us an aggregate principal
amount of $10.0 million, with the full amount funded in a single disbursement; (iii) we will not issue an additional warrant to Lender in connection with the
loan, if any, described in clause (ii) above; and (iv) Lender’s security interest in specific collateral will be subordinated to the arbitration financing
investors’ security interest in the specific collateral. If the loan described in clause (ii) above is not made by March 31, 2023, the RGC Loan Agreement
will terminate on that date, and we will not be obligated to pay the prepayment fee described in the RGC Loan Agreement but the final payment fee
described in the RCG Loan Agreement will become immediately due and payable.
Borrowings under the term loan facility bear interest at a variable annual rate equal to the sum of (i) the greater of (a) the rate of interest noted in
The Wall Street Journal, Money Rates section, as the “Prime Rate” or (b) 3.5%, plus (ii) 5.0%. We are obligated to make interest-only payments monthly in
arrears through and including September 30, 2024 and thereafter monthly payments in arrears through the maturity date of September 1, 2026 equal to
1/24th of all outstanding principal plus accrued and unpaid interest.
We were obligated to pay a closing fee in the amount of (i) $50,000, which was paid upon the funding of the Term A loan, and (ii) an amount equal
to 0.50% of the Term B loan and the Term C loan advanced to us , if any, due and payable on the applicable funding date of such Term B loan and Term C
loan.
We are also obligated to pay a final payment fee equal to 4.25% of the aggregate principal amount of the funded term loans at the earlier to occur of
(i) the maturity date, (ii) acceleration of the term loans and (iii) prepayment under the RGC Loan Agreement.
We have the option to prepay all, but not less than all, of the amounts of outstanding principal, accrued and unpaid interest and any other amounts
due and payable under the RGC Loan Agreement, including a final payment fee. If we exercise our right to prepay the term loan(s) prior to the maturity
date, we are obligated to pay a prepayment fee equal to (a) 3.0% of the outstanding principal amount of the applicable term loan(s) prepaid at the time of
such prepayment if it occurs on or prior to the first anniversary date, (b) 2.0% of the outstanding principal amount of the applicable term loan(s) prepaid at
the time of such prepayment if it occurs after the first anniversary date but on or prior to the second anniversary date and (c) 1.0% of the outstanding
principal amount of the applicable term loan(s) prepaid at the time of such prepayment if it occurs after the second anniversary date but prior to the
maturity date.
85
Our obligations under the RGC Loan Agreement are collateralized by a first priority security interest in substantially all of our assets other than our
intellectual property. The RGC Loan Agreement also contains customary representations, warranties and covenants that limit, among other things, our
ability to (i) incur indebtedness, (ii) incur liens on our property, (iii) pay dividends or make other distributions, (iv) sell our assets, (v) make certain loans or
investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain indebtedness and (viii) enter into transactions with affiliates, in each case
subject to certain exceptions. Upon the occurrence and during the continuance of an event of default, a default interest rate of an additional 5.0% per annum
may be applied to the outstanding loan balances, and the lender may declare all outstanding obligations immediately due and payable and exercise all of its
rights and remedies as set forth in the RGC Loan Agreement and under applicable law, including, without limitation, termination of its obligations to
extend credit to us. The RGC Loan Agreement contains customary representations, warranties and covenants, including financial covenants, and also
includes customary events of default, including payment defaults, breaches of covenants, change in control and a material adverse effect default.
In connection with the funding of the Term A loan, we issued Runway Growth Finance Corp. warrants to purchase 150,753 shares of our common
stock (the RGC Term A Warrants) at an exercise price of $1.99 per underlying share of our common stock. The RGC Term A Warrants are fully exercisable
in whole or in part at the option of the holder, payable in cash or on a cashless basis according to the formula set forth in the RGC Term A Warrants, and
expire September 2, 2032. In addition, in connection with the RGC Loan Agreement, additional warrants will be issued upon funding of the other term loan
tranches, if any.
As of December 31, 2022, the total outstanding balance owed under the RGC Loan Agreement was $10.0 million and pursuant the December 2022
RGC Loan Amendment, future minimum principal and interest payments, including the final payment fee, were $10.5 million for each of the next 12 and
24 months, respectively.
Registered Direct Offering
In June 2022, we issued and sold 841,989 shares of our common stock at a purchase price of $1.32 per share and pre-funded warrants to purchase
2,205,018 shares of our common stock at a purchase price of $1.31 per share of underlying common stock with an exercise price of $0.01 per share of
underlying common stock (the 2022 Pre-Funded Warrants) for net proceeds of approximately $3.9 million in a registered direct offering (the Offering) with
an accredited institutional healthcare-focused fund. In accordance with their terms, the 2022 Pre-Funded Warrants may not be exercised if the holder’s
ownership of our common stock would exceed 19.99% of the shares of our common stock outstanding immediately after giving effect to such exercise. In
connection with the Offering, we amended two existing pre-funded warrants to purchase shares of our common stock held by the same institutional
healthcare-focused fund to extend the exercise periods and to permit exercise in excess of a similar 19.99% limit following approval of our stockholders of
such exercise.
ATM Facility
In December 2020, as amended in March 2022, we entered into a Capital on DemandTM Sales Agreement (the Sales Agreement) with JonesTrading
pursuant to which we could sell from time to time, at our option, up to an aggregate of $50.0 million of shares of our common stock through JonesTrading,
as sales agent or principal, $45.7 million of which remains available for sale as of December 31, 2022. Sales of our common stock made pursuant to the
Sales Agreement, if any, will be made on the Nasdaq Capital Market under our effective registration statement on Form S-3 subject to limitations on the
amount of securities the Company may sell pursuant to its effective registration statement on Form S-3 within any 12 month period, by means of ordinary
brokers’ transactions at market prices. Additionally, under the terms of the Sales Agreement, we may also sell shares of our common stock through
JonesTrading, on the Nasdaq Capital Market or otherwise, at negotiated prices or at prices related to the prevailing market price. JonesTrading will use its
commercially reasonable efforts to sell our common stock from time to time, based upon our instructions (including any price, time or size limits or other
customary parameters or conditions we may impose). We are required to pay JonesTrading 2.5% of gross proceeds from the common stock sold through
the Sales Agreement.
Operating Lease Obligations
Our operating lease obligations relate to our corporate headquarters in San Diego, California, which expires in April 2027. As of December 31, 2022,
future minimum lease payments under this lease were $0.3 million and $0.7 million for each of the next 12 and 24 months, respectively.
Other Obligations
We enter into contracts in the normal course of business with clinical trial sites and clinical supply manufacturing organizations and with vendors for
preclinical safety and research studies, research supplies and other services and products for operating purposes. These contracts generally provide for
termination on notice, and therefore are cancelable contracts.
86
Cash Flows
The following table summarizes our net cash flow activity for each of the periods set forth below:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Change in cash, cash equivalents, and restricted cash
Years Ended December 31,
2022
2021
(in thousands)
$
$
(26,239)
(17)
19,684
(6,572)
$
$
(22,571)
3,952
10,560
(8,059)
Operating activities. Net cash used in operating activities was $26.2 million and $22.6 million for the years ended December 31, 2022 and 2021,
respectively, and was primarily due to our net loss for the respective year, adjusted for noncash items and offset by changes in our working capital.
Investing activities. Net cash used in investing activities was $17,000 for the year ended December 31, 2022. Net cash provided by investing
activities was $4.0 million for the year ended December 31, 2021 and was due to maturities of short-term investments.
Financing activities. Net cash provided by financing activities was $19.7 million for the year ended December 31, 2022 and primarily resulted from
our $10.0 million debt financing with RGC, $3.4 million in net proceeds from our arbitration financing arrangement, and $7.9 million in net proceeds
received from the Offering and periodic issuances and sales of our common stock under the Sales Agreement with JonesTrading, partially offset by $1.7
million in SVB loan repayments. Net cash provided by financing activities was $10.6 million for the year ended December 31, 2021 and primarily resulted
from $13.4 million in net proceeds raised in connection with an underwritten public offering in July 2021, offset by $2.8 million in net repayments on
borrowings under the 2018 Amended SVB Loan.
Funding Requirements
At December 31, 2022, we had cash and cash equivalents totaling $17.5 million, of which $0.1 million is pledged as collateral for our obligations
under our corporate headquarters facility lease. We believe that our cash and cash equivalents as of December 31, 2022, will be sufficient to fund our
obligations into mid-2023. We will need additional funding to complete the development and commercialization of our product candidates or those of our
partners. In addition, we may evaluate in-licensing and acquisition opportunities to gain access to new product candidates that fit with our strategy. Any
such transaction will likely increase our future funding requirements. These uncertainties raise substantial doubt about our ability to continue as a going
concern for a period of 12 months following the date that the accompanying audited consolidated financial statements were issued.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement
that involves risks and uncertainties, and actual results could vary materially. Our future capital requirements are difficult to forecast and will depend on
many factors, including:
•
•
•
•
•
•
•
•
•
•
our ability to initiate, and the progress and results of, our ongoing and planned clinical trials;
the ability and willingness of our collaboration partners and licensees to continue clinical development of product candidates;
our ability to enter into and maintain our collaborations;
our ability to achieve, and our obligations to make, milestone payments under our collaboration and license agreements;
the outcome of our disputes with I-Mab with respect to the TJ004309 and Bispecific Agreements, our ability to recover any award resulting
from that dispute and the timing of any termination of the TJ004309 Agreement;
the costs and timing of procuring supplies of product candidates for clinical trials and regulatory submissions;
the scope, progress, results and costs of preclinical development, and clinical trials of our product candidates;
the extent to which macroeconomic and geopolitical developments, including as a result of the COVID-19 pandemic, delay our clinical
development activities or those of our collaborators;
the costs, timing and outcome of regulatory review of product candidates;
the revenue, if any, received from commercial sales of our product candidates for which we or any of our partners, including Eucure and
Biocytogen, 3D Medicines and Alphamab, and I-Mab, may receive marketing approval;
87
•
•
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and
defending any intellectual property-related claims;
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any
product candidates for which we receive marketing approval and do not partner for commercialization; and
the extent to which we acquire or in-license other products and technologies.
Until we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity offerings, debt
financings, collaborations, and licensing arrangements. There can be no assurance that additional funds will be available when needed from any source or,
if available, will be available on terms that are acceptable to us. As a result of macroeconomic and geopolitical developments, such as the COVID-19
pandemic and actions taken to slow its spread, the ongoing military conflict between Ukraine and Russia, actual or anticipated changes in interest rates,
economic inflation and the responses by central banking authorities to control such inflation, the global credit and financial markets have experienced
extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or
equity financing more difficult, more costly and more dilutive. Even if we raise additional capital, we may also be required to modify, delay or abandon
some of our plans or programs which could have a material adverse effect on our business, operating results and financial condition and our ability to
achieve our intended business objectives. Any of these actions could materially harm our business, results of operations and future prospects.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Financial Statements and Supplementary Data.
88
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
TRACON Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TRACON Pharmaceuticals, Inc. (the Company) as of December 31, 2022 and 2021, the
related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31,
2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has stated that substantial doubt exists
about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding
these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
Clinical Trial Expense Accruals
Description of the
Matter
During 2022, the Company incurred $13.9 million for research and development expense and as of December 31, 2022, the
Company accrued $6.1 million for clinical trial expenses. As described in Note 1 of the financial statements, the Company
records accruals for estimated research and development costs relating to clinical trials comprising payments for work
performed by third party vendors and consultants, participating clinical trial sites, and others. The Company accounts for the
expenses based upon the progress of the clinical trial as measured by patient progression through the trial.
Auditing the Company’s accounting for clinical trial expense accruals was especially challenging as evaluating the progress or
patient progression through the clinical trials is dependent upon a high volume of data which is tracked in spreadsheets.
89
How We Addressed the
Matter in Our Audit
To test the completeness of the Company’s accrued clinical trial expenses, among other procedures, we obtained supporting
evidence of the research and development activities performed for significant clinical trials. We inquired of internal clinical
trial project managers to understand the status of significant clinical trial activities. To assess the appropriate measurement of
accrued clinical trial costs, our audit procedures included, among others, obtaining and inspecting significant agreements and
agreement amendments, evaluating the Company’s documentation of key milestones and completion terms, activities, timing,
and costs of clinical trials, and testing a sample of transactions by comparing the costs against related invoices and contracts.
We also tested a sample of subsequent payments by agreeing the invoice to the original accrual and the invoice payments to
bank statements.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
San Diego, California
March 8, 2023
90
TRACON Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Prepaid and other assets
Total current assets
Property and equipment, net
Restricted cash
Other assets
Total assets
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses
Accrued compensation and related expenses
Long-term debt, current portion
Total current liabilities
Other long-term liabilities
Arbitration financing payable
Commitments and contingencies (Note 5)
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value, authorized shares — 10,000,000 at
December 31, 2022 and December 31, 2021; issued and outstanding
shares — none
Common stock, $0.001 par value; authorized shares — 40,000,000 at
December 31, 2022 and December 31, 2021; issued and outstanding shares —
23,125,250 and 19,445,903 at December 31, 2022 and December 31, 2021,
respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ equity (deficit)
See accompanying notes.
91
December 31,
2022
2021
$
$
$
$
$
$
17,433
795
18,228
51
67
1,123
19,469
11,107
1,457
9,807
22,371
969
3,280
24,072
864
24,936
50
—
1,571
26,557
10,753
1,532
1,391
13,676
1,167
—
—
—
23
229,737
(236,911)
(7,151)
19,469
$
19
219,471
(207,776)
11,714
26,557
$
TRACON Pharmaceuticals, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
License revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other expense:
Interest expense, net
Other expense
Total other expense
Net loss
Net loss per share, basic and diluted
Weighted-average shares outstanding, basic and diluted
2022
Years Ended December 31,
2021
2020
$
—
$
346 $
—
13,888
14,006
27,894
(27,894)
(994)
(247)
(1,241)
(29,135)
$
11,146
17,547
28,693
(28,347)
(318)
(2)
(320)
(28,667) $
8,198
8,025
16,223
(16,223)
(545)
(7)
(552)
(16,775)
(1.39)
$
(1.66) $
20,919,118
17,252,637
(1.87)
8,984,148
$
$
See accompanying notes.
92
TRACON Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share data)
Additional
Total
Stockholders’
Equity (Deficit)
Balance at December 31, 2019
Issuance of common stock under equity plans
Stock-based compensation expense
Issuance of common stock and warrants, net of offering costs
Issuance of common stock in exchange for services
Net loss
Balance at December 31, 2020
Issuance of common stock under equity plans
Stock-based compensation expense
Issuance of common stock, net of offering costs
Net loss
Balance at December 31, 2021
Issuance of common stock under equity plans
Stock-based compensation expense
Issuance of common stock and warrants, net of offering costs
Issuance of common stock upon cashless exercise of pre-funded
warrants
Issuance of common stock warrants in connection with debt financing
Net loss
Balance at December 31, 2022
Common Stock
Shares
4,051,187 $
6,628
—
11,320,972
100,000
—
15,478,787
40,414
—
3,926,702
—
19,445,903
56,261
—
3,232,418
390,668
—
—
23,125,250 $
Amount
4 $
—
—
11
—
—
15
—
—
4
—
19
—
—
3
1
—
—
23 $
Paid-in
Capital
165,028 $
2
1,034
37,976
126
—
204,166
149
1,775
13,381
—
219,471
95
2,041
7,871
Accumulated
Deficit
(162,334) $
—
—
—
—
(16,775)
(179,109)
—
—
—
(28,667)
(207,776)
—
—
—
—
259
—
229,737 $
—
—
(29,135)
(236,911) $
2,698
2
1,034
37,987
126
(16,775)
25,072
149
1,775
13,385
(28,667)
11,714
95
2,041
7,874
1
259
(29,135)
(7,151)
See accompanying notes.
93
TRACON Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation
Common stock issued for services
Depreciation and amortization
Noncash interest
Amortization of debt discount
Amortization of premium/discount on short-term investments
Lease asset amortization and liability accretion, net
Equity ownership license revenue
Impairment of private company equity ownership
Changes in assets and liabilities:
Prepaid expenses and other assets
Accounts payable and accrued expenses
Accrued compensation and related expenses
Net cash used in operating activities
Cash flows from investing activities
Purchase of property and equipment
Purchases of available-for-sale short-term investments
Proceeds from the maturity of available-for-sale short-term investments
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from arbitration financing
Proceeds from sale of common stock and warrants, net of offering costs
Proceeds from issuance of common stock under equity plans, net of tax withholdings
Net cash provided by financing activities
Change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosure of cash flow information
Interest paid
Supplemental schedule of noncash investing and financing activities
Issuance of common stock warrants in connection with long-term debt
See accompanying notes.
94
2022
Years Ended December 31,
2021
2020
$
(29,135)
$ (28,667)
$
(16,775)
2,041
—
16
343
435
—
54
—
246
1,775
—
14
61
21
(1)
(73)
(246)
—
69
(233)
(75)
(26,239)
(80)
4,683
(58)
(22,571)
(17)
—
—
(17)
9,960
(1,680)
3,430
7,879
95
19,684
(6,572)
24,072
17,500
(48)
—
4,000
3,952
—
(2,800)
—
13,211
149
10,560
(8,059)
32,131
$ 24,072
1,034
126
12
123
43
(1)
(25)
—
—
64
(1,878)
235
(17,042)
(5)
(3,998)
—
(4,003)
—
(1,400)
—
38,162
2
36,764
15,719
16,412
32,131
$
359
$
266
$
443
259
$
—
$
—
$
$
$
TRACON Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and Business
TRACON Pharmaceuticals, Inc. (TRACON or the Company) was incorporated in the state of Delaware on October 28, 2004. TRACON is a
biopharmaceutical company focused on the development and commercialization of novel targeted therapeutics for cancer, and utilizes its cost efficient,
contract research organization (CRO) independent product development platform to partner with other life science companies to develop and
commercialize innovative products in the United States.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, TRACON Pharma Limited and
TRACON Pharma International Limited, which were formed in September 2015 and January 2019, respectively, and are currently inactive. All significant
intercompany accounts and transactions have been eliminated.
Basis of Presentation
As of December 31, 2022, the Company has devoted substantially all its efforts to product development, raising capital, and building infrastructure
and has not realized revenues from its planned principal operations. The Company has incurred operating losses since inception. As of December 31, 2022,
the Company had an accumulated deficit of $236.9 million. The Company anticipates that it will continue to incur net losses into the foreseeable future as it
continues the development and commercialization of its product candidates and works to develop additional product candidates through research and
development programs. At December 31, 2022, the Company had cash and cash equivalents of $17.5 million, of which $0.1 million is classified as
restricted cash as it is pledged as collateral for the Company’s obligations under its corporate headquarters facility lease. Based on the Company’s current
business plan, management believes that there is substantial doubt as to whether existing cash and cash equivalents will be sufficient to meet its obligations
as they become due within twelve months from the date the consolidated financial statements are issued. The Company’s ability to execute its operating
plan through 2023 and beyond depends on its ability to obtain additional funding through equity offerings, debt financings, or potential licensing and
collaboration arrangements. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going
concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. However, the Company’s current
working capital, anticipated operating expenses and net losses, and the uncertainties surrounding its ability to raise additional capital as needed, as
discussed below, raise substantial doubt about its ability to continue as a going concern for a period of one year following the date that these consolidated
financial statements are issued. The consolidated financial statements do not include any adjustments for the recovery and classification of assets or the
amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company plans to continue to fund its losses from operations through its existing cash and cash equivalents, as well as through future equity
offerings, debt financings, other third-party funding, and potential licensing or collaboration arrangements. In addition, the Company may fund its losses
from operations through the Capital on DemandTM Sales Agreement (the Sales Agreement) the Company entered into with JonesTrading in December
2020, as amended in March 2022, pursuant to which the Company may sell, at its option, up to an aggregate of $50.0 million of the Company’s common
stock, $45.7 million of which remained available for sale as of December 31, 2022. There can be no assurance that additional funds will be available when
needed from any source or, if available, will be available on terms that are acceptable to the Company. As a result of the COVID-19 pandemic and actions
taken to slow its spread, as well as adverse macroeconomic and geopolitical developments, such as the ongoing military conflict between Ukraine and
Russia, actual or anticipated changes in interest rates, economic inflation and the responses by central banking authorities to control such inflation, the
global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in
consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit
markets deteriorate in the future, it may make any additional debt or equity financing more difficult, more costly, and more dilutive. Even if the Company
raises additional capital, it may also be required to modify, delay or abandon some of its plans, which could have a material adverse effect on the
Company’s business, operating results and financial condition, and the Company’s ability to achieve its intended business objectives. Any of these actions
could materially harm the Company’s business, results of operations, and future prospects.
95
Risks and Uncertainties
COVID-19, a novel strain of coronavirus (together with its variants, COVID-19), has become a global pandemic. The impact of this pandemic has
been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to
the global economy, as well as businesses and capital markets around the world. While vaccines have become widely available in certain countries, and
businesses and economies have reopened, the status of global economic recovery remains uncertain and unpredictable, and will continue to be impacted by
developments in the pandemic including any subsequent waves of outbreak or new variant strains of the COVID-19 virus which may require re-closures or
other preventative measures. The COVID-19 pandemic may also have long-term effects on the nature of the office environment and remote working, which
may present risks for the Company’s strategy, operational, talent recruiting and retention, and workplace culture.
In addition to the ongoing COVID-19 pandemic, global economic and business activities continue to face widespread macroeconomic uncertainties,
including labor shortages, inflation and monetary supply shifts, recession risks and potential disruptions from the Russia-Ukraine conflict. The Company
continues to actively monitor the impact of these macroeconomic factors on its financial condition, liquidity, operations, and workforce. The extent of the
impact of these factors on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the
expected time frame, will depend on future developments, which are uncertain and cannot be predicted; however, any continued or renewed disruption
resulting from these factors could negatively impact the Company’s business.
Use of Estimates
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States
(GAAP). The preparation of the Company’s consolidated financial statements requires it to make estimates and assumptions that impact the reported
amounts of assets, liabilities, revenue, and expenses. The most significant estimates in the Company’s consolidated financial statements relate to expenses
incurred for clinical trials. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future,
actual results may ultimately materially differ from these estimates and assumptions. The Company is not aware of any specific event or circumstance that
would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of the date
of this filing.
Restricted Cash
Restricted cash consists of money market funds held by the Company’s financial institution as collateral for the Company’s obligations under its
facility lease for the Company’s corporate headquarters in San Diego, California.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less at the date of purchase. The
carrying amounts approximate fair value due to the short maturities of these investments. Cash and cash equivalents include cash in readily available
checking and money market funds.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.
The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any
losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository
institutions in which those deposits are held.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the related assets, which is
generally five years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the related assets. Repairs and
maintenance costs are charged to expense as incurred.
96
Leases
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are
recorded as other assets, accounts payable and accrued expenses, and other long-term liabilities within the consolidated balance sheet. The Company
currently does not have any finance leases.
Operating lease right-of-use (ROU) assets and operating lease liabilities are recognized based on the present value of the future minimum lease
payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before
the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the
commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. Lease terms may include options
to extend or terminate when the Company is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over
the lease term.
Revenue Recognition
To date, substantially all the Company’s revenue has been derived from license agreements. The terms of these arrangements included payments to
the Company for the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for
manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products. In accordance
with Accounting Standards Codification 606, Revenue from Contracts with Customers, (ASC 606) the Company performs the following five steps in
determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (i) identification of the
contract(s) with a customer; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in
the context of the contract; (iii) measurement of the transaction price, including any constraint on variable consideration; (iv) allocation of the transaction
price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation. The Company only
applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or
services transferred to the customer. Once a contract is determined to be within the scope of ASC 606, at contract inception, the Company assesses the
goods or services promised within the contract to determine those that are performance obligations and assesses whether each promised good is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when, or as, the
performance obligation is satisfied.
As part of the accounting for these arrangements, the Company develops assumptions that require judgment to determine the stand-alone selling
price for each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may
include development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success.
Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance
obligations identified in the arrangement, the Company recognizes revenues allocated to the license when the license is transferred to the customer and the
customer is able to use and benefit from the license. For licenses that are bundled with other promised goods or services, the Company utilizes judgment to
assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in
time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress
each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments: At the inception of each arrangement that includes development, commercialization, and regulatory milestone payments, the
Company evaluates whether the achievement of the milestones is considered probable and estimates the amount to be included in the transaction price
using the most likely amount method. Performance milestone payments represent a form of variable consideration. If it is probable that a significant
revenue reversal would not occur, the associated milestone value is included in the transaction price. Achievement of milestones that are not within the
control of the Company or the licensee, such as regulatory approvals, are not considered probable until the approvals are achieved. The transaction price is
then allocated to each performance obligation on a relative stand-alone selling price basis and the Company recognizes revenue as or when the performance
obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achieving such
milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a
cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
97
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical
development or commercial supply at the customer’s discretion are generally considered options. The Company assesses if these options provide a material
right to the licensee and if so, they are accounted for as separate performance obligations at the outset of the arrangement.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed
to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the
performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not
recognized any royalty revenue resulting from any of its out-licensing arrangements.
The Company receives payments from its collaborators based on billing schedules established in each contract. Up-front and other payments may
require deferral of revenue recognition to a future period until the Company performs its obligations under its collaboration arrangements. Amounts are
recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a
significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the
promised goods or services to the customer will be one year or less.
Clinical Trial Expense Accruals
As part of the process of preparing the Company’s financial statements, the Company is required to estimate expenses resulting from its obligations
under contracts with vendors, clinical sites, and consultants in connection with conducting clinical trials. The financial terms of these contracts vary and
may result in payment flows that do not match the periods over which materials or services are provided under such contracts.
The Company’s objective is to reflect the appropriate trial expenses in its consolidated financial statements by recording those expenses in the period
in which services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the clinical trial as
measured by patient progression and the timing of various aspects of the trial. The Company determines accrual estimates through discussion with the
clinical sites and applicable personnel and outside service providers as to the progress or state of consummation of trials. During a clinical trial, the
Company adjusts the clinical expense recognition if actual results differ from its estimates. The Company makes estimates of accrued expenses as of each
balance sheet date based on the facts and circumstances known at that time. The Company’s clinical trial accruals are dependent upon accurate reporting by
clinical sites and other third-party vendors. Although the Company does not expect its estimates to differ materially from amounts actually incurred, its
understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in
reporting amounts that are too high or too low for any particular period. For each of the three years in the period ended December 31, 2022, there were no
material adjustments to the Company’s prior period estimates of accrued expenses for clinical trials.
Research and Development Costs
Research and development costs, including license fees, are expensed as incurred.
Patent Costs
Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since
recoverability of such expenditures is uncertain.
Stock-Based Compensation
Stock-based compensation expense represents the grant date fair value of employee stock option grants, employee restricted stock unit grants
(RSUs), and employee stock purchase plan (ESPP) rights recognized as expense over the requisite service period of the awards (usually the vesting period)
on a straight-line basis. The Company estimates the fair value of stock option grants and ESPP rights using the Black-Scholes option pricing model. The
fair value of RSUs is based on the closing sales price for such stock on the date of grant. Equity award forfeitures are recorded as they occur.
98
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are
determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as
income in the period that includes the enactment date.
The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In
making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary
differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would
be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax
asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than
not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-
than‑not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate
settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense.
Any accrued interest and penalties are included within the related tax liability.
Comprehensive Loss
Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources.
Net loss and comprehensive loss were the same for all periods presented.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average shares of common stock outstanding for the period, without
consideration for common stock equivalents and adjusted for the weighted average number of shares of common stock outstanding that are subject to
repurchase. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common stock equivalents outstanding for
the period determined using the treasury-stock method. For all periods presented, there is no difference in the number of shares used to calculate basic and
diluted shares outstanding due to the Company’s net loss position.
Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in
common stock equivalent shares):
Warrants to purchase common stock
Common stock options
ESPP shares
Segment Reporting
2022
6,766,246
2,246,310
3,387
9,015,943
December 31,
2021
4,810,409
1,308,360
3,258
6,122,027
2020
4,810,409
601,481
5,349
5,417,239
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by
the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and
manages its business in one operating segment.
99
2. Financial Instruments and Fair Value Measurements
Cash equivalents, which are classified as equity securities, and restricted cash consisted of the following (in thousands):
December 31, 2022
Unrealized
Gain
Unrealized
(Loss)
Cost
Estimated Fair
Value
December 31, 2021
Unrealized
(Loss)
Unrealized
Gain
Estimated Fair
Value
Money market funds
Equity securities(1)
Classified as:
Cash equivalents
Restricted cash
Other assets
$ 10,150 $
—
$ 10,150 $
— $
—
— $
— $
—
— $
$
Cost
10,150 $ 5,003 $
246
10,150 $ 5,249 $
—
10,083
67
—
— $
—
— $
— $
—
— $
$
5,003
246
5,249
5,003
—
246
Total cash equivalents, restricted cash,
and other assets
$
10,150
$
5,249
(1) The Company’s equity securities included in other assets as of December 31, 2021 consisted of its investment in a privately held company obtained as
partial consideration under the 2021 Enviro license agreement. The Company recognizes its private company equity securities at cost minus impairments,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The $0.2
million investment was fully impaired during the year ended December 31, 2022 and recorded within other expense on the consolidated statements of
operations.
The Company had no short-term investments at December 31, 2022 and 2021. The Company classifies all investments as available-for-sale
securities, as the sale of such investments may be required prior to maturity to implement management strategies. These investments are carried at
amortized cost which approximates fair value. A decline in the market value of any short-term investment below cost that is determined to be other-than-
temporary will result in a revaluation of its carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is
established. No such impairment charges were recorded for any period presented.
Realized gains and losses from the sale of short-term investments, if any, are determined on a specific identification basis. Realized gains and losses
and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense on the consolidated
statements of operations. Realized and unrealized gains and losses during the periods presented were immaterial. Premiums and discounts are amortized or
accreted over the life of the related security as an adjustment to yield using the straight-line method and are included in interest income on the consolidated
statements of operations. Interest and dividends on securities classified as available-for-sale are included in interest income on the consolidated statements
of operations.
The carrying amounts of cash and cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be
representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the
Company for loans with similar terms, which is considered a Level 2 input, the Company believes that the fair value of long-term debt approximates its
carrying value.
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering
such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1:
Observable inputs such as quoted prices in active markets.
Level 2:
Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements.
100
None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have
occurred during the periods presented.
The fair values of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were determined using the following
inputs (in thousands):
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Fair Value Measurements at
Reporting Date Using
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
10,150 $
— $
10,150 $
5,003 $
— $
5,003 $
—
—
Total
$
$
At December 31, 2022
Money market funds
At December 31, 2021
Money market funds
3. Balance Sheet Details
Property and Equipment
Property and equipment consisted of the following (in thousands):
Computer and office equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
December 31,
2022
2021
$
$
203
19
21
243
(192)
51
$
$
186
19
21
226
(176)
50
Depreciation expense related to property and equipment totaled approximately $16,000, $14,000 and $12,000 for the years ended
December 31, 2022, 2021 and 2020, respectively.
Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
Accounts payable
Accrued clinical related expenses
Accrued legal and accounting
Accrued long-term debt terminal interest
Current portion of operating lease liability
Other accruals
101
December 31,
2022
2021
3,923
6,091
299
425
198
171
11,107
$
$
4,943
4,461
842
280
147
80
10,753
$
$
4. Long-Term Debt
Arbitration Financing Investment Agreement
In December 2022, the Company entered into a non-recourse financing agreement (the Investment Agreement) with certain investors (collectively
the Investors) pursuant to which the Investors will pay the Company a maximum aggregate amount (Maximum Capital) equal to $30.0 million or a lesser
amount based on the amount awarded (Award), if any, to the Company in connection with its ongoing arbitration proceeding (the Arbitration) with I-Mab
Biopharma (I-Mab). Of the Maximum Capital, (i) $3.5 million (Initial Capital) was paid to the Company shortly after execution, (ii) 25% will be paid to the
Company within 15 business days of issuance of an Award, subject to the Award size exceeding a prespecified threshold and satisfaction of other
conditions set forth in the Investment Agreement, and (iii) the remainder will be paid to the Company in tranches over a multi-year period, subject to the
issuance of an Award and the Award size exceeding a prespecified threshold and satisfaction of other conditions set forth in the Investment Agreement. In
connection with the execution of the Investment Agreement and funding of the Initial Capital amount, the Company paid a closing fee in the amount of 2%.
Subject to and contingent on the Company’s actual recovery of proceeds from an Award or any contemporaneously resolved settlements with I-Mab
and following the payment of applicable attorney’s fees (the Proceeds), the Company shall pay the Investors an amount (Repayment Amount) equal to the
sum of (i) all amounts paid by the Investors to or on behalf of the Company pursuant to the Investment Agreement, plus (ii) a low sub-single digit to low
single digit multiple calculated on each tranche of Maximum Capital actually paid by the Investors to or on behalf of the Company with the applicable
multiple being based on the timing of payment from the Company and whether certain events relating to the Arbitration occur, plus (iii) a mid-teen
percentage annual rate of return on the amounts set forth in clauses (i) and (ii) that begins to accrue if the amounts are not paid by the Company to the
Investors within a multi-month period specified in the Investment Agreement. If the amount of Proceeds are less than the Repayment Amount, then the
Company shall only be required to pay to the Investors the Proceeds recovered (other than in circumstances in which the Company accepts a settlement
offer that resolves the Arbitration for an amount less than the Repayment Amount without the prior written consent of the Investors), and in the
circumstance in which there are no Proceeds then the Company shall not be required to pay the Investors any Repayment Amounts and the Investors shall
have no right of recourse or right of action against the Company.
The Investment Agreement contains customary representations, warranties and covenants and also includes customary events of default, including
payment defaults, breaches of representations or covenants and a bankruptcy default. The Investment Agreement also contains customary covenants that
require the Company to, among other things, (i) use commercially reasonable efforts to pursue its claims in connection with the Arbitration and recover
amounts awarded to it in connection with an Award, (ii) pay costs and expenses in connection with enforcing an Award, (iii) keep the Investors informed
regarding the Arbitration and its collection and enforcement efforts and (iv) not incur liens (other than permitted liens) on or transfer any portion of its
assets related to its claims in connection with the Arbitration, any Award, the Proceeds and related assets.
The Company may terminate the obligation of the Investors to pay all or certain tranches of the Maximum Capital by providing advance written
notice to the Investors as set forth in the Investment Agreement. If the Company fails to pay amounts owed to the Investors when due, such overdue
amounts bear interest at a default rate set forth in the Investment Agreement. Upon certain remedy events, including the Company’s breach of the
Investment Agreement, the Investors may exercise all of their rights and remedies as set forth in the Investment Agreement and under applicable law,
including, without limitation, termination of their obligations to pay additional amounts under the Investment Agreement. Pursuant to the Investment
Agreement, the Company will also grant to the Investors a security interest in its interest in its claims in connection with the Arbitration, any Award, the
Proceeds and related assets (Specific Collateral), as further described in the Investment Agreement, as security for the payment of the Company’s
obligations under the Investment Agreement.
In December 2022, the Investors funded the Initial Capital amount of $3.5 million which was recorded as arbitration financing payable on the
consolidated balance sheet. The carrying amount of the arbitration financing payable recorded on the consolidated balance sheet is net of debt discount,
including the Initial Capital closing fee, which is being amortized over the estimated term of the agreement using the effective interest method. Pursuant to
the terms of the Investment Agreement, repayment of all capital amounts funded under the Investment Agreement, including the Initial Capital, and the
obligation amount owed is contingent upon the Company’s actual recovery of proceeds from an Award, which is uncertain. Accordingly, as of December
31, 2022, the Company has estimated an effective interest rate and term of the agreement over which the related debt discount is being amortized. The
Company will re-evaluate this estimate at the end of each subsequent reporting period, with any material changes recorded prospectively using a new
effective interest rate based on the updated estimate of the amount of arbitration financing payable owed as of the end of the reporting period. In the event
in which there is no recovery of proceeds from an Award, the Company is not required to repay the $3.5 million Initial Capital. As of December 31, 2022,
the arbitration financing payable was classified as long-term liabilities as it is considered unlikely the obligation amount owed under the Investment
Agreement will be settled prior to December 31, 2023.
102
Runway Growth Finance Corp. Loan and Security Agreement
In September 2022, the Company entered into a loan and security agreement (the RGC Loan Agreement). with Runway Growth Finance Corp.
(RGC). The RGC Loan Agreement is a long-term debt facility that provides a term loan commitment in an aggregate principal amount of up to $35.0
million in three tranches: (i) a Term A loan in an aggregate principal amount of $10.0 million, with the full amount funded in a single disbursement on
closing of the RGC Loan Agreement and repaid in January 2023 in connection with the Investment Agreement; (ii) a Term B loan in an aggregate principal
amount of up to $15.0 million to be funded in one or more disbursements at the request of the Company on or prior to June 30, 2024, subject to certain
conditions being met; and (iii) a Term C loan in an aggregate principal amount of up to $10.0 million that may be disbursed in a single disbursement in the
lender’s sole discretion upon the Company’s request at any time from closing of the RGC Loan Agreement through and including December 31, 2024. In
December 2022, the Company and RGC amended the RGC Loan Agreement (the RGC Loan Amendment) under which: (i) the Company repaid all
amounts of principal and accrued but unpaid interest in respect of the Term A Loan on January 3, 2023; (ii) on or before March 31, 2023, at the Company’s
request, if the Company has raised at least $25.0 million in net cash proceeds from certain equity or debt transactions (including amounts raised in
connection with the Investment Agreement) prior to making such request, Lender will loan to the Company an aggregate principal amount of $10.0 million,
with the full amount funded in a single disbursement; (iii) the Company will not issue an additional warrant to Lender in connection with the loan, if any,
described in clause (ii) above; and (iv) Lender’s security interest in Specific Collateral was subordinated to the arbitration financing Investors’ security
interest in the Specific Collateral. If the loan described in clause (ii) above is not made by March 31, 2023, the RGC Loan Agreement will terminate on that
date, and the Company will not be obligated to pay the prepayment fee described in the RGC Loan Agreement but the final payment fee described in the
RCG Loan Agreement will become immediately due and payable. All other material terms and conditions of the RGC Loan Agreement remained
unchanged and the transaction was accounted for as a debt modification.
Borrowings under the term loan facility bear interest at a variable annual rate equal to the sum of (i) the greater of (a) the rate of interest noted in
The Wall Street Journal, Money Rates section, as the “Prime Rate” or (b) 3.5%, plus (ii) 5.0%. The Company is obligated to make interest-only payments
monthly in arrears through and including September 30, 2024 and thereafter monthly payments in arrears through the maturity date of September 1, 2026
equal to 1/24th of all outstanding principal plus accrued and unpaid interest.
The Company is obligated to pay a closing fee in the amount of (i) $50,000, which was paid upon the funding of the Term A loan, and (ii) an
amount equal to 0.50% of the Term B loan and the Term C loan advanced to the Company, if any, due and payable on the applicable funding date of such
Term B loan and Term C loan.
The Company is also obligated to pay a final payment fee equal to 4.25% of the aggregate principal amount of the funded term loans at the earlier to
occur of (i) the maturity date, (ii) acceleration of the term loans and (iii) prepayment under the RGC Loan Agreement. The closing fee, other related debt
issuance costs, and the final payment fee were recorded as a component of the total debt discount and will be recognized as interest expense over the term
of the RGC Loan Agreement using the effective interest method.
The Company has the option to prepay all, but not less than all, of the amounts of outstanding principal, accrued and unpaid interest and any other
amounts due and payable under the RGC Loan Agreement, including a final payment fee. If the Company exercises its right to prepay the term loan(s)
prior to the maturity date, it is obligated to pay a prepayment fee equal to (a) 3.0% of the outstanding principal amount of the applicable term loan(s)
prepaid at the time of such prepayment if it occurs on or prior to the first anniversary date, (b) 2.0% of the outstanding principal amount of the applicable
term loan(s) prepaid at the time of such prepayment if it occurs after the first anniversary date but on or prior to the second anniversary date and (c) 1.0% of
the outstanding principal amount of the applicable term loan(s) prepaid at the time of such prepayment if it occurs after the second anniversary date but
prior to the maturity date.
103
The Company’s obligations under the RGC Loan Agreement are collateralized by a first priority security interest in substantially all of its assets
other than the intellectual property of the Company and for Specific Collateral that is subordinated to the arbitration financing Investors’ security interest.
The RGC Loan Agreement also contains customary representations, warranties and covenants that limit, among other things, the ability of the Company to
(i) incur indebtedness, (ii) incur liens on its property, (iii) pay dividends or make other distributions, (iv) sell its assets, (v) make certain loans or
investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain indebtedness and (viii) enter into transactions with affiliates, in each case
subject to certain exceptions. Upon the occurrence and during the continuance of an event of default, a default interest rate of an additional 5.0% per annum
may be applied to the outstanding loan balances, and the lender may declare all outstanding obligations immediately due and payable and exercise all of its
rights and remedies as set forth in the RGC Loan Agreement and under applicable law, including, without limitation, termination of its obligations to
extend credit to the Company. The RGC Loan Agreement contains customary representations, warranties and covenants, including financial covenants, and
also includes customary events of default, including payment defaults, breaches of covenants, change in control and a material adverse effect default. As of
December 31, 2022, the Company was in compliance with all covenants and conditions of the RGC Loan Agreement.
In connection with the funding of the Term A loan, the Company issued Runway Growth Finance Corp. warrants to purchase 150,753 shares of its
common stock (the RGC Term A Warrants) at an exercise price of $1.99 per underlying share of the Company’s common stock. The RGC Term A
Warrants are fully exercisable in whole or in part at the option of the holder, payable in cash or on a cashless basis according to the formula set forth in the
RGC Term A Warrants, and expire September 2, 2032. The fair value of the warrant at the grant date was determined utilizing a Black-Scholes pricing
model, recorded as a component of the total debt discount and stockholders’ equity (deficit) within additional paid-in capital on the consolidated balance
sheets, and will be amortized to interest expense using the effective interest method over the term of the debt.
Long-term debt and unamortized debt discount balances associated with the RGC Loan Agreement entered into in 2022 were as follows (in
thousands):
Long-term debt
Less debt discount, net of current portion
Long-term debt, net of debt discount
Less current portion of long-term debt
Long-term debt, net of current portion
Current portion of long-term debt
Current portion of debt discount
Current portion of long-term debt, net
December 31,
2022
10,000
—
10,000
(10,000)
—
10,000
(193)
9,807
$
$
$
$
As of December 31, 2022, future minimum principal and interest payments, including the final payment, under the RGC Loan Agreement are as
follows (in thousands):
2023
Less interest and final payment
Long-term debt
Silicon Valley Bank Loan and Security Agreement
$
$
10,491
10,491
(491)
10,000
In May 2018, the Company entered into a third amendment to its Amended and Restated Loan and Security Agreement with Silicon Valley Bank
(the 2018 Amended SVB Loan) under which the Company borrowed $7.0 million, all of which was immediately used to repay the Company’s then existing
loan with SVB (the 2017 Amended SVB Loan).
As of December 31, 2021, the total principal amount owed under the 2018 Amended SVB Loan was $1.4 million, net of a remaining unamortized
debt discount balance of $9,000. The 2018 Amended SVB Loan matured in June 2022 and in accordance with its terms, the Company paid a final payment
of $0.3 million associated with the payoff of the 2018 Amended SVB Loan. In August 2022, the Company terminated the Amended and Restated Loan and
Security Agreement with SVB.
104
At December 31, 2022, the Company had the following exercisable outstanding warrants for the purchase of common stock issued in connection
with the Company’s loan agreements with SVB:
November 14, 2023 through June 4, 2024
January 25, 2024
May 3, 2025
Expiration
5. Commitments and Contingencies
License Agreements
Number of shares
3,874
4,669
5,363
13,906
Exercise price
$
$
$
77.40
51.40
26.10
The Company has entered into various license agreements pursuant to which the Company acquired licenses to certain intellectual property. The
agreements generally required an upfront license fee and, in some cases, reimbursement of patent costs. Additionally, under each agreement, the Company
may be required to pay annual maintenance fees, royalties, milestone payments and sublicensing fees. Each license agreement is generally cancelable by
the Company, given appropriate prior written notice. At December 31, 2022, potential future milestone payments under these agreements totaled an
aggregate of $9.6 million.
6. Stockholders’ Equity
Sale of Common Stock and Pre-Funded Warrants
In June 2022, the Company issued and sold 841,989 shares of its common stock at a purchase price of $1.32 per share and pre-funded warrants to
purchase 2,205,018 shares of its common stock at a purchase price of $1.31 per share of underlying common stock with an exercise price of $0.01 per share
of underlying common stock (the 2022 Pre-Funded Warrants) for net proceeds of approximately $3.9 million in a registered direct offering (the Offering)
with an accredited institutional healthcare-focused fund. In accordance with their terms, the 2022 Pre-Funded Warrants may not be exercised if the holder’s
ownership of the Company’s common stock would exceed 19.99% of the shares of the Company’s common stock outstanding immediately after giving
effect to such exercise. The 2022 Pre-Funded Warrants were recorded as a component of stockholders’ equity (deficit) within additional paid-in capital on
the consolidated balance sheets. In connection with the Offering, the Company amended two existing pre-funded warrants to purchase shares of the
Company’s common stock held by the same institutional healthcare-focused fund to extend the exercise periods and to permit exercise in excess of a
similar 19.99% limit following approval of the Company’s stockholders of such exercise.
In July 2021, the Company completed an underwritten public offering of 3,926,702 shares of its common stock at an offering price of $3.82 per
share. The Company received net proceeds of approximately $13.4 million, after deducting underwriting discounts, commissions and offering-related
expenses.
At-The-Market Issuance Sales Agreement
In December 2020, as amended in March 2022, the Company entered into a Capital on DemandTM Sales Agreement (the Sales Agreement) with
JonesTrading, pursuant to which it may sell from time to time, at its option, up to an aggregate of $50.0 million of the Company’s common stock through
JonesTrading, as sales agent or principal, $45.7 million of which remains available for sale as of December 31, 2022. Sales of the Company’s common
stock made pursuant to the Sales Agreement with JonesTrading, if any, will be made on the Nasdaq Capital Market under the Company’s effective
registration statement on Form S-3, subject to limitations on the amount of securities the Company may sell pursuant to its effective registration statement
on Form S-3 within any 12-month period, by means of ordinary brokers’ transactions at market prices. Additionally, under the terms of the Sales
Agreement, the Company may also sell shares of its common stock through JonesTrading, on the Nasdaq Capital Market or otherwise, at negotiated prices
or at prices related to the prevailing market price. JonesTrading will use its commercially reasonable efforts to sell the Company’s common stock from time
to time, based upon the Company’s instructions (including any price, time or size limits or other customary parameters or conditions the Company may
impose). The Company is required to pay JonesTrading 2.5% of gross proceeds for the common stock sold through the Sales Agreement.
105
Common Stock Warrants
As of December 31, 2022, the Company had the following outstanding warrants for the purchase of common stock:
Expiration
November 14, 2023 through June 4, 2024
January 25, 2024
March 27, 2024
May 3, 2025
August 27, 2030
August 31, 2030
June 21, 2032
September 2, 2032
Number of shares
3,874
4,669
1,369,602
5,363
1,889,513
1,137,454
2,205,018
150,753
6,766,246
Exercise price
$
$
$
$
$
$
$
$
77.40
51.40
27.00
26.10
0.01
0.01
0.01
1.99
During the year ended December 31, 2022, the Company issued 390,668 shares of its common stock upon the cashless exercise of 398,093 pre-
funded warrants. During the year ended December 31, 2021, no warrants were exercised.
Stock Compensation Plans
Effective January 1, 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (2015 Plan). Under the 2015 Plan, the Company
may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then employees, officers,
non-employee directors or consultants of the Company or its subsidiaries. Initially, a total of 80,103 shares of common stock were reserved for issuance
under the 2015 Plan. In addition, pursuant to the June 10, 2021 amendment, the number of shares of common stock available for issuance under the 2015
Plan will be annually increased on the first day of each fiscal year during the term of the 2015 Plan, as amended, beginning with the 2022 fiscal year until
(and including) January 1, 2031, by an amount equal to 5% of the total number of shares of common stock outstanding on December 31st of the preceding
calendar year or such other amount as the Company’s board of directors may determine. The maximum term of the options granted under the 2015 Plan is
no more than ten years. Grants generally vest at 25% one year from the vesting commencement date and ratably each month thereafter for a period of 36
months, subject to continuous service. In addition, pursuant to a June 2021 amendment, the 2015 Plan was amended to allow an additional aggregate
200,000 shares of common stock to be used exclusively for the grant of equity awards as a material inducement for individuals to commence employment
at the Company in compliance with Nasdaq Listing Rule 5635(c)(4).
Stock Options
Stock option activity under all Plans is summarized as follows:
Balance at December 31, 2021
Granted
Exercised
Forfeited
Balance at December 31, 2022
Information about the Company’s outstanding stock options as of December 31, 2022 is as follows:
Number of
Options
Weighted-
Average
Exercise Price
1,308,360 $
937,950
—
—
2,246,310 $
13.99
2.20
—
—
9.07
Options outstanding
Options vested and expected to vest
Options exercisable
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
9.07
9.07
17.36
8.00 $
8.00 $
6.75 $
23,168
23,168
1,480
Number of
Shares
2,246,310 $
2,246,310 $
860,683 $
106
The weighted-average grant date fair value per share of employee option grants during the years ended December 31, 2022, 2021 and 2020 was
$1.65, $6.05, and $2.62, respectively. The aggregate intrinsic value used in the above table of options at December 31, 2022 is based on the Company’s
closing market price per common share on December 30, 2022, the last business day of the 2022 fiscal year, of $1.49. No stock options were exercised
during the year ended December 31, 2022 and 3,727 stock options were exercised during the year ended December 31, 2021 for proceeds of $21,000. The
total intrinsic value of options exercised was $4,000 during the year ended December 31, 2021. The total grant-date fair value of options that vested during
the years ended December 31, 2022, 2021 and 2020 was $2.6 million, $0.8 million and $1.0 million, respectively.
Employee Stock Purchase Plan (ESPP)
On January 1, 2015, the Company’s board of directors adopted the ESPP, which became effective upon the pricing of the Company’s initial public
offering on January 29, 2015. The ESPP permits participants to purchase common stock through payroll deductions of up to 15% of their eligible
compensation. Initially, a total of 18,346 shares of common stock was reserved for issuance under the ESPP. In addition, pursuant to the June 10, 2021
amendment, the number of shares of common stock available for issuance under the ESPP will be annually increased on the first day of each fiscal year
during the term of the ESPP, beginning with the 2022 fiscal year, by an amount equal to the lessor of: (i) 250,000 shares; (ii) 1% of the total number of
shares of common stock outstanding on December 31st of the preceding calendar year; or (iii) such other amount as the Company’s board of directors may
determine. Stock compensation expense for the years ended December 31, 2022, 2021 and 2020 related to the ESPP was immaterial.
Stock-Based Compensation Expense
The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants
were as follows:
Risk-free interest rate
Expected volatility
Expected term (in years)
Expected dividend yield
Years Ended December 31,
2022
2021
2020
1.9%
89.8%
6.2
—
0.8%
90.3%
6.2
—
1.2%
85.8%
6.2
—
Risk-free interest rate. The Company bases the risk‑free interest rate assumption on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds
with maturities similar to those of the expected term of the award being valued.
Expected volatility. The Company considers its historical volatility when determining the expected volatility.
Expected term. The expected term represents the period of time that options are expected to be outstanding. Because the Company does not have
historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the
option and its vesting period.
Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no
present intention to pay cash dividends.
The allocation of stock-based compensation expense was as follows (in thousands):
Research and development
General and administrative
Years Ended December 31,
2021
2022
2020
$
$
830
1,211
2,041
$
628
1,147
$ 1,775
$
386
648
$ 1,034
As of December 31, 2022 and 2021, the unrecognized compensation cost related to outstanding time-based options was $3.6 million and $4.0
million, respectively, and is expected to be recognized as expense over approximately 2.5 years and 2.7 years, respectively.
107
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance was as follows:
Common stock warrants
Common stock options granted and outstanding
Awards available under the 2015 Plan
Shares available under the Employee Stock Purchase Plan
December 31,
2022
2021
6,766,246
2,246,310
150,335
243,817
9,406,708
4,810,409
1,308,360
115,990
105,619
6,340,378
7. Collaborations
Eucure and Biocytogen Collaborative Development and Commercialization Agreement
In October 2021, the Company, Eucure (Beijing) Biopharma Co., Ltd. (Eucure) and Biocytogen Pharmaceuticals (Beijing) Co., Ltd. (Biocytogen),
Eucure’s controlling affiliate, entered into a collaborative development and commercialization agreement (the YH001 Collaboration Agreement) for the
development of YH001, a monospecific investigational CTLA-4 antibody.
Pursuant to the YH001 Collaboration Agreement, the Company was granted an exclusive (including with respect to Eucure and its affiliates),
nontransferable, license to develop and commercialize YH001 in North America for the treatment, through administration of YH001 by intravenous or
subcutaneous means, of multiple human indications, including sarcoma, microsatellite stable colorectal cancer, renal cell carcinoma (RCC), and K-ras
positive non-small cell lung cancer (collectively, the Initial Indications) or one or more of bladder cancer, endometrial cancer, and melanoma as substitute
indications, which may be substituted for Initial Indications at the Company’s discretion (each upon such substitution, a Substitute Indication). The
Company is responsible for, and will bear the costs of, preparing and filing all regulatory submissions and conducting any Phase 1, Phase 2, Phase 3, or
post-approval clinical trials in North America for YH001 in the Initial Indications and potentially the Substitute Indications, while Eucure is responsible for
conducting, and will bear the costs of, the preparation of chemistry, manufacturing and controls activities for YH001. Eucure has agreed to manufacture
and supply, or to arrange for a third party manufacturer to manufacture and supply, YH001 to the Company for clinical trials pursuant to the terms of a
clinical supply and quality agreement to be separately negotiated.
During a specified period, the Company has the option, subject to Eucure’s prior written approval, to expand the license to include the development
and commercialization of YH001 for the treatment, through administration by intravenous or subcutaneous means, of all human and veterinary therapeutic
indications in North America for a payment to Eucure in the low single digit millions.
The Company will be responsible for commercializing YH001 in North America, including booking of sales revenue in the Initial and Substitute
Indications. The Company will owe Eucure escalating double digit royalties on net sales of YH001 in North America ranging from the mid-twenties to
mid-double digits; provided that until the end of the first full calendar year following the first commercial sale of YH001, royalties will range from the
lower double digits to the mid-double digits. If sales of YH001 exceed a pre-determined sales threshold in the first full year of sales following first
commercial sale, the Company will owe a milestone to Eucure in the high single digit millions. Payment obligations under the YH001 Collaboration
Agreement continue on a country-by-country basis until the latest of (i) expiration of the last to expire licensed patent covering YH001, (ii) expiration of
marketing or regulatory exclusivity covering YH001 and (iii) 10 years from the first commercial sale of YH001 in such country in North America. Eucure
has agreed to manufacture and supply, or to arrange for a third party manufacturer to manufacture and supply, YH001 to the Company at cost plus a low
double digit markup for commercial sales pursuant to the terms of a commercial supply and quality agreement to be separately negotiated.
3D Medicines and Alphamab Collaboration and Clinical Trial Agreement
In December 2019, the Company, 3D Medicines Co., Ltd. (3D Medicines), and Jiangsu Alphamab Biopharmaceuticals Co., Ltd. (Alphamab) entered
into a collaboration and clinical trial agreement (the Envafolimab Collaboration Agreement) for the development of envafolimab, also known as KN035, an
investigational PD-L1 single-domain antibody (sdAb), or nanobody, administered by subcutaneous injection, for the treatment of sarcoma in North
America. No consideration was exchanged in the Envafolimab Collaboration Agreement. Given no consideration was exchanged, no value was assigned to
the Envafolimab Collaboration Agreement in the accompanying consolidated balance sheets.
108
Pursuant to the Envafolimab Collaboration Agreement, the Company was granted an exclusive license to develop and commercialize envafolimab
for the treatment of sarcoma in North America. The Company is responsible for conducting, and will bear the costs of Phase 1, Phase 2, and Phase 3 or
post-approval clinical trials in North America for envafolimab in the indications of refractory and first line treatment of sarcoma. 3D Medicines and
Alphamab are responsible for conducting, and will bear the costs of, investigational new drug (IND)-enabling studies (other than those specific to the
sarcoma indication) and the preparation of chemistry, manufacturing and controls (CMC) activities sections of an IND application for envafolimab. 3D
Medicines and Alphamab have agreed to manufacture and supply, or to arrange for a third party manufacturer to manufacture and supply, envafolimab to
the Company at pre-negotiated prices that vary based on clinical or commercial use. 3D Medicines and Alphamab retained the right to develop envafolimab
in all territories outside of North America as well as within North America for all indications other than sarcoma.
The Company will be responsible for commercializing envafolimab for sarcoma in North America, including booking of sales revenue, unless (a)
envafolimab is first approved in North America for an indication other than sarcoma and launched in North America, or (b) envafolimab is first approved in
North America for sarcoma and subsequently approved in North America for an additional non-orphan indication and sold commercially by 3D Medicines
and/or Alphamab, or a licensee, in which case 3D Medicines and Alphamab will be responsible for commercializing envafolimab for sarcoma in North
America, including booking of sales revenue. If 3D Medicines and Alphamab become responsible for commercialization under the Envafolimab
Collaboration Agreement, the Company has the option to co-market envafolimab for sarcoma in North America. In the event that envafolimab is first
approved in North America for sarcoma and within three years of the commercial launch of envafolimab in North America for sarcoma 3D Medicines and
Alphamab replace the Company as the party responsible for commercialization, and the Company elects and 3D Medicines and Alphamab agree for the
Company to not co-market envafolimab for sarcoma in North America, then 3D Medicine and Alphamab will be required to compensate the Company for
its costs associated with preparing for and conducting commercial activities.
If the Company has the responsibility for commercialization under the Envafolimab Collaboration Agreement, the Company will owe 3D Medicines
and Alphamab tiered double digit royalties on net sales of envafolimab for sarcoma in North America ranging from the teens to mid-double digits. If 3D
Medicines and Alphamab have responsibility for commercialization under the Envafolimab Collaboration Agreement, the Company will be entitled to (a)
escalating double digit royalties on net sales of envafolimab for sarcoma in North America ranging from the teens to mid-double digits if the Company has
chosen to not co-market envafolimab in sarcoma or (b) a 50% royalty on net sales of envafolimab for sarcoma in North America if the Company has
chosen to co-market envafolimab in sarcoma. Payment obligations under the Envafolimab Collaboration Agreement continue on a country-by-country
basis until the last to expire licensed patent covering envafolimab expires.
3D Medicines and Alphamab retain the right to reacquire the rights to envafolimab for sarcoma in North America in connection with an arm’s length
sale to a third party, provided that the sale may not occur prior to completion of a pivotal trial of envafolimab in sarcoma without the Company’s written
consent and the parties must negotiate in good faith and agree to fair compensation to be paid to the Company for the value of and opportunity represented
by the required rights.
Each party agreed that during the term of the Envafolimab Collaboration Agreement, it would not develop or license from any third party a
monospecific inhibitor to PD-L1 or PD-1 in sarcoma.
The term of the Envafolimab Collaboration Agreement continues until the later of the date the parties cease further development and
commercialization of envafolimab for sarcoma in North America or the expiration of all payment obligations. The Envafolimab Collaboration Agreement
may be terminated earlier by a party in the event of an uncured material breach by the other party or bankruptcy of the other party, or for safety reasons
related to envafolimab. In the event the Company elects, or a joint steering committee determines, to cease further development or commercialization of
envafolimab, or if the Company fails to use commercially reasonable efforts to develop (including progress in clinical trials) and commercialize
envafolimab and does not cure such failure within a specified time period, then the Company’s rights and obligations under the Envafolimab Collaboration
Agreement will revert to 3D Medicines and Alphamab.
I-Mab Collaboration Agreements
In November 2018, the Company and I-Mab Biopharma (I-Mab) entered into separate strategic collaboration and clinical trial agreements (the I-Mab
Collaboration Agreements) for the development of programs for multiple immuno-oncology product candidates, including I-Mab’s proprietary CD73
antibody TJ004309 (the TJ004309 Agreement) as well as up to five proprietary bispecific antibodies currently under development by I-Mab (the Bispecific
Agreement).
No consideration was exchanged in the I-Mab Collaboration Agreements. Given the early preclinical stage of development of these assets as of the
agreement date, no value was assigned to the I-Mab Collaboration Agreements in the accompanying consolidated balance sheets.
109
TJ004309 Agreement
Pursuant to the TJ004309 Agreement, the Company and I-Mab are collaborating on developing the TJ004309 antibody, with the Company bearing
the costs of filing an IND and for Phase 1 clinical trials, with the parties sharing costs equally for Phase 2 clinical trials, and with the Company and I-Mab
bearing 40% and 60%, respectively, of the costs for pivotal clinical trials. I-Mab will be responsible for the cost of certain non-clinical activities, the drug
supply of TJ004309, and any reference drugs used in the clinical trials. Each of the parties also agreed for a specified period of time to not develop or
license to or from a third party any monoclonal antibody targeting CD73 or any other biologic for certain indications that a joint steering committee (JSC),
as set up under the TJ004309 Agreement, selects for TJ004309 development.
In the event that I-Mab licenses rights to TJ004309 to a third party, the Company would be entitled to receive escalating portions of royalty and non-
royalty consideration received by I-Mab with respect to territories outside of Greater China. In the event that I-Mab commercializes TJ004309, the
Company would be entitled to receive a royalty on net sales by I-Mab in North America ranging from the mid-single digits to low double digits, and in the
EU and Japan in the mid-single digits. The portions of certain third-party royalty and non-royalty consideration and the royalty from net sales by I-Mab to
which the Company would be entitled escalate based on the phase of development and relevant clinical trial obligations the Company completed under the
TJ004309 Agreement, ranging from a high-single digit to a mid-teen percentage of non-royalty consideration as well as a double digit percentage of royalty
consideration. In March 2020, I-Mab issued a press release announcing a strategic partnership with KG Bio, whereby KG Bio received what the press
release described as a right of first negotiation outside North America for TJ004309 for up to $340 million in potential payments to I-Mab. On April 8,
2020, the Company issued a notice of dispute regarding possible breach of the TJ004309 Agreement, which resulted in a binding arbitration proceeding
under the Rules of Arbitration of the ICC before the Tribunal. The latest developments in the dispute with I-Mab are discussed in more detail below
following the discussion of the Bispecific Agreement.
The TJ004309 Agreement may be terminated by either party in the event of an uncured material breach by the other party or bankruptcy of the other
party, or for safety reasons related to TJ004309. I-Mab may also terminate the TJ004309 Agreement if the Company causes certain delays in completing a
Phase 1 clinical trial. In addition, I-Mab may terminate the TJ004309 Agreement for any reason within 90 days following the completion of the first Phase
1 clinical trial, in which case the Company would be entitled to a minimum termination fee of $9.0 million, or following the completion of the first Phase 2
clinical trial, in which case the Company would be entitled to a pre-specified termination fee of $15.0 million and either a percentage of non-royalty
consideration I-Mab may receive as part of a license to a third party or an additional payment if TJ004309 is approved for marketing outside Greater China
before a third-party license is executed, in addition to a double digit percentage of royalty consideration. In 2021, I-Mab sent the Company notices
purporting to terminate the TJ004309 Agreement, which would result in I-Mab owing the Company a prespecified termination fee of $9.0 million.
However, I-Mab does not have an option to terminate the TJ004309 Agreement without cause until the ongoing Phase 1 clinical trial of TJ004309 is
“Complete,” as that term is defined in the TJ004309 Agreement, and the Company responded by disputing the basis for I-Mab’s termination. In March
2021, I-Mab filed a lawsuit in the Delaware Court of Chancery seeking an order of specific performance requiring the Company to comply with I-Mab’s
effort to terminate the agreement. The Company disagreed with I-Mab’s position and in May 2021, the Delaware Court of Chancery stayed the lawsuit filed
by I-Mab and subsequently this matter was remanded and included in the proceeding before the Tribunal.
Bispecific Agreement
Pursuant to the Bispecific Agreement, the Company and I-Mab may mutually select through a joint steering committee (JSC) up to five of I-Mab’s
bispecific antibody (BsAb) product candidates within a five-year period for development and commercialization in North America.
For each product candidate selected by the JSC for development under the Bispecific Agreement, I-Mab will be responsible and bear the costs for
IND-enabling studies and establishing manufacturing for the product candidate, while the Company will be responsible for and bear the costs of filing an
IND and conducting Phase 1 and Phase 2 clinical trials, and the Company will be responsible for and will share equally with I-Mab in the costs of
conducting Phase 3 or pivotal clinical trials, in each case within North America. Subject to I-Mab’s right to co-promote an approved product candidate, the
Company will be responsible for commercializing any approved product candidates in North America and will share profits and losses equally with I-Mab
in North America. The Company would also be entitled to tiered low single digit royalties on net sales of product candidates in the EU and Japan.
At any time prior to completing the first pivotal clinical trial for a product candidate or if I-Mab ceases to support development costs or pay its
portion of Phase 3 clinical trial costs for a product candidate or the JSC decides to cease development over the Company’s objections after initiating Phase
3 clinical trials, the Company will have an option to obtain an exclusive license to such product candidate in all territories except Greater China and Korea,
and any other territories in which I-Mab previously licensed rights to a third party subject to the Company’s right of first refusal for any licenses I-Mab
may grant to third-parties.
110
If the Company exercises the option, it would assume sole responsibility for developing and commercializing the product candidate in the licensed
territory, and in lieu of profit or loss sharing with I-Mab with respect to such product candidate, the Company would owe I-Mab pre-specified upfront and
milestone payments and royalties on net sales, with the payments and royalties escalating depending on the phase of development the product candidate
reached at the time the Company obtained the exclusive license as follows: (i) if before IND-enabling studies and the preparation of the CMC activities of
the collaborative product, the Company would owe I-Mab a one-time upfront payment of $10.0 million, development and regulatory based milestone
payments totaling up to $90.0 million that begin upon completion of a pivotal trial, sales milestones totaling up to $250.0 million, and royalties in the mid-
single digits on annual net sales; (ii) if after IND submission but before completion of a Phase 1a clinical trial of the collaborative product, the Company
would owe I-Mab a one-time upfront payment of $25.0 million, development and regulatory based milestone payments totaling up to $125.0 million that
begin upon completion of a pivotal trial, sales milestones totaling up to $250.0 million, and royalties in the high single digits on annual net sales; (iii) if
after completion of a Phase 1a clinical trial but before completion of Phase 2 proof of concept clinical trial for the collaborative product, the Company
would owe I-Mab a one-time upfront payment of $50.0 million, development and regulatory based milestone payments totaling up to $250.0 million that
begin upon completion of a pivotal trial, sales milestones totaling up to $250.0 million, and royalties in the low double digits on annual net sales; and (iv) if
after completion of Phase 2 proof of concept clinical trial and before completion of pivotal trial for the collaborative product, the Company would owe I-
Mab a one-time upfront payment of $80.0 million, development and regulatory based milestone payments totaling up to $420.0 million that begin upon
completion of a pivotal trial, sales milestones totaling up to $250.0 million, and royalties in the high-teen double digits on annual net sales.
Each party agreed that for a specified period of time, it would not develop or license to or from any third party any bispecific monoclonal antibody
targeting the same two biological targets as those of any selected product candidates under the Bispecific Agreement.
If development of any selected product candidates is terminated by a decision of the JSC, all rights to the product candidate will revert to I-Mab,
subject to the Company’s right to obtain an exclusive license in certain circumstances. If development is terminated after submission of an IND and prior
to initiating Phase 3 clinical trials or after initiating Phase 3 clinical trials and with the Company’s concurrence, the Company would be entitled to tiered
low single digit royalties on net sales of the product candidate in North America, the EU, and Japan.
The Bispecific Agreement may be terminated by either party in the event of an uncured material breach by the other party, bankruptcy of the other
party, or with respect to any selected product candidate, for safety reasons related to that product candidate.
In March 2020, the Company learned that I-Mab had entered into two license and collaboration agreements with ABL Bio in July 2018. Under ABL
Bio License 1, I-Mab granted to ABL Bio exclusive, worldwide (excluding Greater China), royalty-bearing rights to develop and commercialize a BsAb
using certain monoclonal antibody sequences. Under ABL License 2, I-Mab and ABL agreed to collaborate to develop three PD-L1-based bispecific
antibodies by using ABL Bio’s proprietary BsAb technology and commercialize them in their respective territories, which, collectively, include China,
Hong Kong, Macau, Taiwan and South Korea, and other territories throughout the rest of the world if both parties agree to do so in such other territories
during the performance of the agreement.
In June 2020, I-Mab commenced an arbitration proceeding under the Rules of Arbitration of the International Chamber of Commerce (the ICC)
before an arbitration tribunal seated in New York City (the Tribunal) after the Company invoked contractual dispute resolution provisions asserting that I-
Mab had breached its contractual obligations concerning the TJ004309 Agreement and Bispecific Agreement. The Tribunal held a hearing on the merits in
February 2022, and final post-hearing briefs were submitted by the Company and I-Mab in May 2022. On November 8, 2022, the Tribunal invited the
parties to submit additional, limited briefing on two discrete issues by December 9, 2022. Following that submission, the parties submitted their respective
cost submissions for attorney fees reimbursement in January 2023. The Tribunal did not indicate when it expects to render its final decision; however, it did
note that it was far along in its deliberations and preparation of a final award. Under the applicable rules of the arbitration, the prevailing party may be
awarded attorneys’ fees at the Tribunal’s discretion. As of the date of this Annual Report, the TJ004309 Agreement and Bispecific Agreement disputes
remain under consideration by the Tribunal, and the Company expects the Tribunal to render its final decision in the first quarter of 2023. The claims under
the arbitration are complex; accordingly, the Company cannot predict the outcome of the arbitration, and is unable to estimate the amount of recovery or
damages, if any, that may be awarded by the Tribunal.
111
8. Leases
The Company’s operating lease obligations relate to its corporate headquarters as the Company leases its office space under a non-cancelable
operating lease. The Company amended its lease in August 2021 extending the lease term to April 2027. The lease is subject to base lease payments and
additional charges for common area maintenance and other costs and includes certain lease incentives and tenant improvement allowances. Operating lease
expense was $0.4 million for each of the three years ended December 31, 2022, 2021 and 2020. As of December 31, 2022, the Company does not have any
finance leases, nor any other operating leases.
Supplemental cash flow information related to operating leases was as follows (in thousands):
Cash paid within operating cash flows
ROU assets recognized in exchange for new lease obligations
Years Ended December 31,
2022
2021
2020
$
$
285
—
$
$
461
1,117
$
$
442
—
Supplemental balance sheet information related to operating leases was as follows (in thousands, except lease term and discount rate):
Reported as:
Other assets (ROU asset)
Accounts payable and accrued expenses (lease liability)
Other long-term liabilities (lease liability)
Total lease liabilities
Weighted average remaining lease term
Weighted average discount rate
$
$
$
December 31,
2022
2021
1,123
198
969
1,167
$
$
$
1,325
147
1,167
1,314
4.3
11.3%
5.3
11.3%
As of December 31, 2022, the maturities of the Company’s operating lease liabilities are as follows (in thousands):
2023
2024
2025
2026
2027
Total lease payments
Less imputed interest
Total operating lease liabilities
$
$
320
334
349
365
123
1,491
(324)
1,167
Under the terms of the lease agreement, the Company provided the lessor with an irrevocable letter of credit in the amount of $66,949. The lessor is
entitled to draw on the letter of credit in the event of any default by the Company under the terms of the lease.
112
9. Income Taxes
A reconciliation of the Company’s effective tax rate and federal statutory tax rate is summarized as follows (in thousands):
Federal income taxes
State income taxes, net of federal benefit
Permanent items
Uncertain tax positions
Research and development credits
Other, net
Stock compensation
Change in valuation allowance
Provision for income taxes
2022
Years Ended December 31,
2021
2020
$
$
(6,118) $
(1,962)
81
2,477
(2,119)
125
78
7,438
— $
(6,020) $
(1,889)
93
494
(1,661)
28
203
8,752
— $
(3,523)
(1,084)
104
1,224
(555)
—
113
3,721
—
Significant components of the Company’s deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Research and development and Orphan Drug credits
Depreciation and amortization
Right-of-use liability
Section 174 capitalized research expense
Other, net
Total deferred tax assets
Right-of-use asset
Total deferred tax liabilities
Total net deferred
Valuation allowance
Net deferred tax assets
December 31,
2022
2021
$
$
50,779 $
11,928
236
245
2,503
1,906
67,597
(236)
(236)
67,361
(67,361)
— $
47,633
10,472
247
276
—
1,573
60,201
(278)
(278)
59,923
(59,923)
—
The Company has net deferred tax assets relating primarily to net operating loss (NOL) carryforwards and research and development and Orphan
Drug credit carryforwards. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 requires taxpayers to capitalize and amortize research and development
expenditures over five years for domestic research and 15 years for foreign research pursuant to Section 174 of the Internal Revenue Code (Code). Subject
to certain limitations, the Company may use these deferred tax assets to offset taxable income in future periods. Due to the Company’s history of losses and
uncertainty regarding future earnings, a full valuation allowance has been recorded against the Company’s deferred tax assets, as it is more likely than not
that such assets will not be realized. The net change in the total valuation allowance for the years ended December 31, 2022, 2021 and 2020 was
$7.4 million, $8.8 million and $3.7 million, respectively.
As of December 31, 2022, the Company had federal and California NOL carryforwards of $194.3 million and $144.5 million, respectively. The
federal and California NOL carryforwards will begin to expire in 2030 and 2033, respectively, if not utilized. The federal NOL generated after 2017 of
$111.1 million will carryforward indefinitely, but the deductibility of such federal NOLs is limited to 80% of taxable income. As of December 31, 2022, the
Company also had federal research and development and Orphan Drug tax credit carryforwards of $13.7 million and California research and development
tax credit carryforwards of $3.0 million. The federal research and development and Orphan Drug tax credit carryforwards will begin expiring in 2031 and
2036, respectively, if not utilized. The California research credit will carry forward indefinitely under current law.
113
Pursuant to Sections 382 and 383 of the Code, the annual use of the Company’s NOL and research and development credit carryforwards may be
limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. The Company previously completed a
Section 382/383 analysis regarding the limitation of NOL and research and development credit carryforwards as of December 31, 2018 and did not identify
any change in ownership of more than 50% within the preceding three-year period since an ownership change was determined to have occurred at the time
of the Company’s initial public offering in January 2015. The Company has not completed a study to assess whether an ownership change has occurred or
whether there have been multiple ownership changes since December 31, 2018. If the Company has experienced an ownership change at any time since
December 31, 2018, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 of the Code. Any
limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. Any carryforwards that will expire prior to
utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance with no net
effect on income tax expense or the effective tax rate.
The Inflation Reduction Act of 2022, which incorporates a Corporate Alternative Minimum Tax (CAMT), was signed on August 16, 2022. The
changes will become effective for the tax years beginning after December 31, 2022. The new tax will require companies to compute two separate
calculations for federal income tax purposes and pay the greater of the new minimum tax or their regular tax liability. The act is not expected to have a
significant impact on the Company's financial position, results of operations or cash flows.
The changes in the Company’s unrecognized tax benefits are summarized as follows (in thousands):
Balance at December 31, 2019
Change related to prior year positions
Increase related to current year positions
Balance at December 31, 2020
Change related to prior year positions
Increase related to current year positions
Balance at December 31, 2021
Change related to prior year positions
Increase related to current year positions
Balance at December 31, 2022
$
$
5,092
—
1,518
6,610
1
506
7,117
(5)
2,984
10,096
The Company’s policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense. The
Company has no accruals for interest or penalties in the accompanying consolidated balance sheets as of December 31, 2022 and 2021 and has not
recognized interest or penalties in the accompanying consolidated statements of operations for the three years in the period ended December 31, 2022.
Due to the valuation allowance recorded against the Company’s deferred tax assets, future changes in unrecognized tax benefits will not impact the
Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly in the next 12 months.
The Company is subject to taxation in the United States and California. Due to the net operating loss carryforwards, the U.S. federal and California
returns are open to examination for all years since inception. The Company has not been, nor is it currently, under examination by the federal or any state
tax authority.
10. 401(k) Plan
The Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are
determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make
certain matching contributions to the 401(k) plan. Matching contributions for the years ended December 31, 2022, 2021 and 2020 totaled $0.2 million, $0.1
million and $0.1 million, respectively.
114
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified and pursuant to the requirements of the SEC’s rules and forms and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (who are our principal executive
officer and principal financial officer, respectively), to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by Rule 13a-15(b) promulgated under the Exchange Act, we carried out an evaluation, with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2022,
the end of the period covered by this report. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal
executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal
Control — Integrated Framework.
Based on our assessment, our management has concluded that, as of December 31, 2022, our internal control over financial reporting was effective
based on those criteria.
Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered public
accounting firm regarding internal control over financial reporting.
115
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and
increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating processes. During the quarter ended December 31, 2022, there were no changes in our
internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B.
Other Information.
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
116
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item and not set forth below will be set forth in our definitive proxy statement to be filed with the Securities and
Exchange Commission on Schedule 14A in connection with our 2023 Annual Meeting of Stockholders (the Proxy Statement), which is expected to be filed
by May 1, 2023, under the headings “Executive Officers,” “Proposal 1 – Election of Directors,” “Class II Director Nominees,” Governance – Board of
Directors,” “Continuing Directors,” “Information Regarding the Board of Directors and Corporate Governance,” and “Delinquent Section 16(a) Reports,”
if any, and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to our directors and employees (including our principal executive officer,
principal financial officer, principal accounting officer and controller), and have posted the text of the policy on our website (www.traconpharma.com). In
addition, we intend to promptly disclose on our website in the future (i) the nature of any amendment to the policy that applies to our principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver,
including an implicit waiver, from a provision of the policy that is granted to one of these specified individuals, the name of such person who is granted the
waiver and the date of the waiver, to the extent any such waiver is required to be disclosed pursuant to the rules and regulations of the SEC.
Item 11.
Executive Compensation.
The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the sections
titled “Executive Compensation” in our Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the
information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement.
The information required by Item 201(d) of Regulation S-K is incorporated by reference to the information set forth in the section titled “Executive
Compensation” in our Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item regarding certain relationships and related transactions and director independence is incorporated by
reference to the information set forth in the sections titled “Transactions with Related Parties” and “Information Regarding the Board of Directors and
Corporate Governance,” respectively, in our Proxy Statement.
Item 14.
Principal Accountant Fees and Services.
The information required by this item regarding principal accountant fees and services is incorporated by reference to the information set forth in the
section titled “Principal Accountant Fees and Services” in our Proxy Statement.
117
Item 15.
Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report.
1. Financial Statements
PART IV
The consolidated financial statements of TRACON Pharmaceuticals, Inc. listed below are set forth in Item 8 of this Annual Report for the year ended
December 31, 2022:
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Consolidated Notes to Financial Statements
2. Financial Statement Schedules
89
91
92
93
94
95
These schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they
are not applicable or not required.
3. Exhibits
Exhibit
Number
3.1(1)
3.2(2)
3.3(1)
4.1(3)
4.2(4)
4.3(4)
4.4(12)
4.5(7)
4.6(7)
4.7(7)
4.8(3)
4.9(3)
4.10(3)
4.11(9)
Amended and Restated Certificate of Incorporation.
Description of Document
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of TRACON Pharmaceuticals, Inc.
Amended and Restated Bylaws.
Form of Common Stock Certificate of the Registrant.
Form of Pre-Funded Warrant dated March 27, 2018 (attached as Exhibit B-1 to the Securities Purchase Agreement).
Form of Common Warrant dated March 27, 2018 (attached as Exhibit B-2 to the Securities Purchase Agreement).
Description of Capital Stock.
Form of Pre-Funded Warrant dated June 21, 2022.
Form of Amended and Restated Pre-Funded Warrant 1 dated June 21, 2022.
Form of Amended and Restated Pre-Funded Warrant 2 dated June 21, 2022.
Warrant to Purchase Stock issued to Silicon Valley Bank on November 14, 2013.
Warrant to Purchase Stock issued to Silicon Valley Bank on June 4, 2014.
Warrant to Purchase Stock issued to Silicon Valley Bank on May 13, 2015.
Warrant to Purchase Stock issued to Silicon Valley Bank on January 25, 2017.
4.12(10)
Warrant to Purchase Stock issued to Silicon Valley Bank on May 3, 2018.
4.13(8)
10.1+(3)
10.2+(3)
Form of Warrant to Purchase Common Stock dated September 2, 2022.
Form of Indemnity Agreement by and between the Registrant and its directors and officers.
TRACON Pharmaceuticals, Inc. 2011 Equity Incentive Plan and Forms of Stock Option Agreement and Notice of Exercise
thereunder.
118
Exhibit
Number
10.3+(11)
10.4+
10.5+(12)
10.6+(13)
10.7+(14)
10.8+
10.9+
Description of Document
TRACON Pharmaceuticals, Inc. 2015 Equity Incentive Plan and Forms of Stock Option Grant Notice, Stock Option Agreement,
Notice of Exercise and Restricted Stock Unit Agreement thereunder, as amended June 28, 2021.
TRACON Pharmaceuticals, Inc. Non-Employee Director Compensation Policy, as amended February 1, 2023.
TRACON Pharmaceuticals, Inc. Amended and Restated 2015 Employee Stock Purchase Plan, as amended June 10, 2021.
TRACON Pharmaceuticals, Inc. Bonus Plan, as amended January 29, 2021.
Amended and Restated Employment Agreement by and between the Registrant and Charles P. Theuer, M.D., Ph.D., dated February
5, 2019.
Employment Agreement by and between the Registrant and Bonne Adams, dated February 27, 2017.
Severance Agreement by and between the Registrant and Bonne Adams, dated September 27, 2017.
10.10+(5)
Employment Agreement by and between the Registrant and Scott Brown, dated January 28, 2020.
10.11+(5)
Severance Agreement by and between the Registrant and Scott Brown, dated December 4, 2019.
10.12+(3)
TRACON Pharmaceuticals, Inc. Severance Plan and Summary Plan Description.
10.13*#(5)
10.14(2)
10.15 (6)
10.16*#(15)
10.17(7)
10.18*#
10.19(8)*#
10.20*#
23.1
24.1
31.1
31.2
32.1
32.2
Collaboration and Clinical Trial Agreement by and among the Registrant, 3D Medicines (Beijing) Co., LTD. and Jiangsu Alphamab
Biopharmaceuticals Co., LTD. dated December 20, 2019.
Capital on DemandTM Sales Agreement, dated as of December 9, 2020, by and between the Registrant and JonesTrading Institutional
Services LLC.
Amendment to the Capital on DemandTM Sales Agreement, dated as of March 15, 2022, by and between the Registrant and
JonesTrading Institutional Services LLC.
Collaborative Development and Commercialization Agreement by and among the Registrant, Eucure (Beijing) Biopharma Co., Ltd.
and Biocytogen Pharmaceuticals (Beijing) Co., Ltd. dated October 8, 2021.
Securities Purchase Agreement, between the Registrant and Opaleye L.P., dated June 21, 2022.
Investment Agreement, dated December 22, 2022, by and between the Registrant and Batiste Investments LLC.
Loan and Security Agreement by and among the Registrant, each other party thereto as a borrower from time to time, the lenders
from time to time party thereto and Runway Growth Finance Corp., dated as of September 2, 2022.
First Amendment to Loan and Security Agreement, dated December 22, 2022, by and between the Registrant and Runway Growth
Finance Corp.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney. Reference is made to the signature page hereto.
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
Certification of the Principal Executive Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C.
Section 1350.
Certification of the Principal Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C.
Section 1350.
101.INS
101.SCH
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema Document
119
Exhibit
Number
101.CAL
101.DEF
101.LAB
101.PRE
104
Description of Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
The cover page for the Registrant’s Annual Report on Form 10-K has been formatted in Inline XBRL and contained in Exhibit 101
+
*
#
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Indicates management contract or compensatory plan.
Pursuant to Item 601(b)(10) of Regulation S-K, certain portions of this exhibit have been omitted (indicated by “[***]”) because the Registrant has
determined that the information is both not material and is the type that the Registrant treats as private or confidential.
Schedules (or similar attachments, including exhibits) to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of
any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission or its staff upon request.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 4, 2015.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on December 9, 2020.
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-201280), as amended.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 23, 2018.
Incorporated by reference to Registrant's Annual Report on Form 10-K, filed with the SEC on February 28, 2020.
Incorporated by reference to the Registrant’s Registration Statement on Form S-3, filed with the SEC on March 16, 2022.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on June 21, 2022.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 6, 2022.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 31, 2017.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed with the SEC on May 10,
2018.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on June 30, 2021.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on June 11, 2021
Incorporated by reference to the Registrant's Annual Report on Form 10-K, filed with the SEC on February 25, 2021.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed with the SEC on March 1, 2019.
Incorporated by reference to the Registrant’s Annual Report on Form 10-Q, filed with the SEC on November 3, 2021.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 27, 2020
Incorporated by reference to the Registrant's Current Report on Form 8-K, filed with the SEC on August 31, 2020.
120
Signatures
Pursuant to the requirements of the Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 8, 2023
By: /s/ CHARLES P. THEUER, M.D., PH.D.
Charles P. Theuer, M.D., Ph.D.
President and Chief Executive Officer
TRACON Pharmaceuticals, Inc.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dr. Charles P.
Theuer, M.D., Ph.D. and Scott B. Brown, CPA, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
President, Chief Executive Officer and Member of the Board of Directors
March 8, 2023
(Principal Executive Officer)
Chief Financial Officer (Principal Financial and Accounting Officer)
March 8, 2023
/s/ Charles P. Theuer, M.D., Ph.D.
Charles P. Theuer, M.D., Ph.D.
/s/ Scott B. Brown, CPA
Scott B. Brown, CPA
/s/ Lisa Johnson-Pratt, M.D.
Lisa Johnson-Pratt, M.D.
/s/ Carol C. Lam, J.D.
Carol C. Lam. J.D.
/s/ William R. LaRue
William R. LaRue
Member of the Board of Directors
Member of the Board of Directors
Member of the Board of Directors
/s/ Martin A. Mattingly, Pharm.D.
Martin A. Mattingly, Pharm.D.
Member of the Board of Directors
/s/ Saundra Pelletier
Saundra Pelletier
/s/ J. Rainer Twiford, J.D., Ph.D.
J. Rainer Twiford, J.D., Ph.D.
/s/ Stephen T. Worland, Ph.D.
Stephen T. Worland, Ph.D.
Member of the Board of Directors
Member of the Board of Directors
Member of the Board of Directors
121
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
TRACON PHARMACEUTICALS, INC.
NON-EMPLOYEE DIRECTOR COMPENSATION POLICY
(Adopted February 1, 2023)
Exhibit 10.4
Each member of the Board of Directors (the “Board”) who is not also serving as an employee of TRACON Pharmaceuticals, Inc.
(the “Company”) or any of its subsidiaries (each such member, a “Non-Employee Director”) will receive the compensation
described in this Non-Employee Director Compensation Policy (the “Director Compensation Policy”) for his or her Board
service.
The Director Compensation Policy may be amended at any time in the sole discretion of the Board or the Compensation
Committee of the Board.
A Non-Employee Director may decline all or any portion of his or her compensation by giving notice to the Company prior to
the date cash is to be paid or equity awards are to be granted, as the case may be.
Annual Cash Compensation
Each Non-Employee Director will receive the cash compensation set forth below for service on the Board. The annual cash
compensation amounts will be payable in equal quarterly installments, in arrears following the end of each quarter in which the
service occurred, pro-rated for any partial months of service. All annual cash fees are vested upon payment.
1.
Annual Board Service Retainer:
a. All Eligible Directors: $40,000
b. Chairman/Lead Independent Director (as applicable): $60,000 (in lieu of above)
2.
Annual Committee Member Service Retainer:
a. Member of the Audit Committee: $7,500
b. Member of the Compensation Committee: $5,000
c. Member of the Nominating and Corporate Governance Committee: $3,750
3.
Annual Committee Chair Service Retainer (in lieu of Committee Member Service Retainer):
a. Chairman of the Audit Committee: $15,000
b. Chairman of the Compensation Committee: $10,000
c. Chairman of the Nominating and Corporate Governance Committee: $7,500
Equity Compensation
Equity awards will be granted under the Company’s 2015 Equity Incentive Plan or any successor equity incentive plan (the
“Plan”). All stock options granted under this policy will be Nonqualified Stock Options (as defined in the Plan), with a term of
ten years from the date of grant
1.
and an exercise price per share equal to 100% of the Fair Market Value (as defined in the Plan) of the underlying common stock
of the Company on the date of grant.
(a)
Automatic Equity Grants.
(i)
Initial Grant for New Directors. Without any further action of the Board, on the date of the
Non-Employee Director’s initial election to the Board (or, if such date is not a market trading day, the first market trading day
thereafter), the Non-Employee Director will automatically be granted a Nonstatutory Stock Option to purchase 31,500 shares of
common stock (the “Initial Grant”). Each Initial Grant will vest in a series of 3 successive equal annual installments over the 3-
year period measured from the date of grant.
(ii)
Annual Grant. Without any further action of the Board, at the close of business on the date
of each annual meeting of the Company’s stockholders, each person who is then a Non-Employee Director will automatically be
granted either (A) a Nonstatutory Stock Option to purchase 18,000 shares of common stock or (B) a restricted stock unit (“RSU”)
covering 7,875 shares of common stock ((A) or (B) as applicable, the “Annual Grant”). Whether the Annual Grant for any
particular year takes the form of a Nonstatutory Stock Option or an RSU shall be determined prior to each annual meeting of the
Company’s stockholders by the Board or the Compensation Committee; provided that absent a determination for any given year,
the Annual Grant shall take the form of a Nonstatutory Stock Option. Each Annual Grant will vest in full on the earlier of the
one-year anniversary of date of grant, or the date of the next annual meeting of the Company’s stockholders.
(b)
Vesting; Change in Control. All vesting is subject to the Non-Employee Director’s “Continuous Service”
(as defined in the Plan) on each applicable vesting date. Notwithstanding the foregoing vesting schedules, for each Non-
Employee Director who remains in Continuous Service with the Company until immediately prior to the closing of a “Change in
Control” (as defined in the Plan), the shares subject to his or her then-outstanding equity awards that were granted pursuant to
this policy will become fully vested immediately prior to the closing of such Change in Control.
(c)
Remaining Terms. The remaining terms and conditions of each stock option, including transferability, will
be as set forth in the Company’s standard Option Agreement, in the form adopted from time to time by the Board. The remaining
terms and conditions of each RSU, including transferability, will be as set forth in the Company’s standard Restricted Stock Unit
Award Agreement, in the form adopted from time to time by the Board.
Expenses
The Company will reimburse Non-Employee Director for ordinary, necessary and reasonable out-of-pocket travel expenses to
cover in-person attendance at and participation in Board and committee meetings; provided, that the Non-Employee Director
timely submit to the Company appropriate documentation substantiating such expenses in accordance with the Company’s travel
and expense policy, as in effect from time to time.
2.
Exhibit 10.8
TRACON PHARMACEUTICALS, INC. AMENDED AND RESTATED EMPLOYMENT AGREEMENT
For
BONNE ADAMS
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into effective as
of February 27, 2017 (the "Effective Date"), by and between TRACON Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), and Bonne Adams (the "Executive"). The Company and Executive are hereinafter collectively referred to as the
"Parties", and individually referred to as a "Party". From and following the Effective Date, this Agreement along with the
Amended and Restated Severance Agreement entered into by and between Executive and the Company concurrently with this
Agreement (the "Amended Severance Agreement') shall replace and supersede that certain Employment Agreement between
Executive and Company entered into as of August 23, 2006 and amended as of March 25, 2011 and Severance Agreement
between the Company and Executive dated June 2, 2014 (collectively, the "Prior Agreement"). Certain capitalized terms used
in this Agreement are defined in Section 11.
RECITALS
WHEREAS, Executive and the Company are currently parties to the Prior Agreement that is superseded and replaced in
its entirety by this Agreement and the Amended Severance Agreement;
WHEREAS, the Company desires to continue to employ Executive to provide personal services to the Company in that
capacity, and wishes to provide Executive with certain compensation and benefits in return for such services, and Executive
wishes to be so employed and to receive such benefits; and
WHEREAS, the Company and Executive wish to enter into this Agreement to define their mutual rights and duties with
respect to Executive's compensation and benefits.
Now, THEREFORE, in consideration of the mutual promises and covenants contained herein, and for other good and
valuable consideration, the Parties, intending to be legally bound, agree as follows:
1.
Employment by the Company.
AGREEMENT
1.1
Position. Executive shall continue to serve as the Company's Senior Vice President, Clinical
Operations. During the term of Executive's employment with the Company, Executive will
devote Executive's best efforts and substantially all of Executive's business time and attention
to the business of the Company, except for approved vacation periods and reasonable
periods of illness or other incapacities permitted by the Company's general employment policies.
1
1.2
Duties and Location. Executive shall continue to report to the Company's Chief
Executive Officer (the "CEO''), and shall have such duties and responsibilities as are customary for the positions of Senior Vice
President, Clinical Operations. Executive's primary office location shall continue to be the Company's San Diego, California office.
The Company reserves the right to reasonably require Executive to perform Executive's duties at places other than Executive's
primary office location from time to time, and to require reasonable business travel.
Policies and Procedures. The employment relationship between the Parties shall be
governed by the general employment policies and practices of the Company, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or practices, this Agreement shall control.
1.3
2.
Compensation.
Salary. Executive shall receive a base salary at the rate of $288,779 per year (the
"Base Salary"), subject to standard payroll deductions and withholdings and payable in accordance with the Company's regular
payroll schedule.
2.1
2.2
Bonus. Executive will be eligible for an annual discretionary bonus of up to 35% of
Executive's Base Salary (the "Annual Bonus"). Whether Executive receives an Annual Bonus for any given year, and the amount of
any such Annual Bonus, will be determined by the Board (or the Compensation Committee thereof) in its sole discretion based upon
the Company's and Executive's achievement of objectives and milestones to be determined on an annual basis by the Company's
Board of Directors (the "Board'') (or the Compensation Committee thereof). Executive must remain an active employee through the
end of any given calendar year in order to earn an Annual Bonus for that year and any such bonus will be paid prior to March 15 of
the year following the year in which Executive's right to such amount became vested. Executive will not be eligible for, and will not
earn, any Annual Bonus (including a prorated bonus) if Executive's employment terminates for any reason before the end of the
calendar year.
3.
Standard Company Benefits. Executive shall be entitled to participate in all employee benefit
programs for which Executive is eligible under the terms and conditions of the benefit plans that may be in effect from time to time
and provided by the Company to its employees. The Company reserves the right to cancel or change the benefit plans or programs it
offers to its employees at any time.
4.
Vacation. Executive shall be entitled to accrue vacation in accordance with the terms of the
Company's vacation policy and practices (including but not limited to maximum vacation accrual caps).
5.
Expenses. The Company will reimburse Executive for reasonable travel, entertainment or other
expenses incurred by Executive in furtherance or in connection with the
2
performance of Executive's duties hereunder, in accordance with the Company's expense reimbursement policy as in effect
from time to time.
6.
Equity.
Prior Awards. Any stock, stock options, or other equity awards that Executive
has already been granted by the Company shall continue to be governed in all respects by the terms of the applicable grant
agreements, grant notices, and plan documents, except as otherwise provided in this agreement.
6.1
grant additional stock, stock options, or other equity awards to Executive in its sole discretion.
6.2
Additional Awards. The Board (or the Compensation Committee thereof) may
7.
Termination of Employment.
Executive or the Company may terminate the employment relationship at any time, with or without cause or advance notice.
7.1
At-Will Employment. Executive's employment relationship is at-will. Either
7.2
Termination Benefits. In the event that Executive's employment terminates for
any reason, including due to Executive's death or disability, no further payments shall be due under this Agreement, except that
the Executive shall be entitled to any amounts earned, accrued or owing but not yet paid under Section 2 above, any benefits
accrued or earned under the Company's benefit plans and programs or to which Executive is otherwise entitled under applicable
law, and any outstanding equity awards vested as of the termination date, which awards must be exercised within 90 days of the
termination date or the earlier expiration of such equity award, whichever occurs first. Executive may also be eligible for other
post-employment payments and benefits pursuant to the terms of the Amended Severance Agreement.
8.
Section 409A. It is intended that all of the benefits and other payments payable under this
Agreement satisfy, to the greatest extent possible, the exemptions from the application of Code Section 409A and this
Agreement will be construed to the greatest extent possible as consistent with those provisions, and to the extent not so exempt,
this Agreement (and any definitions hereunder) will be construed in a manner that complies with Section 409A.
9.
Proprietary Information Obligations.
9.1
Confidential Information Agreement. As a condition of continued
employment, Executive acknowledges and reaffirms Executive's obligations to the Company under the Employee Proprietary
Information and Inventions Agreement which Executive executed on or about September 18, 2014 (the "Confidentiality
Agreement”)
9.2
Third-Party Agreements and Information. Executive represents and warrants
that Executive's employment by the Company does not conflict with any prior employment or consulting agreement or other
agreement with any third party, and that Executive will perform Executive's duties to the Company without violating any such
agreement. Executive represents and warrants that Executive does not possess confidential information arising out of prior
employment, consulting, or other third party relationships, that would be used in connection with Executive's
3
employment by the Company, except as expressly authorized by that third party. During Executive's employment by the Company,
Executive will use in the performance of Executive's duties only information which is generally known and used by persons with
training and experience comparable to Executive's own, common knowledge in the industry, otherwise legally in the public domain,
or obtained or developed by the Company or by Executive in the course of Executive's work for the Company.
10.
Outside Activities During Employment.
10.1
Non-Company Business. Except with the prior written consent of the Board,
Executive will not during the term of Executive's employment with the Company undertake or engage in any other employment,
occupation or business enterprise, other than ones in which Executive is a passive investor. Executive may engage in civic and not-
for-profit activities so long as such activities do not materially interfere with the performance of Executive's duties hereunder.
No Adverse Interests. Executive agrees not to acquire, assume or participate in,
directly or indirectly, any position, investment or interest known to be adverse or antagonistic to the Company, its business or
prospects, financial or otherwise.
10.2
11.
(or
such
other
location
as mutually
Dispute Resolution. To ensure the rapid and economical resolution of disputes that may arise in
connection with Executive's employment and services for the Company, Executive and the Company agree that any and all disputes,
claims, or causes of action, in law or equity, including but not limited to statutory claims, arising from or relating to the enforcement,
breach, performance, or interpretation of this Agreement, Executive's employment with and services for the Company, or the
termination of Executive's employment with and services for the Company, will be resolved pursuant to the Federal Arbitration Act,
9 U.S.C. §§1-16, and to the fullest extent permitted by law, by final, binding and confidential arbitration conducted in San Diego,
California
Inc.
("JAMS") or its successors by a single arbitrator. Both Executive and the Company acknowledge that by agreeing to this
arbitration procedure, they each waive the right to resolve any such dispute through a trial by jury or judge or
administrative proceeding. Any such arbitration proceeding will be governed by JAMS' then applicable rules and procedures for
employment disputes, which can be found at http://www.jamsadr.com/rules-clauses/ and which will be provided to Executive upon
request. In any such proceeding, the arbitrator shall (a) have the authority to compel adequate discovery for the resolution of the
dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written arbitration decision including the
arbitrator's essential findings and conclusions and a statement of the award. Executive and the Company each shall be entitled to all
rights and remedies that either would be entitled to pursue in a court of law. Nothing in this Agreement is intended to prevent either
the Company or Executive from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such
arbitration pursuant to applicable law. The Company shall pay all filing fees in excess of those that would be required if the dispute
were decided in a court of law, and shall pay the arbitrator's fees and any other fees or costs unique to arbitration. Any awards or
orders in such arbitrations may be entered and enforced as judgments in the federal and state courts of any competent jurisdiction.
parties)
JAMS,
agreed
the
by
by
4
12.
General Provisions.
Notices. Any notices provided must be in writing and will be deemed effective
upon the earlier of personal delivery (including personal delivery by fax) or the next day after sending by overnight carrier, to
the Company at its primary office location and to Executive at the address as listed on the Company payroll.
12.1
12.2
Severability. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed
and enforced in such jurisdiction to the extent possible in keeping with the intent of the parties.
Waiver. Any waiver of any breach of any provisions of this Agreement must be
in writing to be effective, and it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or
any other provision of this Agreement.
12.3
12.4
Complete Agreement. This Agreement, together with the Severance Agreement
and Confidentiality Agreement, constitutes the entire agreement between Executive and the Company with regard to this subject
matter and is the complete, final, and exclusive embodiment of the Parties' agreement with regard to this subject matter. This
Agreement is entered into without reliance on any promise or representation, written or oral, other than those expressly
contained herein, and it supersedes any other such promises, warranties or representations (including but not limited to the Prior
Agreement). It cannot be modified or amended except in a writing signed by a duly authorized officer of the Company and
Executive.
Counterparts. This Agreement may be executed in separate counterparts, any
one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the
same Agreement.
12.5
only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.
12.6
Headings. The headings of the paragraphs hereof are inserted for convenience
12.7
Successors and Assigns. This Agreement is intended to bind and inure to the
benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and
administrators, except that Executive may not assign any of Executive's duties hereunder and Executive may not assign any of
Executive's rights hereunder without the written consent of the Company, which shall not be withheld unreasonably.
12.8
Tax Withholding and Indemnification. All payments and awards
contemplated or made pursuant to this Agreement will be subject to withholdings of applicable taxes in compliance with all
relevant laws and regulations of all appropriate government authorities. Executive acknowledges and agrees that the Company
has neither made any assurances nor any guarantees concerning the tax treatment of any payments or awards contemplated by
or made pursuant to this Agreement. Executive has had the opportunity to retain a tax and financial advisor and fully understands
the tax and economic consequences of all payments and awards made
5
pursuant to the Agreement.
interpretation of this Agreement will be governed by the laws of the State of California.
12.9
Choice of Law. All questions concerning the construction, validity and
IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and year first written above.
TRACON PHARMACEUTICALS, INC.
By: /s/ Charles P. Theuer
Charles P. Theuer, M.D., Ph.D
Chief Executive Officer
Executive
/s/ Bonne Adams
Bonne Adams
6
Exhibit 10.9
TRACON PHARMACEUTICALS, INC. SEVERANCE PLAN AMENDED AND
RESTATED SEVERANCE AGREEMENT
This Amended and Restated Severance Agreement (the "Agreement") is entered into by and between Bonne
Adams ("you" or "your") and TRACON Pharmaceuticals, Inc. (the "Company") pursuant to the TRACON
Pharmaceuticals, Inc. Severance Plan ("Plan"). Capitalized terms used herein but not otherwise defined have the meanings
set forth in the Plan.
This Agreement has an effective date of September 27, 2017 (the "Effective Date") and as of the Effective Date
amends, restates and supersedes in its entirety the Severance Agreement between you and the Company dated June 2, 2014.
You are a Covered Employee (as defined in the Plan) and participant in the Plan as provided by the Plan. This Agreement is
the Severance Agreement described in the Plan and this Agreement enumerates the Plan benefits that may be provided to you
as a Covered Employee as referenced in Section II of the Plan. All provisions of this Agreement are subject to and governed
by the terms of the Plan. In the event of any conflict in terms between the Plan and this Agreement, the terms of the Plan shall
prevail and govern.
In consideration of the mutual covenants and promises made in this Agreement, you and the Company agree
as follows:
I.
Certain Definitions. In addition to terms defined elsewhere herein or in the Plan, the
following terms have the following meanings when used in this Agreement:
(a)
"Base Salary" means your then current base pay (excluding incentive pay,
premium pay, commissions, overtime, bonuses and other forms of variable compensation), at the rate in effect during the
last regularly scheduled payroll period immediately preceding the date of your Qualifying Termination, and determined
prior to any reduction in base pay that would permit you to voluntarily resign employment for Good Reason or any
reduction in your base pay which occurs following a Change in Control.
(b)
(c)
"Board" means the Company's Board of Directors.
"Cause" means the occurrence of one or more of the following:
(i)
your performance of duties for the Company;
Your commission of fraud or other unlawful conduct in
your conviction of, or a plea of guilty or nolo contendere to, a
felony or other crime (except for misdemeanors which are not materially injurious to the business or reputation of the
Company or a Company affiliate); or
(ii)
(iii)
your willful refusal to perform in any material respect your
duties and responsibilities for the Company or a Company affiliate or your failure to comply in any material respect with the
terms of any agreement between you and the Company, including any proprietary information and assignment of inventions
agreement or and the policies and procedures of the Company or a Company affiliate at which you are employed or serve as
an officer and/or director if such refusal or failure causes or reasonably expects to cause injury to the Company or a Company
affiliate;
for the Company or a Company affiliate;
(iv)
fraud or other illegal conduct in your performance of duties
any conduct by you which is materially injurious to the
Company or a Company affiliate or materially injurious to the business reputation of the Company or a Company
affiliate.
(v)
The foregoing events are an exhaustive list for which your employment can be terminated by the Company for Cause for
purposes of this Agreement. Prior to your termination for Cause at any time within 12 months following a Change in
Control, you will be provided with written notice from the Company describing the conduct forming the basis for the alleged
Cause and to the extent curable as determined by the Board in its good faith discretion, an opportunity of 15 days to cure
such conduct before the Company may terminate you for Cause. If the Board determines that the Cause event is curable, you
may during this 15 day period present your case to the full Board before any termination for Cause is finalized by the
Company. Any termination for "Cause" will not limit any other right or remedy the Company may have under this
Agreement or otherwise.
(a)
"Change in Control Related Termination" means that a Qualifying
Termination where your Termination Date occurs on or within 12 months after a Change in Control.
(b)
"Change in Control" has the meaning as defined in the Company's 2015 Equity
Incentive Plan. For purposes of this Agreement, only the first Change in Control occurring after the Effective Date will be a
"Change in Control."
(c)
"Company" shall mean TRACON Pharmaceuticals, Inc., a Delaware
corporation, and shall include any successor company following a Change in Control.
(d)
"Good Reason" means a resignation of your employment after the first
occurrence of any one or more of the following events without your written consent.
(i)
(ii)
(iii)
a material diminution in your responsibilities, duties or authority;
a material diminution in your Base Salary; or
a relocation of the Company's principal place of business where
you are assigned to work outside of the San Diego metropolitan area;
provided, however that your resignation will only be for Good Reason if each of the following additional conditions is met:
(i) you provide the Company with written notice describing in detail the basis and underlying facts supporting your belief
that a Good Reason event has occurred within 45 days of the initial existence of such Good Reason event, (ii) the Company
has not cured or remedied the Good Reason event within 30 days after its receipt of your written notice, and (iii) your
resignation occurs within ninety (90) days of the initial existence of the Good Reason event. This "Good Reason" definition
and process is intended to comply with the safe harbor provided under Treasury Regulation Section l.409A-l(n)(2)(ii) and
shall be interpreted accordingly.
(e)
"Non-Change in Control Related Termination" means a Qualifying
Termination that is not a Change in Control Related Termination.
(f)
"Qualifying Termination" means a termination of your employment by the
Company without Cause or your resignation of employment for Good Reason. A Qualifying Termination does not include
any termination of your employment due to death or disability.
(g)
"Separation Agreement" means the separation agreement and general release of
all claims in substantially the form attached as Exhibit A hereto, with such other changes as the Company may reasonably
require in order to provide for an effective release of claims, and delivered to you no later than five days following your
Termination Date.
(h)
"Target Bonus" means the applicable percentage of your annual Base Salary that
you were eligible to earn as an annual bonus for the year including your Termination Date, and calculated without giving effect to
any reduction in your Base Salary that would give rise to your right to resign for Good Reason or any reduction in Base Salary
implemented following a Change in Control.
(i)
"Termination Date" means your last day of employment with the Company.
2.
Non-Change in Control Related Termination of Employment. If your employment is
terminated due to a Non-Change in Control Related Termination, you will be eligible to receive the
severance benefits provided in this Section 2, provided that you must: (i) within not later than forty-five
(45)
effective in accordance with its terms, and (ii) remain in full compliance with the terms of such Separation Agreement. Upon any
breach of the terms of your Separation Agreement, severance benefits provided under this Section 2 will immediately cease.
days after your Termination Date, execute and deliver to the Company the Separation Agreement and permit it to become
(a)
You will receive a severance payment equal to nine months of your Base Salary
("Cash Severance"). The Cash Severance shall be paid to you in substantially equal installments in accordance with the
Company's regular payroll practices over the nine month period following your Termination Date; provided, however, the
first payment shall be made on the 601h day following your Termination Date and such first installment shall be in an
amount to cover the first two months of Cash Severance payments otherwise scheduled to occur following your Termination
Date.
(b)
Provided that you timely elect COBRA coverage and you continue to timely pay the
same portion (if any) of the necessary group health insurance premium that you were responsible to pay as of immediately
before your Termination Date, the Company shall continue to pay the Company portion of the premiums for your Company
group health insurance coverage for you and your dependents (the "COBRA Premiums") until the earlier of: (i) nine months
following the Termination Date, (ii) the date you are provided with other group health insurance coverage, or (iii) the date you
cease to be eligible for COBRA coverage (the "COBRA Payment Period''). For purposes of this Agreement, COBRA
Premiums do not include amounts paid by you for coverage under a Section 125 health care reimbursement account plan.
Notwithstanding the foregoing, if the Company determines, in its sole discretion, that it cannot pay the COBRA Premiums
without potentially incurring financial costs or penalties under applicable law (including, without limitation, Section 2716 of
the Public Health Service Act), the Company instead shall pay you on the first day of each calendar month following the
Termination Date, a fully taxable cash payment equal to the applicable COBRA Premiums for that month, subject to applicable
tax withholdings for the remainder of the COBRA Payment Period.
(c)
In addition to the Cash Severance and COBRA Premiums, all of your outstanding
equity awards that are subject to vesting solely upon the passage of time and your continued employment with the Company
shall be accelerated in accordance with their applicable vesting schedules as if you had completed an additional nine months
of employment as of your Termination Date.
3.
Change in Control Related Termination of Employment. If your employment is terminated due
to a Change in Control Related Termination, you will be eligible to receive severance benefits provided in this Section 3,
provided that you must: (i) within not later than forty-five (45) days after your Termination Date, execute and deliver to the
Company the Separation Agreement and permit it to become effective in accordance with its terms, and (ii) remain in full
compliance with the terms of such Separation Agreement. Upon any breach of the terms of your Separation Agreement,
severance benefits provided under this Section 3 will immediately cease.
(a)
You will receive a severance payment equal to your annual Base Salary and
Target Bonus ("CIC Cash Severance"). The CIC Cash Severance shall be paid to you in substantially equal installments
in accordance with the Company's regular payroll practices over the twelve month period following your Termination Date;
provided, however, the first payment shall be made on the 60tl' day following your Termination Date and such first
installment shall be in an amount to cover the first two months of CIC Cash Severance payments otherwise scheduled to
occur following your Termination Date.
(b)
Provided that you timely elect COBRA coverage and you continue to timely pay
the same portion (if any) of the necessary group health insurance premium that you were responsible to pay as of immediately
before your Termination Date, the Company shall continue to pay the Company portion of the premiums for your Company
group health insurance coverage for you and your dependents (the "COBRA Premiums") until the earlier of: (i) twelve
months following the Termination Date, or (ii) the date you are provided with other group health insurance coverage (the
"CIC COBRA Payment Period''). For purposes of this Agreement, COBRA Premiums do not include amounts paid by you
for coverage under a Section 125 health care reimbursement account plan. Notwithstanding the foregoing, if the Company
determines, in its sole discretion, that it cannot pay the COBRA Premiums without potentially incurring financial costs or
penalties under applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the Company
instead shall pay you on the first day of each calendar month following the Termination Date, a fully taxable cash payment
equal to the applicable COBRA Premiums for that month, subject to applicable tax withholdings for the remainder of the CIC
COBRA Payment Period.
(c)
In addition to the Cash Severance and COBRA Premiums, all of your outstanding
equity awards that are subject to vesting solely upon the passage of time and your continued employment with the Company
shall be accelerated such that 100% of such outstanding equity awards shall be deemed immediately vested and exercisable
as of your Termination Date.
4.
Assignability; Binding Nature. Commencing on the Effective Date, this Agreement will be
binding upon you and the Company. This Agreement may not be assigned by you except that your rights to compensation
and benefits hereunder, subject to the limitations of this Agreement, may be transferred by will or operation of law. No rights
or obligations of the Company under this Agreement may be assigned or transferred except in the event of a merger or
consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the
assets of the Company provided that the assignee or transferee is the successor to all or substantially all of the assets of the
Company and assumes the Company's obligations under this Agreement contractually or as a matter of law. The Company
will require any such purchaser, successor or assignee to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if no such purchase, succession or assignment
had taken place. Your rights and obligations under this Agreement shall not be transferable by you by assignment or
otherwise provided, however, that if you die, all amounts then payable to you hereunder shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate.
5.
Governing Law. This Agreement is governed by the Employee Retirement Income
Security Act of 1974, as amended, and, to the extent applicable, the laws of the State of Delaware, without reference to
the conflict of law provisions thereof.
6.
Taxes. The Company shall have the right to withhold and deduct from any payment hereunder
any federal, state or local taxes of any kind required by law to be withheld with respect to any such payment. The Company
(including without limitation members of its Board) shall not be liable to you or other persons as to any unexpected or adverse
tax consequence realized by you and you shall be solely responsible for the timely payment of all taxes arising from this
Agreement that are imposed on you. This Agreement is intended to comply with the applicable requirements of Internal
Revenue Code (the "Code") Section 409A and shall be limited, construed and interpreted in a manner so as to comply
therewith. Each payment made pursuant to any provision of this Agreement shall be considered a separate payment and not
one of a series of payments for purposes of Code Section 409A. While it is intended that all payments and benefits provided
under this Agreement to you will be exempt from or comply with Code Section 409A, the Company makes no representation
or covenant to ensure that the payments under this Agreement are exempt from or compliant with Code Section 409A. The
Company will have no liability to you or any other party if a payment or benefit under this Agreement is challenged by any
taxing authority or is ultimately determined not to be exempt or compliant. In addition, if upon your Termination Date, you
are then a "specified employee" (as defined in Code Section 409A), then solely to the extent necessary to comply with Code
Section 409A and avoid the imposition of taxes under Code Section 409A, the Company shall defer payment of "nonqualified
deferred compensation" subject to Code Section 409A payable as a result of and within six (6) months following your
Termination Date until the earlier of (i) the first business day of the seventh month following your Termination Date or (ii) ten
(10) days after the Company receives written confirmation of your death. Any such delayed payments shall be made without
interest.
7.
Section 280G. Limitation on Payments. If any payment or benefit you will or may receive from
the Company or otherwise (a"280G Payment") would (i) constitute a "parachute payment" within the meaning of Section
2800 of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then any such 2800 Payment pursuant to this Agreement (a "Payment") shall be equal to the Reduced Amount. The
"Reduced Amount" shall be either
(x) the largest portion of the Payment that would result in no portion of the Payment (after reduction) being subject to the
Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount (i.e., the amount
determined by clause (x) or by clause (y)), after taking into account all applicable federal, state and local employment taxes,
income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax
basis, of the greater economic benefit notwithstanding that all or some portion of the Payment may be subject to the Excise
Tax. If a reduction in a Payment is required pursuant to the preceding sentence and the Reduced Amount is determined
pursuant to clause (x) of the preceding sentence, the reduction shall occur in the manner
(the "Reduction Method") that results in the greatest economic benefit for you. If more than one method of reduction will
result in the same economic benefit, the items so reduced will be reduced pro rata (the "Pro Rata Reduction Method").
Notwithstanding any provision of the preceding paragraph to the contrary, if the Reduction Method or the Pro Rata
Reduction Method would result in any portion of the Payment being subject to taxes pursuant to Section 409A of the Code
that would not otherwise be subject to taxes pursuant to Section 409A of the Code, then the Reduction Method and/or the Pro
Rata Reduction Method, as the case maybe, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A
of the Code as follows: (A) as a first priority, the modification shall preserve to the greatest extent possible, the greatest
economic benefit for you as determined on an after-tax basis; (B) as a second priority, Payments that are contingent on future
events (e.g., being terminated without cause), shall be reduced (or eliminated) before Payments that are not contingent on
future events; and (C) as a third priority, Payments that are "deferred compensation" within the meaning of Section 409A of
the Code shall be reduced (or eliminated) before Payments that are not deferred compensation within the meaning of Section
409A of the Code.
Unless you and the Company agree on an alternative accounting firm or law firm, the accounting firm engaged by the
Company for general tax compliance purposes as of the day prior to the effective date of the Change in Control shall perform
the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting or
law firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the
determinations by such accounting or law firm required to be made hereunder. The Company shall use commercially
reasonable efforts to cause the accounting or law firm engaged to make the determinations hereunder to provide its
calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after
the date on which your right to a 280G Payment becomes reasonably likely to occur (if requested at that time by you or the
Company) or such other time as requested by you or the Company.
If you receive a Payment for which the Reduced Amount was determined pursuant to clause (x) of the first paragraph
of this Section 7 and the Internal Revenue Service determines thereafter that some portion of the Payment is subject to the
Excise Tax, you shall promptly return to the Company a sufficient amount of the Payment (after reduction pursuant to clause
(x) of the first paragraph of this Section 7 so that no portion of the remaining Payment is subject to the Excise Tax. For the
avoidance of doubt, if the Reduced Amount was determined pursuant to clause (y) of the first paragraph of this Section 7, you
shall have no obligation to return any portion of the Payment pursuant to the preceding sentence.
8.
No Change in At-Will Status. Your employment with the Company is and shall continue to be
at-will, as defined under applicable law. If your employment terminates for any reason, you shall not be entitled to any
payments, benefits, damages, awards or compensation other than as provided by this Agreement or required by applicable law,
or as may otherwise be established under the Company's then existing employee benefit plans or policies at the time of
termination. Nothing in this Agreement modifies your at-will employment status and either you or the Company can
terminate the employment relationship at any time, with or without Cause.
9.
Entire Agreement. Except as otherwise specifically provided in this Agreement, the Plan and
this Agreement (and the agreements referenced herein) contain all the legally binding understandings and agreements
between you and the Company pertaining to the subject matter of this Agreement and supersedes all such agreements,
whether oral or in writing, previously discussed or entered into between the parties.
10.
Covenants (a) As a condition of this Agreement and to your receipt of any post- employment
benefits, you agree that you will fully and timely comply with all of the covenants set forth in this Section 1O(a) (which shall
survive your termination of employment and termination or expiration of this Agreement):
(i)
You will fully comply with all obligations under the proprietary
information and inventions agreement between you and the Company (as amended from time to time, the "Confidentiality
Agreement") and further agree that the provisions of the Confidentiality Agreement shall survive any termination or
expiration of this Agreement or termination of your employment or any subsequent service relationship with the Company;
(ii)
Within five (5) days of the Termination Date, you shall return to
the Company all Company confidential information including, but not limited to, intellectual property, etc. and you shall
not retain any copies, facsimiles or summaries of any Company proprietary information;
(iii)
You will not at any time during or following your employment
with the Company, make (or direct anyone to make) any disparaging statements (oral or written) about the Company, or any
of its affiliated entities, officers, directors, employees, stockholders, representatives or agents, or any of the Company's
products or services or work-in-progress, that are harmful to their businesses, business reputations or personal reputations;
(iv)
You agree that, upon the Company's request and without any
payment therefore, you shall reasonably cooperate with the Company (and be available as necessary) after the Termination
Date in connection with any matters involving events that occurred during your period of employment with the Company.
(b)
You also agree that you will fully and timely comply with all of the covenants set
forth in this Section 1O(b) (which shall survive your termination of employment and termination or expiration of this
Agreement):
(i)
You will fully pay off any outstanding amounts owed to the
Company no later than their applicable due date or within thirty days of your Termination Date (if no other due date has been
previously established);
(ii)
Within five (5) days of the Termination Date, you shall
return to the Company all Company property including, but not limited to, computers, cell phones, pagers, keys,
business cards, etc.;
submit any outstanding expense reports to the Company on or prior to the Termination Date; and
(iii)
Within fifteen (15) days of the Termination Date, you will
As of the Termination Date, you will no longer represent that
you are an officer, director or employee of the Company and you will immediately discontinue using your Company mailing
address, telephone, facsimile machines, voice mail and e-mail.
(iv)
(c)
You acknowledge that (i) upon a violation of any of the covenants contained in
Section 10 of this Agreement or (ii) if the Company is terminating your employment for Cause, the Company would as a
result sustain irreparable harm, and, therefore, you agree that in addition to any other remedies which the Company may
have, the Company shall be entitled to seek equitable relief including specific performance and injunctions restraining you
from committing or continuing any such violation; and
11.
Offset. Any Severance or other payments or benefits made to you under this Agreement may be
reduced, in the Company's discretion, by any amounts you owe to the Company provided that any such offsets do not violate
Code Section 409A. To the extent you receive severance or similar payments and/or benefits under any other Company plan,
program, agreement, policy, practice, or the like, or under the WARN Act or similar state law, the payments and benefits due
to you under this Agreement will be correspondingly reduced on a dollar-for-dollar basis (or vice-versa) in a manner that
complies with Code Section 409A.
12.
Notice. Any notice that the Company is required to or may desire to give you shall be given by
personal delivery, recognized overnight courier service, email, telecopy or registered or certified mail, return receipt
requested, addressed to you at your address of record with the Company, or at such other place as you may from time to time
designate in writing. Any notice that you are required or may desire to give to the Company hereunder shall be given by
personal delivery, recognized overnight courier service, email, telecopy or by registered or certified mail, return receipt
requested, addressed to the
Company's Chief Executive Officer at its principal office, or at such other office as the Company may from time to time
designate in writing. The date of actual delivery of any notice under this Section 1O shall be deemed to be the date of
delivery thereof.
13.
Waiver; Severability. No provision of this Agreement may be amended or waived unless such
amendment or waiver is agreed to by you and the Company in writing. No waiver by you or the Company of the breach of
any condition or provision of this Agreement will be deemed a waiver of a similar or dissimilar provision or condition at the
same or any prior or subsequent time. Except as expressly provided herein to the contrary, failure or delay on the part of either
party hereto to enforce any right, power, or privilege hereunder will not be deemed to constitute a waiver thereof. In the event
any portion of this Agreement is determined to be invalid or unenforceable for any reason, the remaining portions shall be
unaffected thereby and will remain in full force and effect to the fullest extent permitted by law.
14.
Voluntary Agreement. You acknowledge that you have been advised to review this Agreement
with your own legal counsel and other advisors of your choosing and that prior to entering into this Agreement, you have had
the opportunity to review this Agreement with your attorney and other advisors and have not asked (or relied upon) the
Company or its counsel to represent you or your counsel in this matter. You further represent that you have carefully read and
understand the scope and effect of the provisions of this Agreement and that you are fully aware of the legal and binding
effect of this Agreement. This Agreement is executed voluntarily by you and without any duress or undue influence on the
part or behalf of the Company.
By signing below, you expressly acknowledge that you (i) have received a copy of the Plan and its Summary Plan
Description, (ii) understand the terms of the Plan and this Agreement, (iii) are voluntarily entering into this Agreement and
(iv) are agreeing to be bound by the terms of the Plan and this Agreement.
Please acknowledge your acceptance and understanding of this Agreement by signing and returning it to the undersigned. A
copy of this signed Agreement will be sent to you for your records.
ACKNOWLEDGED AND AGREED:
TRACON PHARMACEUTICALS, INC.
BY: /s/ Charles P. Theuer /s/ Bonne Adams
Charles P. Theuer, President and CEO Bonne Adams
[Signature Page to Severance Agreement]
SEPARATION AGREEMENT AND GENERAL RELEASE OF ALL CLAIMS
EXHIBIT A
This Separation Agreement and General Release, dated [DATE] (the "Agreement"), is made pursuant to that
certain Amended and Restated Severance Agreement dated [DATE], 2017 (the "Severance Agreement") entered into by and
between Bonne Adams ("Employee") on the one hand, and TRACON Pharmaceuticals, Inc. (the "Company"), on the other.
This Agreement is entered into in consideration for and as condition precedent to the Company providing separation benefits to
Employee pursuant to the Severance Agreement. It is understood and agreed that the Company is not otherwise obligated to
provide such benefits under the terms of the Severance Agreement and that the Company is doing so as a direct result of
Employee's willingness to agree to the terms hereof. Collectively, Employee and the Company shall be referred to as the
"Parties."
1.
Employee was formerly employed by the Company. Employee's
employment with the Company ended effective [DATE] (the "Termination Date").
2.
The purpose of this Agreement is to resolve any and all disputes relating to
Employee's employment with the Company, and the termination thereof (the "Disputes"). The Parties desire to resolve the
above-referenced Disputes, and all issues raised by the Disputes, without the further expenditure of time or the expense of
contested litigation. Additionally, the Parties desire to resolve any known or unknown claims as more fully set forth below.
For these reasons, they have entered into this Agreement.
3.
Employee acknowledges and agrees that Employee has received all wages due
to Employee through the Termination Date, including but not limited to all accrued but unused vacation, bonuses,
commissions, options, benefits, and monies owed by the Company to Employee. Employee further agrees and acknowledges
that Employee has been fully paid and reimbursed for any and all business expenses which Employee incurred during his/her
employment with the Company.
4.
The Company expressly denies any violation of any federal, state or local
statute, ordinance, rule, regulation, policy, order or other law. The Company also expressly denies any liability to Employee.
This Agreement is the compromise of disputed claims and nothing contained herein is to be construed as an admission of
liability on the part of the Company hereby released, by whom liability is expressly denied. Accordingly, while this
Agreement resolves all issues referenced herein, it does not constitute an adjudication or finding on the merits of the
allegations in the Disputes and it is not, and shall not be construed as, an admission by the Company of any violation of
federal, state or local statute, ordinance, rule, regulation, policy, order or other law, or of any liability alleged in the Disputes.
5.
In consideration of and in return for the promises and covenants undertaken
by the Company and Employee herein and the releases given by Employee herein:
a.
[The Company has previously granted to Employee the
following options (collectively, the "Options") to purchase shares of the Company's common stock (the "Shares") under the
Company's 2015 Equity Incentive Plan (the "Plan"): [List all Option Grants]. As of the Termination Date of [DATE], a total
of [
Stock Options"). The remaining shares underlying Employee's stock options are unvested and have been forfeited and
canceled as of the Termination Date. Employee has until the date that is ninety (90) days after the Termination Date to
exercise any or all of the Vested Options (the "Option Termination Date"). Any portion of Employee's Vested Stock
Options that remain unexercised as of the Option Termination Date shall be forfeited and canceled as of such date.]
] shares underlying Employee's stock options are vested (collectively, the "Vested
110847319 v3
Exhibit A-1
actual work performed up to and including the Termination Date, Employee shall receive severance compensation as
b.
In addition to any compensation otherwise due Employee for
outlined in Section
of the Severance
Agreement. Pursuant to
Section
of the Severance
J month[s] of Employee's base salary [and Employee's target bonus] (the "Severance Pay"). The Severance Pay
Agreement, Employee will receive a total sum of$
representing
[
shall be paid to Employee in cash, in substantially equal monthly installments, payable over the[
following the Termination Date; provided, however, the first payment shall be made on the 60'" day following the
Termination Date and such first installment shall be in an amount to cover the first two months following the Termination
Date. As a condition to receiving and continuing to receive the Severance Pay, Employee must (i) within but not later than
forty-five (45) days after the Termination Date, execute and deliver to the Company this Agreement, (ii) permit this
Agreement to become effective, and (iii) remain in full compliance with this Agreement and the Severance Agreement.
Employee shall not be entitled to accrue any additional leave or other benefits subsequent to the Termination Date.
] month period
, less standard withholdings,
c.
Provided Employee timely elects continuation coverage
pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") of the Company's group health
plan, the Company shall pay the entire applicable premiums to continue Employee's existing medical and dental benefits
through [DATE], which represents [
Thereafter, Employee shall be eligible to continue his or her medical and dental benefits at his or her own cost in accordance
with COBRA. If at any time subsequent to the Termination Date, Employee obtains medical and dental benefits through
another employer, Employee shall immediately notify the Company that he or she has obtained such medical and dental
benefits and the Company shall no longer be required to pay any premiums for Employee's medical and dental benefits as of
the date that Employee's new medical and dental benefits begin coverage.
] month[sJ following the Termination Date.
d.
Any tax liabilities resulting from or arising out of the benefits
to Employee referred to in paragraphs Sa, Sb and Sc, above, shall be the sole and exclusive responsibility of Employee.
Employee agrees to indemnify and hold the Company and the others released herein harmless from and for any tax liability
(including, but not limited to, assessments, interest, and penalties) imposed on the Company by any taxing authority on
account of the Company failing to withhold for tax purposes any amount from the benefits made as consideration of this
Agreement.
6.
Except for any rights created by this Agreement, in consideration of and in
return for the promises and covenants undertaken herein by the Company, and for other good and valuable consideration,
receipt of which is hereby acknowledged:
a.
Employee does hereby acknowledge full and complete
satisfaction of and does hereby release, absolve and discharge the Company, and each of its parents, subsidiaries, divisions,
related companies and business concerns, past and present, as well as each of its partners, trustees, directors, officers, agents,
attorneys, servants and employees, past and present, and each of them (hereinafter collectively referred to as "Releasees")
from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, grievances, wages,
vacation payments, severance payments, obligations, commissions, overtime payments, debts, profit sharing claims, expenses,
damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether known or unknown
to Employee which Employee now owns or holds or has at any time owned or held as against Releasees, or any of them,
including specifically but not exclusively and without limiting the generality of the foregoing, any and all claims, demands,
grievances, agreements, obligations and causes of action, known or unknown, suspected or unsuspected by Employee: (1)
arising out of or in any way connected with the Disputes; or (2) arising out of Employee's employment with the Company; or
(3) arising out of or in any way connected with any claim, loss, damage or injury whatever, known or unknown, suspected
ll0847319v3
Exhibit A-2
or unsuspected, resulting from any act or omission by or on the part of the Releasees, or any of them, committed or omitted on
or before the Effective Date hereof. Additionally, Employee in any future claims may not use against Releasees as evidence
any acts or omissions by or on the part of the Releasees, or any of them, committed or omitted on or before the Effective Date
hereof, and no such future claims may be based on any such acts or omissions. Also without limiting the generality of the
foregoing, Employee specifically releases the Releasees from any claim for attorneys' fees. EMPLOYEE ALSO
SPECIFICALLY AGREES AND ACKNOWLEDGES EMPLOYEE IS WANING ANY RIGHT TO RECOVERY BASED
ON STATE OR FEDERAL AGE, SEX, PREGNANCY, RACE, COLOR, NATIONAL ORIGIN, MARITAL STATUS,
RELIGION, VETERAN STATUS, DISABILITY, SEXUAL ORIENTATION, MEDICAL CONDITION OR OTHER ANTI-
DISCRIMINATION LAWS, INCLUDING, WITHOUT LIMITATION, TITLE VII OF THE CNIL RIGHTS ACT OF 1964,
THE AGE DISCRIMINATION IN EMPLOYMENT ACT, THE EQUAL PAY ACT, THE AMERICANS WITH
DISABILITIES ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, THE CALIFORNIA FAMILY
RIGHTS ACT, CALIFORNIA LABOR CODE SECTION 970, THE FAMILY AND MEDICAL LEAVE ACT, THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT, THE WORKER ADWSTMENT AND RETRAINING ACT, THE
FAIR LABOR STANDARDS ACT, AND ANY OTHER SECTION OF THE CALIFORNIA LABOR OR GOVERNMENT
CODE, ALL AS AMENDED, WHETHER SUCH CLAIM BE BASED UPON AN ACTION FILED BY EMPLOYEE OR
BY A GOVERNMENTAL AGENCY. This release does not release claims that cannot be released as a matter of law.
7.
Employee agrees and understands as follows: It is the intention of Employee in
executing this instrument that it shall be effective as a bar to each and every claim, demand, grievance and cause of action
hereinabove specified. In furtherance of this intention, Employee hereby expressly waives any and all rights and benefits
conferred upon Employee by the provisions of Section 1542 of the California Civil Code and expressly consents that this
Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those
relating to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other
claims, demands and causes of action hereinabove specified. Section 1542 provides:
"A general release does not extend to claims which the creditor does not know or
suspect to exist in his or her favor at the time of executing the release, which if known
by him or her must have materially affected his or her settlement with the debtor."
Having been so apprised, Employee nevertheless hereby voluntarily elects to and does waive the rights
described in Civil Code section 1542 and elects to assume all risks for claims that now exist in Employee's favor, known or
unknown, that are released under this Agreement.
8.
Employee agrees: (1) the fact of and the terms and conditions of this
Agreement; and (2) any and all actions by Releasees taken in accordance herewith, are confidential, and shall not be
disclosed, discussed, publicized or revealed by the parties or their attorneys to any other person or entity, including but not
limited to radio, television, press media, newspapers, magazines, professional journals and professional reports, excepting
only the Parties' accountants, lawyers, immediate family members (mother, father, brother, sister, child, spouse), the persons
necessary to carry out the terms of this Agreement or as required by law. Should Employee be asked about the Disputes or
this Agreement, Employee shall limit Employee's response, if any, by stating that the matters have been amicably resolved.
110847319 v3
Exhibit A-3
9.
In the event a government agency files or pursues a charge or complaint relating
to Employee's employment with the Company and/or the Disputes, Employee agrees not to accept any monetary or other
benefits arising out of the charge or complaint.
10.
Employee agrees not to make any derogatory, disparaging or negative
comments about the Company, its products, officers, directors, or employees.
11.
If any provision of this Agreement or application thereof is held invalid, the
invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid
provision or application. To this end, the provisions of this Agreement are severable.
12.
Employee agrees and understands that this Agreement may be treated as a
complete defense to any legal, equitable, or administrative action that may be brought, instituted, or taken by Employee, or on
Employee's behalf, against the Company or the Releasees, and shall forever be a complete bar to the commencement or
prosecution of any claim, demand, lawsuit, charge, or other legal proceeding of any kind against the Company and the
Releasees.
13.
This Agreement and all covenants and releases set forth herein shall be
binding upon and shall inure to the benefit of the respective Parties hereto, their legal successors, heirs, assigns, partners,
representatives, parent companies, subsidiary companies, agents, attorneys, officers, employees, directors and shareholders.
14.
The Parties hereto acknowledge each has read this Agreement, that each
fully understands its rights, privileges and duties under the Agreement, that each has had an opportunity to consult with
an attorney of its choice and that each enters this Agreement freely and voluntarily.
15.
This Agreement may not be released, discharged, abandoned, changed or
modified in any manner, except by an instrument in writing signed by Employee and an officer of the Company. The failure
of any Party to enforce at any time any of the provisions of this Agreement shall in no way be construed as a waiver of any
such provision, nor in any way to affect the validity of this Agreement or any part thereof or the right of any Party thereafter
to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other
or subsequent breach.
16.
This Agreement and the provisions contained herein shall not be construed
or interpreted for or against any party hereto because that party drafted or caused that party's legal representative to draft
any of its provisions.
17.
In the event of litigation arising out of or relating to this Agreement,
the prevailing party shall be entitled to recover reasonable attorneys' fees and costs.
18.
Employee acknowledges Employee may hereafter discover facts different from,
or in addition to, those Employee now knows or believes to be true with respect to the claims, demands, liens, agreements,
contracts, covenants, actions, suits, causes of action, wages, obligations, debts, expenses, damages, judgments, orders and
liabilities herein released, and agrees the release herein shall be and remain in effect in all respects as a complete and general
release as to all matters released herein, notwithstanding any such different or additional facts.
19.
The undersigned each acknowledge and represent that no promise or
representation not contained in this Agreement has been made to them and acknowledge and represent that this Agreement
and the Severance Agreement contains the entire understanding between the Pmties
110847319 vJ
Exhibit A-4
and contains all terms and conditions pertaining to the compromise and settlement of the subjects referenced herein. The
undersigned further acknowledge that the terms of this Agreement are contractual and not a mere recital.
20.
Employee expressly acknowledges, understands and agrees that this
Agreement includes a waiver and release of all claims which Employee has or may have under the Age Discrimination in
Employment Act of 1967, as amended, 29 U.S.C. §621, et seq. ("ADEA''). The terms and conditions of Paragraphs 20
through 22 apply to and are part of the waiver and release of ADEA claims under this Agreement. Company hereby advises
Employee in writing to discuss this Agreement with an attorney before signing it. Employee acknowledges the Company has
provided Employee at least forty-five days within which to review and consider this Agreement before signing it. If
Employee elects not to use all forty-five days, then Employee knowingly and voluntarily waives any claim that Employee
was not in fact given that period of time or did not use the entire forty-five days to consult an attorney and/or consider this
Agreement.
21.
Within three calendar days of signing and dating this Agreement, Employee
shall deliver the signed original of this Agreement to
acknowledge and agree that Employee may revoke this Agreement for up to seven calendar days following Employee's
execution of this Agreement and that it shall not become effective or enforceable until the revocation period has expired. The
Parties further acknowledge and agree that such revocation must be in writing addressed to and received
by
Agreement by Employee. If Employee revokes this Agreement under this Paragraph, this Agreement shall not be effective or
enforceable and Employee will not receive the benefits described above, including those described in Paragraph 5.
of the Company not later than midnight on the seventh day following execution of this
of the Company. However, the Parties
22.
If Employee does not revoke this Agreement in the timeframe specified in
Paragraph 21 above, the Agreement shall be effective at 12:00:01 a.m. on the eighth day after it is signed by Employee (the
"Effective Date").
23.
This Agreement is intended to be exempt from the requirements of section
409A of the Internal Revenue Code of 1986 as amended ("Section 409A") and will be interpreted accordingly. While it is
intended that all payments and benefits provided under this Agreement to Employee or on behalf of Employee will be
exempt from Section 409A, the Company makes no representation or covenant to ensure that such payments and benefits are
exempt from or compliant with Section 409A. The Company will have no liability to Employee or any other party if a
payment or benefit under this Agreement is challenged by any taxing authority or is ultimately determined not to be exempt
from or compliant with Section 409A.
24.
This Agreement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original and such counterparts shall together constitute one and the same
Agreement.
25.
This Agreement shall be construed in accordance with, and be deemed
governed by, the Employee Retirement Income Security Act of 1974, as amended, and, to the extent applicable, the laws of
the State of Delaware, without reference to the conflict of law provisions thereof.
26.
The Company executes this Agreement for itself and on behalf of all
other respective Releasees.
110847319 v3
Exhibit A-5
I have read the foregoing Separation Agreement and General Release of All Claims, consisting of [ J pages, and I
accept and agree to the provisions contained therein and hereby execute it voluntarily and with full understanding of its
consequences.
PLEASE READ CAREFULLY. TIDS AGREEMENT CONTAINS A GENERAL RELEASE OF
ALL KNOWN AND UNKNOWN CLAIMS.
Dated: _
Dated:
TRACON
_
Bonne Adams
Pharmaceuticals, Inc.
Name: Title:
[Signature Page to Separation Agreement and General Release of All Claims]
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE
IT IS BOTH (I) NOT MATERIAL AND (II) IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL.
Execution Version
Exhibit 10.18
Dated as of December 22, 2022
Investment Agreement
TRACON - Investment Agreement
CONTENTS
SECTION
PAGE
1.
2.
Definitions1
Investment Obligations and Investors’ Entitlement1
2.1
2.2
Capital Amounts1
Investors’ Entitlement3
3.
Payment Obligations of the Counterparty5
3.1
3.2
Payments5
Waiver of Right of Set-Off7
4.
Covenants7
4.1
4.2
4.3
4.4
Covenants of Each Party7
Covenants of the Investors7
Covenants of the Counterparty7
Notice and Information Rights9
5.
Representations and Warranties10
5.1
5.2
Representations and Warranties of Each Party10
Representations and Warranties of the Counterparty11
6.
7.
8.
9.
Confidentiality12
Legal Privilege12
Exculpation; Reinstatement12
Remedy Events13
9.1
9.2
9.3
9.4
9.5
9.6
Failure to Pay or Deliver13
Failure to Discharge Claim Costs13
Breach or Repudiation13
Misrepresentation14
Bankruptcy14
Reorganization Without Assumption14
10.
Remedies14
10.1
10.2
Available Remedies Generally14
Additional Remedy for Failure to Pay15
TRACON - Investment Agreement
10.3
10.4
Additional Remedy for Failure to Discharge Claim Costs15
Remedies Cumulative15
Enforcement of Claim Resolution16
Limitations on Transfer, Successors and Assigns; Third Party Beneficiaries16
Tax Withholding and Other Tax Matters16
Anti-Corruption; Data Protection16
Notices16
Amendments17
Entire Agreement17
Counterparts17
No Waiver17
Severability17
Expenses18
Relationship of Parties18
Governing Law18
Dispute Resolution18
Administrative and Collateral Agent18
Rules of Construction19
Limited Indemnity20
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
TRACON - Investment Agreement
INVESTMENT AGREEMENT, dated as of December 22, 2022
(“Agreement”), between TRACON
Pharmaceuticals, Inc., an entity organized or formed under the laws of the jurisdiction identified in Annex I (the
“Counterparty”), on the one hand, and each of Batiste Investments LLC, a limited liability company and Maplewood Park
Investments LP, a limited partnership, in each case formed under the laws of the jurisdiction identified on Annex I (“Investor No.
1” and “Investor No. 2”, respectively, and each of them, severally but not jointly an “Investor”, and collectively, the
“Investors”), on the other hand.
WHEREAS, the Counterparty before interacting with the Investors has pursued the Claim (as defined herein) and has
requested that the Investors provide external capital based on the value of the Claim;
WHEREAS, the Investors have committed to provide such capital in accordance with the terms and conditions of this
Agreement and, in consideration for providing such capital, the Investors shall be entitled to a share of Proceeds (as defined
herein) that arise if the Claim is successful; and
WHEREAS, the Investors are passive providers of capital and do not own or control the Claim; consequently, while
the Investors will receive information about the Claim and consult with the Counterparty thereon, the Counterparty remains in
full control of the assertion and resolution of the Claim;
NOW, THEREFORE, in consideration of the mutual agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound,
hereby agree as follows:
1.
DEFINITIONS
Capitalized terms used herein have the meanings assigned to them in in Exhibit A or elsewhere in this Agreement.
2.
2.1
INVESTMENT OBLIGATIONS AND INVESTORS’ ENTITLEMENT
Capital Amounts
The Investors shall provide capital to the Counterparty as set forth below.
(a)
Capital Amounts: Up to the lesser of (x) thirty million dollars (US$30,000,000) or (y) [***] percent ([***]%) of the
Award (such amount, the “Maximum Commitment Amount”), to be deployed as follows:
(i) three million five hundred thousand dollars (US$3,500,000) shall be provided to the payment account of the
Counterparty set forth on Annex II within [***] Business Days of the Closing Date (the “Closing Capital
Amount”);
(ii)provided the Threshold Recovery Condition has been satisfied, twenty-five percent (25%) of the Maximum
Commitment Amount shall be provided to the payment account of the Counterparty within fifteen (15)
Business Days of the issuance of an Award by the ICC tribunal considering the Claim (the “Post-Award
Capital Amount”);
TRACON - Investment Agreement
(iii)provided the Threshold Recovery Condition has been satisfied, up to [***] dollars (US$[***]) shall be
provided for reasonable legal fees and costs associated with an Award confirmation process (the
“Confirmation Capital Amounts”) and/or Award enforcement effort (the “Enforcement Capital Amounts”,
and together with the Confirmation Capital Amount, the “Confirmation & Enforcement Capital Amounts”),
subject to the following conditions:
(A)
(B)
(C)
(D)
Covington & Burling LLP (“Covington”) and Foley Hoag LLP (“Foley”) shall serve as the
Counterparty’s initial counsel in connection with confirming the Award in the United States of
America and Kobre & Kim LLP (“K&K”) shall serve as the Counterparty’s initial counsel in
connection with all other litigation to enforce and monetize the Award, with any subsequent
change to confirmation process counsel or enforcement counsel to be mutually agreed between
Counterparty and Investors;
the Counterparty and the Investors have mutually approved in writing the respective estimated
budgets for such confirmation and enforcement proceedings;
Confirmation & Enforcement Capital Amounts shall be provided by the Investors on behalf of
the Counterparty directly to the payment account of the relevant counsel (using the wire
information provided by such counsel to the Investors in writing) within [***] Business Days
following receipt by the Investors of satisfactory invoices, but not more frequently than [***];
and
prior to the Enforcement Trigger Date, not more than [***] dollars (US$[***]) of Confirmation
& Enforcement Capital Amounts shall be available to the Counterparty absent the Investors’
consent;
(iv)provided the Threshold Recovery Condition has been satisfied, an amount equal to the (x) Maximum
Commitment Amount minus (y)(i) the Closing Capital Amount, (ii) the Post-Award Capital Amount, and (iii)
US$[***] shall be provided to the payment account of the Counterparty in six (6) equal tranches beginning
[***] after the date on which the Post-Award Capital Amount is due in accordance with Section 2.1(a)(ii) and
every [***] thereafter until the earlier of (x) the [***]-year anniversary of the date on which the Post-Award
Capital Amount is due in accordance with Section 2.1(a)(ii) or (y) such time as an Occurrence occurs (the
“Subsequent Capital
TRACON - Investment Agreement
Page 2
Amounts”), subject to the following provisos:
(A)
the Counterparty may terminate the commitment of Investors to provide any given tranche of
Subsequent Capital Amounts by written notice to the Investors provided not less than [***] days
prior to the date upon which such Subsequent Capital Amount tranche is to be funded,
whereupon such tranche of Subsequent Capital Amounts shall be removed from the Maximum
Commitment Amount and not included among Subsequent Capital Amounts; and
(B)
for the avoidance of doubt, if [***].
(b)
Allocation of Funding. Capital Amounts shall be provided in accordance with the following allocation:
(i) Investor No. 1: [***]%
(ii)Investor No. 2: [***]%
(c)
(d)
Transaction Costs. The Investors shall retain [***] percent ([***]%) of the Closing Capital Amount to cover their
closing and other costs (the “Transaction Costs”).
Commercial Viability. Notwithstanding the foregoing, if any court of competent jurisdiction issues a ruling that, in the
sole discretion of the Investors, has the effect of rendering the Claim not commercially viable, then the Investors may
terminate their obligations with respect to any unfunded portion of the Capital Amounts and no Investors’ Entitlement
shall be payable with respect to such unfunded Capital Amounts.
2.2
Investors’ Entitlement
In consideration of their agreement to provide the Capital Amounts, the Investors shall be entitled to receive the Investors’
Entitlement set forth below.
(a)
Investors’ Entitlement: The Investors’ Entitlement shall be the following to be paid first dollar after payment only of
all Applicable Attorney Fees:
(A)
(B)
an amount equal to [***] plus
a return calculated on each tranche of Capital Amounts actually paid to or on behalf of the
Counterparty by the Investors hereunder, equal to a multiple of such Capital Amount, as follows:
(I) for the Closing Capital Amount, [***]x such Capital Amount;
(II)for all Capital Amounts other than the Closing Capital Amount, if an Occurrence does
not occur, then:
TRACON - Investment Agreement
Page 3
(aa)
(bb)
(cc)
(dd)
if the Investors’ Entitlement with respect to such Capital Amount is paid in
full within [***] months of the Multiple Start Date applicable to such
Capital Amount, [***]x such Capital Amount; or
if the Investors’ Entitlement with respect to such Capital Amount is paid in
full on or after the [***]-month anniversary but before the [***]-month
anniversary of the Multiple Start Date applicable to such Capital Amount,
[***]x such Capital Amount; or
if the Investors’ Entitlement with respect to such Capital Amount is paid in
full on or after the [***]-month anniversary but before the [***]-month
anniversary of the Multiple Start Date applicable to such Capital Amount,
[***]x such Capital Amount; or
if the Investors’ Entitlement with respect to such Capital Amount has not
been paid in full before the [***]-month anniversary of the Multiple Start
Date applicable to such Capital Amount, [***]x such Capital Amount; or
(III)for all Capital Amounts other than the Closing Capital Amount, if and only if an
Occurrence occurs, then:
(aa)
(bb)
if the Investors’ Entitlement with respect to such Capital Amount is paid in
full before the [***]-month anniversary of the Multiple Start Date
applicable to such Capital Amount, [***]x such Capital Amount; or
if the Investors’ Entitlement with respect to such Capital Amount has not
been paid in full before the [***]-month anniversary of the Multiple Start
Date applicable to such Capital Amount, [***]x such Capital Amount;
plus
(C)
as to each tranche of Capital Amounts actually paid to or on behalf of the Counterparty by the
Investors hereunder, a [***]% rate of
TRACON - Investment Agreement
Page 4
(b)
(c)
(d)
3.
3.1
(a)
return, accruing daily and compounding annually, on the sum of such Capital Amount and its
applicable return set forth in Section 2.2(a)(B), with such accrual beginning [***] months from
the Multiple Start Date applicable to such Capital Amount and ending on the date that the
Investors’ Entitlement with respect to such Capital Amount is paid in full.
Applications of Payments. The components of the Investors’ Entitlement shall be payable on a first-in, first-out basis
such that payment of Proceeds shall be applied to the earliest deployed and unreturned Capital Amount first, next the
second earliest deployed and unreturned Capital Amount, and so on. As to each Capital Amount, payment of Proceeds
shall be applied as follows: (i) first, towards payment of the returns on the applicable Capital Amount as specified in
clause (C) of Section 2.2(a); (ii) second, towards payment of the returns on the applicable Capital Amount, as specified
in clause (B) of Section 2.2(a); and (iii) third, towards the repayment of the Invested Amount with respect to such
Capital Amount as specified in clause (A) of Section 2.2(a). For the avoidance of doubt, in the event of a partial
repayment of a Capital Amount, the outstanding portion of such Capital Amount shall continue to accrue its return by
reference to its Multiple Start Date.
No Prepayment. The Investors’ Entitlement may not be prepaid in whole or in part by the Counterparty without the
Investors’ written consent.
Allocation of Entitlement. Each Investor shall be entitled to a pro rata portion of the Investors’ Entitlement based on
the Capital Amounts provided by it. In the event that there is an additional Investor added to this Agreement, such
Investor shall be entitled to a portion of the Investors’ Entitlement as specified by the Investors at the time of such new
Investor’s addition to this Agreement.
PAYMENT OBLIGATIONS OF THE COUNTERPARTY
Payments
Non-Recourse Agreement. For purposes of all references in this Agreement to payment of Proceeds for all or any
portion of the Investors’ Entitlement, including all references to Proceeds in this Section 3.1(a), Proceeds shall mean,
and be calculated as, Proceeds minus the amount of Proceeds used to pay all Applicable Attorney Fees. The Capital
Amounts are provided to the Counterparty on a non-recourse basis, and the Investors’ Entitlement is derived and paid
from (and capped at the total amount of) Proceeds. Notwithstanding anything to the contrary in this Agreement, if
there are no Proceeds, then the Counterparty shall not have an obligation to pay any portion of the Investors’
Entitlement (including any repayment of the Invested Amount) and the Investors’ Entitlement with respect to all
Capital Amounts shall be [***] dollars (US$[***]); if Proceeds are less than the Investors’ Entitlement, then the
Counterparty shall not have an obligation to pay the portion of the Investors’ Entitlement that exceeds Proceeds and
the Investors’
TRACON - Investment Agreement
Page 5
Entitlement in aggregate with respect to all Capital Amounts shall equal the amount of Proceeds; provided, however,
that if the Counterparty accepts a settlement offer made by the Adverse Party that resolves the Claim in an amount
which does not permit the Investors to recover the Investors’ Entitlement (as calculated at the time of the Counterparty
accepting the settlement offer) absent Investors’ prior written consent, then the Counterparty shall pay the Investors
the difference between the full Investors’ Entitlement (as calculated at the time of the Counterparty accepting the
settlement offer) and the amount of the settlement.
(b)
Payment and Delivery of Proceeds.
(i) Prior to the payment of any Proceeds to the Counterparty, the Counterparty shall direct the payor to remit such
Proceeds not to the Counterparty but rather to the payment account of the Payment Agent set forth on Annex
II, with proper endorsements if by check or other instrument.
(ii)If Proceeds consist of property that is not freely transferable immediately available funds, then the
Counterparty shall diligently take such actions as are necessary to (x) monetize such property in a
commercially reasonable manner that has been approved by the Investors in their sole discretion (not to be
unreasonably withheld, conditioned or delayed) and (y) cause the prompt payment of the Investors’
Entitlement from the cash realized from such monetization. Notwithstanding the foregoing, in the event
Proceeds consist of property that is not freely transferable immediately available funds and can only be
received or monetized by the Counterparty over a period of time which is greater than [***] months from the
date such Proceeds arise, then the parties shall negotiate in good faith to establish commercially reasonable
monetization and payment parameters and if the parties cannot agree, shall initiate an Expert Determination.
(iii)If, notwithstanding the foregoing, any Proceeds are instead received by the Counterparty or a third party other
than the Payment Agent on the Counterparty’s behalf at any time when any portion of the Investors’
Entitlement remains unpaid, the Counterparty shall, or shall direct such third party to, (x) hold such Proceeds
in trust for the benefit of the Investors; (y) segregate such Proceeds from all other funds and property; and
(z) forthwith remit such Proceeds to the Payment Agent in accordance with clauses (i) and (ii) of this Section
3.1(b).
(c)
Due Date for Payment; Payment Mechanics. Except as otherwise set forth in Section 3.1(b)(ii), the Counterparty
(directly or through the Payment Agent) shall pay Proceeds to the Investors in respect of the Investors’ Entitlement
within [***] Business Days of the Counterparty’s (or the Payment Agent’s) receipt of such Proceeds. Payment of
Proceeds received by the Counterparty or the Payment Agent that are cash shall be made in U.S. Dollars by wire
transfer of freely transferable and immediately available funds to the payment accounts of the Investors specified
TRACON - Investment Agreement
Page 6
in writing. The rights of the Investors to receive the Investors’ Entitlement pursuant to this Agreement will terminate
upon receipt thereof by the Investors.
3.2
Waiver of Right of Set-Off
Subject to Section 13 of this Agreement, each amount that the Counterparty is obligated to pay under this Agreement shall be
paid without set-off, deduction or counterclaim.
4.
4.1
COVENANTS
Covenants of Each Party
Each party agrees that, so long as such party has or may have any obligation under any Transaction Document to the other party:
(a)
(b)
(c)
4.2
it shall maintain its corporate existence, except to the extent that the failure to do so would not have a Material
Adverse Effect;
it shall use all reasonable efforts to obtain and maintain in effect all consents, approvals, actions, authorizations,
exceptions, notices, filings and registrations of or with any Governmental Authority that are required with respect to
any Transaction Document; and
it shall comply with all applicable laws and orders of any Governmental Authority to which it may be subject if failure
so to comply could reasonably be expected to have a Material Adverse Effect.
Covenants of the Investors
Each Investor agrees that:
(a)
(b)
it is not, by virtue of entering into the Transaction Documents or otherwise, a party to any Claim;
without limiting the obligations of the Counterparty or the rights of the Investors under this Agreement, it is not
entitled to control or direct the conduct of any Claim, or to require settlement thereof;
4.3
Covenants of the Counterparty
The Counterparty agrees that:
(a)
with respect to the Claim:
(i) it shall use commercially reasonable efforts to: (A) pursue all of the Counterparty’s legal and equitable rights
arising in connection with the Claim; and (B) bring about the reasonable monetization of the Claim through
TRACON - Investment Agreement
Page 7
a Claim Resolution (including, if so advised by the Nominated Lawyers, by mediating with the Adverse Party
as a means of resolving the Claim prior to going to trial); and (C) collect and enforce any Claim Resolution.
(ii)it shall at its own expense (taking into account the Capital Amounts) and in a timely manner: (A) retain,
remunerate and cooperate with the Nominated Lawyers to prosecute the Claim; (B) discharge all fees,
expenses and other payment obligations necessarily or reasonably recommended or incurred in connection
with the Claim; (C) use commercially reasonable efforts to collect and enforce any settlement, final judgment
or award; (D) if applicable, discharge any obligation to pay adverse costs or post security for an adverse costs
order or award (the costs and expenses of doing all of the foregoing described in clauses (A) – (D), “Claim
Costs”); and (E) actively manage the incurrence of Claim Costs with the goal of achieving a Claim
Resolution, and the collection and enforcement thereof, efficiently and cost-effectively;
(iii)it shall keep the Investors fully and promptly apprised of each material development in the Claim and direct
the Nominated Lawyers to do the same; and it shall respond fully and promptly to any reasonable request
from the Investors or a Representative of an Investor (which Representative, if requested by the Counterparty,
shall be designated by the Investors in writing and, with respect to any information that the Counterparty
reasonably considers material non-public information, subject to confidentiality and non-use obligations
reasonably satisfactory to the Counterparty) for information regarding the Claim;
(iv)it shall not knowingly prejudice the Claim; and
(v)other than Permitted Liens, it shall not Transfer any portion of the Claim or any Proceeds of the Claim; other
than Permitted Liens, it shall not permit to exist any Adverse Interest with respect to any portion of the Claim
or any Proceeds thereof; and it shall not set off or agree to set off any amounts against the Claim or any
Proceeds of the Claim;
(b)
(c)
(d)
it shall at its sole cost maintain an effective, enforceable Payment Instruction Letter with the Payment Agent;
it shall not permit any amendments to the economic terms or scope of representation set forth in any Engagement
Agreement without the Investors’ prior written consent; and
if the Nominated Lawyers cease to act as its legal counsel for any reason or if it needs to retain new legal counsel
outside the scope of the Engagement Agreement(s) with the Nominated Lawyers, then it shall appoint successor
attorneys or new attorneys who have a similar level of quality and reputation in the relevant field of practice as the
Nominated Lawyers, subject to the Investors’ prior
TRACON - Investment Agreement
Page 8
written approval (not to be unreasonably withheld) of the choice of counsel and the economic terms of the
appointment. Upon the engagement of any new counsel, all references to “Nominated Lawyers” will be deemed to
refer to and include such successor or additional counsel. The Counterparty will promptly deliver to the Investors a
copy of the Engagement Agreement(s) with any successor or new attorney and Annex II shall be deemed updated to
reflect such new Engagement Agreements without the necessity of a formal amendment to this Agreement. If pre-
existing Nominated Lawyers were acting as Payment Agent prior to their replacement, then the Counterparty will (i)
require as a condition of the replacement counsel’s engagement that such counsel agree to a Payment Instruction Letter
and (ii) deliver a duly executed copy of such Payment Instruction Letter to the Investors immediately upon engaging
such replacement counsel. The parties acknowledge and agree that, notwithstanding anything in this Agreement to the
contrary, the Counterparty may terminate the engagement of any Nominated Lawyer at any time without the Investors’
consent.
Notice and Information Rights
The Counterparty shall promptly (and in any event within [***] Business Day) notify the Investors of:
(i) any settlement offer made by an Adverse Party, in which case the Counterparty shall in good faith give the
Investors an opportunity to discuss such settlement offer prior to accepting or rejecting it;
(ii)any Claim Resolution or any receipt of any Proceeds (including the amount of such Proceeds and the Claim to
which such Proceeds relate), or of any event that is expected to generate a Claim Resolution or the receipt of
any Proceeds; and
(iii)any Potential Remedy Event or Remedy Event or any event which could reasonably be expected to result in a
Potential Remedy Event or Remedy Event.
Within the [***] Business Days following the end of each calendar month, the Counterparty shall itself, or cause the
applicable Nominated Lawyers to, provide the Investors with a written or oral Monthly Report.
The Counterparty shall respond fully and promptly to any reasonable request by the Investors or a Representative of an
Investor (which Representative, if requested by the Counterparty, shall be designated by the Investors in writing and,
with respect to any information that the Counterparty reasonably considers material non-public information, subject to
confidentiality and non-use obligations reasonably satisfactory to the Counterparty) for information regarding the
financial condition, operations, business or prospects of the Counterparty.
4.4
(a)
(b)
(c)
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5.
5.1
REPRESENTATIONS AND WARRANTIES
Representations and Warranties of Each Party
On each Representation Date, each party represents to the other party that:
(a)
(b)
(c)
(d)
(e)
(f)
it (i) is duly organized or formed and validly existing under the laws of the jurisdiction of its organization or formation
and, if relevant under such laws, in good standing, (ii) is qualified to do business in each jurisdiction in which the
nature of its business so requires, except where the failure to be so qualified could not reasonably be expected to result
in a Material Adverse Effect, and (iii) has not filed any certificates of dissolution or liquidation, or any certificates of
domestication, transfer or continuance in any jurisdiction;
it has the power to execute and deliver each Transaction Document to which it is a party and to perform its obligations
under each Transaction Document to which it is a party; and it has taken all necessary action to authorize such
execution, delivery and performance;
such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its
constitutional documents, any order or judgment of any court or other Governmental Authority applicable to it or any
of its assets or any contractual restriction binding on or affecting it or any of its assets;
all consents, approvals, actions, authorizations, exceptions, notices, filings and registrations that are required to have
been obtained by it with respect to the Transaction Documents to which it is a party have been obtained and are in full
force and effect, and all conditions of any such consents, approvals, actions, authorizations, exceptions, notices, filings
and registrations have been complied with;
the Transaction Documents to which it is a party constitute its legal, valid and binding obligations of such party,
enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization or similar laws
and to general equitable principles); and
(i) it is acting for its own account and has made its own independent decision based on advice from its advisers in
entering into the Transaction Documents to which it is a party; (ii) no communication received from any other party
shall be deemed an assurance as to the expected results of the transactions contemplated hereby; (iii) explanations
related to the terms and conditions of the Transaction Documents and the transactions contemplated hereby shall not
be considered legal advice or a recommendation; and (iv) it has assessed (on its own behalf or through independent
professional legal advice), understands and accepts the terms, conditions and risks of the Transaction Documents.
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5.2
Representations and Warranties of the Counterparty
On each Representation Date, the Counterparty represents and warrants to the Investors that:
(a)
(b)
(c)
(d)
(e)
no Remedy Event or Potential Remedy Event has occurred and is continuing; no Remedy Event or Potential Remedy
Event would occur as a result of its entering into or performing its obligations under the Transaction Documents;
except as set forth on Schedule 5.2(b), no litigation or other proceedings before any court or other Governmental
Authority, official, tribunal or arbitrator that could reasonably be expected, either individually or in the aggregate, to
have a Material Adverse Effect, have been commenced by or against the Counterparty or, to the Counterparty’s
knowledge, are threatened against, the Counterparty;
it is not Insolvent; it is able to pay its debts when due and has no insolvency proceedings threatened or outstanding
against it;
as of the date of this Agreement, it has entered into Engagement Agreement(s) with the Nominated Lawyers; true and
complete copies of the Engagement Agreement(s) have been provided to the Investors and are set forth on Annex II;
with respect to the Claim:
(i) (A) it is the sole legal and beneficial owner of, has good title to, and possesses sole control of, the Claim, free
and clear of any Adverse Interest other than Permitted Liens; (B) it has not Transferred any portion of the
Claim or any Proceeds thereof (other than in connection with Permitted Liens); (C) it has full power and
authority and has obtained all necessary corporate and other authorizations to bring the Claim; (D) the security
interest granted to the Investors under the Security Agreement is a legal, validly created, perfected, first
priority security interest, subject to no other Adverse Interest other than Permitted Liens; and (E) it has not set
off or agreed to set off and there exist no rights against the Counterparty that could permit any set-off of or
counterclaim of any amounts against the Claim;
(ii)(A) as of the date of this Agreement, it has not received any payments in connection with the Claim, and (B)
any payments in connection with the Claim received after the date of this Agreement have been disclosed to
the Investors in accordance herewith;
(iii)it has and reasonably expects to continue to have sufficient assets (taking into account the Capital Amounts)
available to discharge Claim Costs;
(iv)it has not taken or omitted to take any steps or executed or omitted to execute any documents which could
reasonably be expected, either individually or in
TRACON - Investment Agreement
Page 11
the aggregate, to have a Material Adverse Effect; and it has disclosed to the Investors any facts or
circumstances of which it is aware that could reasonably be expected, either individually or in the aggregate,
to have a Material Adverse Effect; and
(v)it has disclosed to the Investors all information in its knowledge, possession or control that is or is likely to be
material to the Investors’ assessment of the Claim (including the enforcement and collection of any related
settlement, award or judgment); all information provided to the Investors in due diligence or otherwise has
been provided in its true and complete form and is, to the knowledge of the Counterparty, accurate; the
Counterparty believes that the Claim is meritorious; and the Counterparty has not been advised by the
Nominated Lawyers or any other legal counsel or litigation funder that the Claim is unlikely to succeed;
it has not agreed to pay any compensation to any agent or broker in connection with the transactions contemplated by
this Agreement; and
it is not materially overdue in the filing of any Tax return nor overdue in the payment of any material amount of Tax.
CONFIDENTIALITY
(f)
(g)
6.
Provisions relating to confidentiality are attached hereto as Exhibit E and incorporated herein.
7.
LEGAL PRIVILEGE
Provisions relating to legal privilege are attached hereto as Exhibit F and incorporated herein.
8.
(a)
(b)
(c)
EXCULPATION; REINSTATEMENT
Other than its obligations to provide the Capital Amounts to the Counterparty, no Investor shall have any obligation to
fund any penalties, costs orders, damages, fees, expenses or other sums (including any in respect of counterclaims) in
relation to any Claim, and all such sums shall be the sole responsibility of the Counterparty.
The liability of each Investor under the Transaction Documents (and the transactions contemplated by the Transaction
Documents) shall in no event exceed [***], except in the event of any fraud or reckless activity amounting to fraud
perpetrated by such Investor. This limitation of liability is absolute and extends to each Investor and its
Representatives.
To the extent any payment received by the Investors from or on behalf of the Counterparty, or obligation incurred by
the Counterparty, is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be
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repaid in whole or in part by the Investors or paid over to a trustee, receiver or any other entity, whether under any
bankruptcy law, insolvency, fraudulent transfer law or otherwise (any such payment or obligation being hereinafter
referred to as a “Challenged Item”), then the obligations of the Counterparty with respect to such Challenged Item
shall (i) be fully reinstated and revived, as the case may be, notwithstanding such payment or incurrence, and (ii) to the
extent of each such Challenged Item, remain effective and continue in full force and effect as if said Challenged Item
had not occurred or been made. The Counterparty shall indemnify the Investors on demand for all reasonable third-
party costs and expenses incurred by the Investors in connection with defending, repaying and/or reviving a
Challenged Item.
9.
REMEDY EVENTS
The occurrence of any of the following events constitutes a “Remedy Event”:
9.1
Failure to Pay or Deliver
The Counterparty fails to make any payment owing to an Investor when and where due.
9.2
Failure to Discharge Claim Costs
The Counterparty fails to comply with any of its obligations to discharge Claim Costs under Section 4.3(a)(ii) and fails to remedy
such failure within [***] Business Days.
9.3
Breach or Repudiation
Other than the obligations referenced in Sections 9.1 and 9.2, which are respectively governed by such sections, the Counterparty
fails to comply with any of its obligations in any Transaction Document if (a) such failure, if remediable, is not (subject to the
next sentence) remedied within [***] Business Days and (b) (i) such failure could reasonably be expected to have a Material
Adverse Effect; (ii) such failure could reasonably be expected to cause any Security Agreement to cease to be in full force and
effect; or (iii) the Counterparty or any of its Representatives acting as an agent of the Counterparty disaffirms, disclaims,
repudiates or rejects or challenges the validity of any Transaction Document in whole or in part. If the failure to cure a Remedy
Event described in this Section 9.3 within fewer than [***] Business Days would be reasonably likely to result in an adverse
effect on the Claim due to exigencies of the litigation or arbitration process, then, upon notice to the Counterparty, the Investors
may shorten the cure period to the extent necessary to avoid or minimize such likelihood.
9.4
Misrepresentation
A representation by the Counterparty in this Agreement or any other Transaction Document proves to have been incorrect or
misleading in any material respect when made or deemed to have been made.
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9.5
Bankruptcy
Any of the following occurs: (a) the voluntary or involuntary commencement of a case or proceeding by or against the
Counterparty under any applicable bankruptcy, insolvency or similar law affecting creditors’ rights, or any other procedure under
any law of any jurisdiction having a similar or analogous nature or effect, and such case, proceeding or procedure, if involuntarily
commenced, is not dismissed or otherwise terminated within [***] days of its commencement; or an administrator, provisional
liquidator, conservator, receiver, trustee, custodian or similar official having powers over the Counterparty or all or a substantial
part of its property is appointed; (b) the Counterparty is unable or fails generally, or admits in writing of its inability, to pay its
debts as they become due; (c) the Counterparty’s dissolution (other than pursuant to a consolidation, amalgamation or merger); or
(d) the adoption of any resolution or other authorization, or the taking of any action in furtherance of, or indicating its consent or
intent to consent to, approval of, or acquiescence in, any of the foregoing by its board of directors (or similar governing body) or
any committee thereof or by its equityholders entitled to vote on and authorize the same.
9.6
Reorganization Without Assumption
The Counterparty consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, or
reorganizes, reincorporates, reconstitutes or divides into or as, another entity (or other entities) and, as a direct or indirect result of
such consolidation, amalgamation, merger, transfer, reorganization, reincorporation, reconstitution or division, (a) no single
resulting, surviving or transferee entity (a “Counterparty Successor”) has assumed (or remain liable for) all the obligations of the
Counterparty under this Agreement and/or the other Transaction Documents; or (b) any benefit of any Security Agreement fails
to extend to the Investors; or (c) all rights to the Claim and Proceeds are no longer held by such a Counterparty Successor.
10.
10.1
REMEDIES
Available Remedies Generally
If at any time a Remedy Event has occurred, in addition to all other legal and equitable remedies, the Investors shall be entitled to
exercise one or more of the following remedies in each case without thereby relieving the Counterparty of any of its obligations
hereunder:
(a)
(b)
(c)
the Investors may terminate their commitment to provide Capital Amounts hereunder;
if the Remedy Event is continuing, the Investors may exercise their rights and remedies under the Security Agreement;
if the Remedy Event is continuing, the Investors may take actions that they deem necessary or advisable on behalf of
the Counterparty in order to prosecute the Claim to which the Remedy Event relates and to bring about the
monetization thereof and
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to collect and enforce any settlement, final judgment or award; in connection therewith, the Counterparty hereby (i)
irrevocably appoints Investor No. 1 as the Counterparty’s attorney-in-fact, with full authority in the place and stead of
the Counterparty and in the name of the Counterparty or otherwise, from time to time following the date such Remedy
Event has occurred and is continuing, in Investor No. 1’s discretion, to take any such actions to the extent consistent
with the Counterparty’s interests in the Claim, including to settle or compromise the Claim or to appoint new
Nominated Lawyers, and (ii) agrees to, and to cause its Affiliates and to use commercially reasonably efforts to cause
its and their Representatives to, cooperate fully with the Investors and counsel in all matters pertaining to the Claim
from time to time following the date such Remedy Event has occurred and is continuing; and
(d)
if the Remedy Event is continuing, the Investors may pursue all other legal and equitable remedies available to the
Investors under applicable law in connection with the enforcement of their rights under the Transaction Documents.
10.2
Additional Remedy for Failure to Pay
If a Remedy Event under Section 9.1 has occurred and is continuing, the Counterparty shall on demand pay interest to the
Investors at the Default Rate on the overdue amount.
10.3
Additional Remedy for Failure to Discharge Claim Costs
If a Remedy Event under Section 9.2 has occurred and is continuing, the Investors shall be entitled to provide to or on behalf of
the Counterparty additional Capital Amounts beyond those set forth in Section 2, to the extent necessary to discharge all Claim
Costs. In consideration thereof, the Investors’ Entitlement with respect to such additional Capital Amounts shall be an amount
equivalent to [***].
10.4
Remedies Cumulative
Except as provided otherwise in this Agreement, the rights, powers, remedies and privileges provided in Section 10 of this
Agreement are cumulative; may be exercised singularly, concurrently or successively at the Investors’ option; and may be
exercised or enforced without constituting a bar to the exercise or enforcement of any other such rights, powers, remedies and
privileges.
11.
ENFORCEMENT OF CLAIM RESOLUTION
If (x) K&K or a replacement of K&K approved by the Investors pursuant to Section 4.3(d) ceases to act as the Counterparty’s
counsel to enforce and monetize the Award, or (y) by the date that is [***] days after the date of a Claim Resolution (the
“Standstill Period”), any portion of a judgment, award or settlement payment owing to the Counterparty as a result thereof
remains unsatisfied, the Investors shall, at their option and upon notice to the Counterparty, be entitled to engage judgment
enforcement professionals of their own
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choosing (including those affiliated with the Investors) to pursue collection or enforcement of the same; provided that,
notwithstanding the expiration of the Standstill Period, in no event shall the Investors pursue collection or enforcement of the
Claim Resolution if the Counterparty shall have commenced, and shall be diligently pursuing, collection or enforcement. In the
event the Investors elect to do so, (a) they shall pay their designated judgment enforcement professionals their reasonable and
customary fees and expenses, (b) any costs incurred by the Investors in such regard shall constitute Capital Amounts, and (c) in
consideration of such additional Capital Amounts, the Investors’ Entitlement with respect to such additional Capital Amounts
shall be an amount equivalent to such additional Capital Amounts plus [***].
12.
LIMITATIONS ON TRANSFER, SUCCESSORS AND ASSIGNS; THIRD PARTY BENEFICIARIES
Provisions relating to
Exhibit G and incorporated herein.
limitations on transfer, successors and assigns and third-party beneficiaries are attached hereto as
13.
TAX WITHHOLDING AND OTHER TAX MATTERS
Provisions relating to tax withholding and certain other tax matters are attached hereto as Exhibit H and incorporated herein.
14.
ANTI-CORRUPTION; DATA PROTECTION
Provisions relating to Anti-Corruption Rules and Data Protection are attached hereto as Exhibit C and incorporated herein.
15.
NOTICES
All notices under the Transaction Documents shall be in writing and may be given in any manner described below to the address
or number provided for the recipient in Annex I and shall be deemed effective (i) if delivered in person or by courier, on the date
it is received; (ii) if sent by certified or registered mail or the equivalent (return receipt requested), on the date it is received; or
(iii) if sent by email, on the date sent in the absence of any immediate automated response indicating the message was not
received or would not be timely read, and if such an immediate automated response is received by the sender, on the date the
sender receives an acknowledgement from the recipient, unless the date of receipt is not a Business Day or the communication is
received after the close of business on a Business Day, in which case such communication shall be deemed given and effective on
the first following day that is a Business Day. Notices to the Counterparty shall be copied to the Nominated Lawyers. Either party
may change the address or email details at which notices or other communications are to be given to it by notice to the other in
accordance with this Section 15.
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16.
AMENDMENTS
No amendment, modification or waiver of this Agreement shall be effective unless in writing and executed by the Counterparty
and the Investors.
17.
ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof and is the final and
complete expression of their intent. Other than the CDA, the parties represent and warrant that no prior or contemporaneous
negotiations, promises, agreements, covenants or representations of any kind or nature, whether made orally or in writing, have
been made or relied upon by them, whether in negotiations leading to this Agreement or relating to the subject matter hereof,
which are not expressly contained herein, or which have not become merged and finally integrated herein; it being the intention
of the parties that in the event of any subsequent litigation, controversy or dispute concerning the terms and provisions of this
Agreement, no party shall be permitted to introduce oral or extrinsic evidence not included herein and not reflected in writing.
18.
COUNTERPARTS
This Agreement and the other Transaction Documents (and each amendment, modification and waiver in respect thereof) may be
executed and delivered in counterparts (including by facsimile or digital transmission), each of which shall be deemed an
original.
19.
NO WAIVER
A failure or delay in exercising any right, power or privilege in any Transaction Document shall not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege shall not be presumed to preclude any subsequent or
further exercise, of that right, power or privilege or the exercise of any other right, power or privilege.
20.
SEVERABILITY
If any term of any Transaction Document, or the application thereof to any party or any circumstance, is held to be unenforceable,
invalid or illegal (in whole or in part) for any reason, the remaining terms, modified by the deletion of the unenforceable, invalid
or illegal portion, shall continue in full force and effect, and such unenforceability, invalidity, or illegality shall not otherwise
affect that of the remaining terms, so long as the Transaction Documents as so modified continues to express, without material
change, the original intentions of the parties and the deletion of such portion of the relevant Transaction Document shall not
substantially impair the expectations or reciprocal obligations of the parties or the practical realization of the benefits that would
otherwise be conferred upon the parties. The parties shall endeavour in good faith negotiations to replace any prohibited or
unenforceable provision with a valid provision the economic effect of which comes as close as possible to that of the prohibited
or unenforceable provision.
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21.
(a)
(b)
22.
(a)
EXPENSES
Except as otherwise expressly provided in any Transaction Document, each party shall bear its own expenses in
connection with the negotiation, execution, delivery and performance of the Transaction Documents.
The Counterparty shall indemnify and hold harmless the Investors for all reasonable out-of-pocket expenses, including
legal fees and disbursements (but not including taxes), incurred by the Investors in enforcing and protecting their
rights under any Transaction Document.
RELATIONSHIP OF PARTIES
Nothing in any Transaction Document is intended to create (i) a fiduciary, lawyer-client, lender-borrower, agency or
other non-contractual relationship between the Counterparty and any Investor; (ii) any partnership, joint venture or any
other type of affiliation between the Counterparty and any Investor; or (iii) a joint interest in any Claim for any
purpose, including for U.S. federal, state and local income Tax purposes. The Investors are not partners, nor are they
engaged in any partnership or joint venture with one another.
23.
GOVERNING LAW
Except as set forth otherwise in Section 24, this Agreement and all matters arising out of or relating in any way whatsoever to this
Agreement (whether in contract, tort or otherwise) shall be construed in accordance with and shall be governed by the law of the
State of [***] (without reference to any conflict of law principles or choice of law doctrine that would have the effect of causing
this Agreement to be construed in accordance with or governed by the law of any other jurisdiction).
24.
DISPUTE RESOLUTION
Provisions relating to Dispute Resolution are attached hereto as Exhibit D and incorporated herein.
25.
(a)
ADMINISTRATIVE AND COLLATERAL AGENT
Investor No. 2 hereby appoints Investor No. 1 as administrative and collateral agent for the Investors hereunder. As
such, Investor No. 1 is hereby authorized to act on behalf of Investor No. 2 for the purpose of (i) giving and receiving
notices, waivers, consents, approvals and instructions; (ii) acquiring, holding and enforcing any and all liens on
collateral granted by the Counterparty to secure the Investors’ rights hereunder; (iii) enforcing any other rights of the
Investors under any Transaction Document, including filing and proving a claim for the aggregate amount of the
Counterparty’s obligations to the Investors hereunder in the event of any bankruptcy or insolvency proceeding relating
to the Counterparty; and (iv) taking
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(b)
(c)
(d)
such other actions as Investor No. 1 deems appropriate to administer the Transaction Documents; in each case together
with such powers and discretion as are reasonably incidental thereto.
The use of the term “agent” or any similar or equivalent term in connection with the foregoing appointment is not
intended to imply any fiduciary or other duties arising under legal principles governing agency relationships. Investor
No. 1 shall not have any duties or obligations in its capacity as administrative and collateral agent except those
expressly set forth herein, and its appointment and all rights and duties of it as an agent hereunder shall be ministerial
and administrative in nature. Notwithstanding the appointment of Investor No. 1 as administrative and collateral agent,
Investor No. 1 shall have the same rights and powers in its capacity as an Investor hereunder as Investor No. 2, and
Investor No. 1 may exercise all such rights and powers as though it were not administrative or collateral agent. The
provisions of this Section 25 are for the benefit of the Investors; no other party shall have any rights as a third party
beneficiary of any provision of this Section 25, provided that the Counterparty shall be entitled to rely on any notices,
waivers, consents, approvals or instructions provided to it by Investor No. 1, or any action to be taken as described in
clauses (ii) through (iv) in Section 25(a), as being on behalf of all the Investors.
Investor No. 1 may perform its duties and exercise its rights and powers as administrative and collateral agent
hereunder by or through any one or more sub-agents or servicing entities appointed by it. The exculpatory provisions
in the following clause (d) shall apply to any such sub-agent or servicing entity.
Investor No. 1 shall not be liable to any other Investor for any action taken or not taken by it (i) with the consent or at
the request of Investor No. 2, (ii) as Investor No. 1 believed in good faith was necessary under the circumstances or
(iii) in the absence of its own gross negligence or willful misconduct. In its capacity as administrative and collateral
agent, Investor No. 1 shall be entitled to rely upon any notice, request, certificate, consent, statement, instrument,
document or other writing believed by it to be genuine and to have been signed, sent or otherwise authenticated by the
proper Person.
26.
RULES OF CONSTRUCTION
Unless the context otherwise clearly requires: (a) the definitions of terms herein shall apply equally to the singular and plural
forms of the terms defined; (b) whenever the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms; (c) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase
“without limitation”; (d) the word “shall” shall be construed to have the same meaning and effect as the word “will”; (e) any
definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such
agreement, instrument or other document as from time to time amended, supplemented, restated or otherwise modified (subject to
any restrictions on such amendments, supplements or
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Page 19
modifications set forth herein); (f) any reference herein to any Person shall be construed to include such Person’s successors and
assigns; (g) the phrase “to its knowledge” and phrases of similar import shall be construed to mean the best knowledge, after due
inquiry, of the Counterparty’s Chief Executive Officer and Chief Financial Officer; (h) the words “herein”, “hereof” and
“hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular
provision hereof; (i) all references herein to Sections, Annexes, Exhibits and Schedules, as applicable, shall be construed to refer
to Sections of, and Annexes, Exhibits and Schedules to, this Agreement, and the same are incorporated herein as part of this
Agreement; and (j) the headings used in this Agreement are for convenience of reference only and are not to affect the
construction of or to be taken into consideration in interpreting this Agreement.
27.
LIMITED INDEMNITY
Provisions relating to a limited indemnity are attached hereto as Exhibit I and incorporated herein.
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IN WITNESS WHEREOF, the parties have executed and delivered this Investment Agreement as of the date first
Signature page to Investment Agreement – 1 of 2
written above.
Investor No. 1:
BATISTE INVESTMENTS LLC
By: /s/ [***]________________________
Name: [***]
Title: Authorized Signatory
Investor No. 2:
MAPLEWOOD PARK INVESTMENTS LP
By:[***]
Its General Partner
By: /s/ [***]________________________
Name: [***]
Title: Director
IN WITNESS WHEREOF, the parties have executed and delivered this Investment Agreement as of the date first
Signature page to Investment Agreement – 2 of 2
written above.
Counterparty:
TRACON PHARMACEUTICALS, INC.
By: /s/ Scott B. Brown
Name: Scott B. Brown
Title: Chief Financial Officer
EXHIBIT A
Defined Terms
“Adverse Interest” means, with respect to any Claim or any Proceeds, (i) any mortgage, deed of trust, lien, pledge,
hypothecation, encumbrance, charge, security interest, purchase option, call or similar right of a third party in, on or affecting
such asset, and (ii) any other claim that a claimant has an interest in such asset or that it is a violation of the rights of the claimant
for another Person to hold, Transfer or deal with such asset. For purposes of clarity, the items set forth on Schedule 5.2(b) shall
not be deemed an Adverse Interest for purposes of the Transaction Documents.
“Adverse Party” means, with respect to any Claim, individually and collectively, the Person(s) named as defendants or
counterclaim defendants in the Claim, as set forth on Annex II, and any other Person added or joined to the Claim from time to
time as a defendant or indemnitor or against whom proceedings are asserted or threatened even if such Person is not named or
served, and in each case their respective Affiliates and successors.
“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
“Agreed Purpose” has the meaning set forth on Exhibit C.
“Anti-Corruption Rules” has the meaning set forth on Exhibit C.
“Applicable Attorney Fees” means the aggregate of the Covington Entitlement and the Foley Entitlement.
“Award” means the total amount awarded by the ICC tribunal considering the Claim to the Counterparty in respect of the Claim.
“Business Day” means a day on which commercial banks and foreign exchange markets settle payments and are open for general
business (including dealings in foreign exchange and foreign currency deposits) in New York.
“Capital Amounts” means each of the Closing Capital Amount, the Post-Award Capital Amount, the Confirmation &
Enforcement Capital Amounts and the Subsequent Capital Amounts.
“CDA” means that certain Confidentiality, Common Interest and Non-Disclosure Agreement, dated as of August 1, 2022 by and
between the Counterparty and an Affiliate of the Investors.
“Claim” means the claim described on Annex II.
Exhibit A - Page 1
TRACON - Investment Agreement
“Claim Costs” has the meaning set forth in Section 4.3(a).
“Claim Resolution” means either full and final settlement of the Claim or the entry of a final, non-appealable and enforceable
award or judgment, in either case resolving with prejudice all aspects and elements of the Claim. In circumstances where a final,
non-appealable and enforceable award or judgment does not automatically come into being upon the rendering of a dispositive
decision, a Claim Resolution shall be deemed to have occurred on the date that is [***] days following such dispositive decision
in the absence of any subsequent challenge thereto.
“Closing Capital Amount” has the meaning set forth in Section 2.1(a)(i).
“Closing Date” means the date of the execution and delivery of this Agreement, December 22, 2022.
“Confirmation Capital Amounts” has the meaning set forth in Section 2.1(a)(iii).
“Confirmation & Enforcement Capital Amounts” has the meaning set forth in Section 2.1(a)(iii).
“Conservatory Measures” has the meaning set forth in Exhibit D.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies
of a Person, whether through the ability to exercise voting power, by contract or otherwise; “Controlling” and “Controlled” have
meanings correlative thereto.
“Counterparty” has the meaning set forth in the introductory paragraph of this Agreement.
“Counterparty Successor” has the meaning set forth in Section 9.6.
“Covington” has the meaning set forth in Section 2.1(a)(iii)(A).
“Covington Entitlement” means Covington’s contingency fee with respect to the Claim, to be paid [***].
“CPD” has the meaning set forth on Exhibit C.
“Data Protection Laws” has the meaning set forth on Exhibit C.
“Default Rate” means a rate per calendar month of [***]%, compounded [***], or the maximum rate permitted by law,
whichever is lower.
“Enforcement Capital Amounts” has the meaning set forth in Section 2.1(a)(iii).
“Enforcement Trigger Date” means the earlier of (x) the date which is [***] months after the date of confirmation of the Award
if the Adverse Party fails to pay the full amount of
Exhibit A - Page 2
TRACON - Investment Agreement
such Award voluntarily by such date or (y) the date upon which the Adverse Party expressly repudiates its obligation to pay the
full amount of such Award (unless another date is mutually agreed by the parties).
“Engagement Agreement” means any engagement, retainer or similar agreement between the Counterparty and its counsel
governing or purporting to govern the terms of the representation of the Counterparty with respect to the Claim.
“Expert Determination” means a determination made by an expert appointed by the [***].
“Foley” means Foley Hoag LLP.
“Foley Entitlement” means Foley’s contingency fee with respect to the Claim, to be paid [***].
“Governmental Authority” means the government of the United States of America, any other nation or any political subdivision
thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity
exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
“Indemnified Parties” has the meaning set forth in Exhibit I.
“Indemnifying Party” has the meaning set forth in Exhibit I.
“Invested Amount” means (i) the sum of all amounts actually paid to or on behalf of the Counterparty by the Investors hereunder
plus (ii) the Transaction Costs.
“Insolvent” means any of the following: (i) the sum of the Counterparty’s debts exceeds the present fair market value of its assets
(not including any fraudulently transferred property); (ii) after the transactions contemplated by this Agreement, the Counterparty
is left with unreasonably small capital for the operation of its business; or (iii) the Counterparty intends or expects to incur debts
beyond its ability to pay.
“Investors”, “Investor No. 1” and “Investor No. 2” have the meanings set forth in the introductory paragraph of this Agreement.
“Investors’ Entitlement” means the amounts set forth as such in Section 2.2.
“Kobre & Kim LLP” has the meaning set forth in Section 2.1(a)(iii)(A).
“[***]” has the meaning set forth in Exhibit D.
“Losses” has the meaning set forth in Exhibit I.
“Material Adverse Effect” means, with respect to any event or circumstance and any party, one or more of (i) the material
impairment of its ability to perform any of its obligations
Exhibit A - Page 3
TRACON - Investment Agreement
under this Agreement or any other Transaction Document, (ii) the material impairment of the rights or remedies available under
this Agreement or any other Transaction Document to the other party and (iii) solely in the case of the Counterparty, an adverse
effect on any Claim or the value or collectability thereof.
“Maximum Commitment Amount” has the meaning set forth in Section 2.1(a).
“Monthly Report” means a report containing the information described on Exhibit B.
“Multiple Start Date” means (x) in respect of each tranche of Capital Amounts (other than Enforcement Capital Amounts
deployed to the relevant counsel on or after the Enforcement Trigger Date), the date of the funding of such tranche of Capital
Amounts; and (y) in respect of each tranche of Enforcement Capital Amounts deployed to the relevant counsel on or after the
Enforcement Trigger Date, the Enforcement Trigger Date.
“Nominated Lawyers” means, with respect to any Claim, the Person or Persons identified as such on Annex II and/or any
successor or new legal counsel appointed as described herein.
“Occurrence” means any of the following events: (i) the Claim is [***], or (ii) the Claim is [***] on, or (iii) an insolvency event
occurs with respect to the Adverse Party; or (iv) after a court confirms the Award and/or any action undertaken by the Adverse
Party to set aside the Award has been denied and all appeals are exhausted, [***].
“Payment Agent” means Covington.
“Payment Instruction Letter” means an agreement with the Payment Agent, in substantially the form attached as Exhibit 1 to the
Security Agreement, pursuant to which the Payment Agent agrees to accept all Proceeds and remit the Investors’ Entitlement
directly to the Investors, which Payment Instruction Letter shall be in a form and substance satisfactory to the Investors in all
respects.
“Permitted Lien” means any of the following: (i) a lien pursuant to the Security Agreement, and (ii) a lien in favor of the
Nominated Lawyers securing amounts payable to them under their Engagement Agreement(s) and (iii) a lien pursuant to the
Runway Facility provided such lien is subject to a Subordination Agreement.
“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership
or other entity or Governmental Authority.
“Post-Award Capital Amount” has the meaning set forth in Section 2.1(a)(ii).
“Potential Remedy Event” means any event which, with the giving of notice or the lapse of time or both, would constitute a
“Remedy Event”.
“Proceeds” means, collectively: (i) [***]; (ii) [***]; (iii) [***]. All of the foregoing constitute Proceeds regardless of form,
including cash, personal property, real property,
Exhibit A - Page 4
TRACON - Investment Agreement
legal or equitable rights, a reduction of or set-off against an amount owed by the Counterparty, and any other thing of value
conveyed, directly or indirectly, to the Counterparty, whether delivered in a lump sum or in installments. In the event that the
Claim is resolved directly or indirectly as a result of or contemporaneously with [***], all proceeds of [***] shall constitute
Proceeds relating to the Claim hereunder [***].
“Recipient” has the meaning set forth in Exhibit E.
“Remedy Event” has the meaning set forth in Section 9.
“Representation Date” means (i) the date hereof, (ii) each date on which the Investors are obligated to or do make any payment
of Capital Amounts and (iii) in the case of the Counterparty, each date on which a Monthly Report is due to be delivered.
“Representatives” means, with respect to any person or entity, as applicable, its Affiliates and its and their directors, officers,
managers, members, partners, principals, employees, shareholders and participants (or potential shareholders and participants),
agents, permitted assignees, insurers, lawyers, accountants, consultants, advisors, auditors and independent contractors.
“Rules” has the meaning set forth in Exhibit D.
“Runway Facility” means the credit facility provided by Runway Growth Finance Corp. (“Runway”) under that certain Loan and
Security Agreement, dated as of September 2, 2022, between the Counterparty and Runway, as in effect on the Closing Date and
as amended.
“Security Agreement” means the security agreement entered into on or around the date hereof between the Investors and the
Counterparty pursuant to which the Counterparty grants to the Investors a security interest in certain collateral to secure the
obligations of the Counterparty hereunder.
“Subordination Agreement” means a subordination agreement among the Investors and another lienholder pursuant to which the
other lienholder (i) subordinates its lien on all collateral granted to the Investors pursuant to the Security Agreement to the lien of
the Investors, and (ii) subordinates its right to receive any payments derived from Proceeds or from any collateral granted to the
Investors pursuant to any Security Agreement to the prior payment in full of all obligations owing by the Counterparty to the
Investors under any Transaction Document, which subordination agreement shall be in form and substance satisfactory to the
Investors in all respects.
“Subsequent Capital Amounts” has the meaning set forth in Section 2.1(a)(iv).
“Tax” means any tax, duty, contribution, impost, withholding, levy or other charge or withholding of a similar nature (including
use, sales and value added taxes), whether domestic or foreign, and any fine, penalty, surcharge or interest in connection
therewith.
Exhibit A - Page 5
TRACON - Investment Agreement
“Threshold Recovery Condition” means the issuance of an Award of at least US$[***].
“Transaction Costs” has the meaning set forth in Section 2.1(c).
“Transaction Documents” means, collectively, this Agreement, the Security Agreement, and any other agreements, documents,
instruments or certificates entered into by the parties in connection with this Agreement.
“Transfer” means to, directly or indirectly, sell, transfer, assign, pledge, encumber, hypothecate, or similarly dispose of, either
voluntarily or involuntarily, by operation of law or otherwise, or to enter into any agreement, arrangement or understanding with
respect to the sale, transfer, assignment, pledge, encumbrance, hypothecation, or similar disposition of, any Claim, any Proceeds,
any interest in or obligations under a Transaction Document, or any portion of any of the foregoing, or any economic or other
interest, including a participation, in any of the foregoing, as applicable.
“Tribunal” has the meaning set forth in Exhibit D.
Exhibit A - Page 6
TRACON - Investment Agreement
Exhibit 10.20
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE
IT IS BOTH (I) NOT MATERIAL AND (II) IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL.
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
This First Amendment to Loan and Security Agreement (this “Amendment”) is entered into as of December 22, 2022, by and among
TRACON PHARMACEUTICALS, INC., a Delaware corporation (“Borrower Representative”), and each other Person party to the Loan Agreement
(as defined below) as a borrower from time to time (individually and collectively, jointly and severally, “Borrower”), the lenders from time to time party to
the Loan Agreement (collectively, “Lenders”, and each, a “Lender”), and RUNWAY GROWTH FINANCE CORP., as administrative agent and
collateral agent for Lenders (in such capacity, “Agent”).
Borrower, Agent and the Lenders are parties to that certain Loan and Security Agreement dated as of September 2, 2022 (as amended, restated,
supplemented or otherwise modified from time to time, the “Loan Agreement”). The parties desire to amend the Loan Agreement in accordance with the
terms of this Amendment.
RECITALS
NOW, THEREFORE, the parties agree as follows:
1.
Section 2.2(a)(i) of the Loan Agreement hereby is amended and restated in its entirety to read as follows:
“(i) Subject to the terms and conditions of this Agreement, on the Closing Date the Lenders, severally and not jointly,
made term loans, in a single disbursement, to Borrower in an aggregate amount of Ten Million Dollars ($10,000,000) according to each
Lender’s Term A Loan Commitment as set forth on Schedule 1 hereto (such term loans are hereinafter referred to singly as a “Term A Loan”,
and collectively as the “Term A Loans”). After the Repayment Event, subject to Borrower’s achievement of the New Equity Milestone and
other terms and conditions of this Agreement, the Lenders agree, severally and not jointly, during the New Term A Draw Period, to allow
Borrower to re-borrow the Term A Loans, in a single disbursement, in an aggregate amount of Ten Million Dollars ($10,000,000) according to
each Lender’s Term A Loan Commitment as set forth on Schedule 1 hereto. Other than as permitted explicitly in the foregoing sentence, once
repaid no Term A Loan may be re‑borrowed.”
2.
Section 2.2(b) of the Loan Agreement hereby is amended and restated in its entirety to read as follows:
“(b)
Repayment. On January 3, 2023, Borrower shall repay all principal and accrued and unpaid interest in
respect of the Term A Loans (the “Repayment Event”). Thereafter, if the Term A Loans are re-borrowed in accordance with
Section 2.2(a)(i) or any other Term Loans are advanced, commencing on the Amortization Date, and continuing thereafter on each
Payment Date, Borrowers shall make consecutive monthly payments of equal principal, which would fully amortize the principal
amount by the Maturity Date, plus accrued and unpaid interest. Any and all unpaid Obligations, including principal and accrued
and unpaid interest in respect of the Term Loans, the Final Payment, other fees and other sums, if any, shall be due and payable in
full on the Maturity Date. The Term Loans may only be prepaid in accordance with Sections 2.2(c) or (d). For the sake of clarity,
the Final Payment due on the Maturity Date shall apply to the Term A Loans, measured with such Term A Loans equal to an
aggregate amount of Ten Million Dollars ($10,000,000), whether or not such Term A Loans are re-borrowed in accordance with
Section 2.2(a)(i).”
3.
Section 2.2(d)(ii) and (iii) of the Loan Agreement hereby are amended and restated in its entirety to read as follows:
“(ii)
except for the Repayment Event prepayment, the Prepayment Fee; plus
-1-
(iii)
except for the Repayment Event prepayment, the Final Payment; plus”
4.
Section 8.9 of the Loan Agreement hereby is amended and restated in its entirety to read as follows:
“8.9
Subordinated Debt. Except as permitted thereunder (i) the Investor Subordination Agreement, or (ii) any
Subordination Agreement governing any Subordinated Debt, shall for any reason be revoked or invalidated or otherwise cease to be
in full force and effect, any party thereto shall be in breach thereof or contest in any manner the validity or enforceability thereof or
deny that it has any further obligation thereunder, or the Obligations shall for any reason not have the priority contemplated by this
Agreement.”
5.
The following defined terms in Exhibit A to the Loan Agreement hereby are added or amended and restated, as appropriate, as
follows:
“Cash Burn” means, for any period of determination, Borrower’s operating cash flow determined based on the most
recently projected cash burn as provided in Borrower’s board approved projections delivered in accordance with Section 6.2(c)
hereof, in accordance with GAAP, and adjusted to account for principal repayments on Indebtedness and calculated on a trailing
three (3) month basis, divided by three (3).
“Excluded Accounts” means (i) any deposit accounts used exclusively for payroll, payroll taxes and other employee
wage and benefit payments, and identified as such in writing to Agent, (ii) the Silicon Valley Bank collateral account [***], and
(iii) the Funds Securities Account (as defined in the Investor Security Agreement) to the extent such account exclusively holds
funds paid as the result of a Claim Resolution (as defined in the Investor Security Agreement).
“First Amendment Effective Date” means December 22, 2022.
“Investor Documents” means (i) that certain Investment Agreement dated as of December 22, 2022 (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the “Investment Agreement”) pursuant to which
Investor has agreed to provide financing to Borrower; and (ii) that certain Security Agreement dated as of December 22, 2022
between Borrower and Investor (as the same may be amended, restated, supplemented or otherwise modified from time to time, the
“Investor Security Agreement”, and collectively with the Investment Agreement and all other documents, instruments, or
certificates evidencing or pertaining to all or any portion thereof.
“Investor” means each and collectively, jointly and severally, BATISTE INVESTMENTS LLC and MAPLEWOOD
PARK INVESTMENTS LP.
“Investor Subordination Agreement” means that certain Subordination Agreement by and among Borrower, Investor,
and Agent, dated as of December 22, 2022.
“Maturity Date” means March 31, 2023; provided however, if the Term A Loans are re-borrowed in accordance with
Section 2.2(a)(i), on the Funding Date of such re-borrowed Term A Loans the Maturity Date shall automatically be extended to
September 1, 2026.
“New Equity Milestone” means Borrower’s receipt, on or after the First Amendment Effective Date, of at least Twenty-
Five Million Dollars ($25,000,000) of net cash proceeds from the sale or issuance of a combination of (i) its equity securities to
investors and on terms and conditions reasonably acceptable to Lender, (ii) Subordinated Debt to investors and on terms and
conditions reasonably acceptable to Lender and (iii) Indebtedness owing to Investor under the Investor Documents so long as such
Indebtedness is at all times subject to the Investor Subordination Agreement.
- 2 -
“New Term A Draw Period” is the period commencing on the date of the occurrence of the New Equity Milestone and
ending on the earlier of (i) March 31, 2023 and (ii) the occurrence and continuance of an Event of Default; provided, however, that
the New Term A Draw Period shall not commence if on the date of the occurrence of the New Equity Milestone an Event of
Default has occurred and is continuing.
“Repayment Event” has the meaning set forth in Section 2.2(b).
“Warrant” means, collectively, each Warrant to Purchase Common Stock dated as of the as of the Closing Date and each
Funding Date (except for the Funding Date, if any, where Borrower re-borrows the Term A Loans in accordance with Section 2.2(a)
(i)) executed by Borrower Representative in favor of each Lender, as amended, modified, supplemented, extended or restated from
time to time.
6.
Definition of Permitted Indebtedness. The definition of “Permitted Indebtedness” in Exhibit A to the Loan Agreement is hereby
amended by deleting “and” from the end of clause (i) and replacing clause (j) and adding new clause (k) as follows:
Dollars ($30,000,000) so long as such Indebtedness is at all times subject to the Investor Subordination Agreement; and
“(j)
Indebtedness under the Investor Documents in an aggregate principal amount not to exceed Thirty Million
extensions, refinancings, modifications, amendments and restatements of any items of Permitted
Indebtedness described in clause (b) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to
impose more burdensome terms upon a Borrower or any of its Subsidiaries, as the case may be.”
(k)
7.
Definition of Permitted Liens. The definition of “Permitted Liens” in Exhibit A to the Loan Agreement is hereby amended by
deleting “and” from the end of clause (k) and replacing clause (l) and adding new clause (m) as follows:
are at all times subject to the Investor Subordination Agreement; and
“(l)
Liens in the Specific Collateral (as defined in the Investor Subordination Agreement) so long as such Liens
Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in
clause (b), but any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal
amount of the indebtedness may not increase.”
(m)
8.
No course of dealing on the part of Agent or the Lenders or their officers, nor any failure or delay in the exercise of any right by
Agent or any Lender, shall operate as a waiver thereof, and any single or partial exercise of any such right shall not preclude any later exercise of any such
right. Agent’s or any Lender’s failure at any time to require strict performance by Borrower of any provision shall not affect any right of Agent or any
Lender thereafter to demand strict compliance and performance. Any suspension or waiver of a right must be in writing signed by an officer of Agent.
9.
Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Loan Agreement. The Loan
Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in
all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an
amendment of, any right, power, or remedy of Agent or any Lender under the Loan Agreement, as in effect prior to the date hereof.
10.
To induce Agent and Lenders to enter into this Amendment, Borrower hereby makes the following representations and warranties
to Agent and Lenders:
- 3 -
a.
b.
c.
d.
e.
f.
Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan Documents
are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and
warranties relate to an earlier date, in which case they are true and correct in all material respects as of such date), and (b) no
Event of Default has occurred and is continuing;
Borrower has the power and due authority to execute and deliver this Amendment and to perform its obligations under the
Loan Agreement, as amended by this Amendment;
The organizational documents of Borrower delivered to Agent on the Effective Date, and updated pursuant to subsequent
deliveries by the Borrower to the Agent, remain true, accurate and complete and have not been amended, supplemented or
restated and are and continue to be in full force and effect;
The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the
Loan Agreement, as amended by this Amendment, do not and will not contravene (i) any material Requirement of Law
binding on or affecting Borrower, (ii) any material agreement binding on Borrower, (iii) any applicable order, judgment or
decree of any Governmental Authority binding on Borrower, or (iv) the organizational documents of Borrower;
The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the
Loan Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization or
validation of, or filing, recording or registration with, or exemption by any Governmental Authority, binding on Borrower,
except as already has been obtained or made; and
This Amendment has been duly executed and delivered by Borrower and is the binding obligation of Borrower, enforceable
against Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or
affecting creditors’ rights.
11.
As a condition to the effectiveness of this Amendment, Agent shall have received, in form and substance satisfactory to Agent, the
following:
(a)
(b)
(c)
execution and delivery of this Amendment;
any of Borrower's accounts; and
appropriate.
(d)
(e)
this Amendment, duly executed by Borrower;
the Investor Subordination Agreement, duly executed by Investor;
a Certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the
all reasonable Lender Expenses incurred through the date of this Amendment, which may be debited from
such other documents, and completion of such other matters, as Agent may reasonably deem necessary or
12.
This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
[Balance of Page Intentionally Left Blank]
- 4 -
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date above written.
BORROWER:
TRACON PHARMACEUTICALS, INC.
By: /s/ Scott Brown
Name: Scott Brown
Title: Chief Financial Officer
AGENT AND LENDER
RUNWAY GROWTH FINANCE CORP.
By: /s/ David Spreng
Name: David Spreng
Title: Chief Executive Officer
[Signature Page to First Amendment to Loan and Security Loan Agreement]
We consent to the incorporation by reference in the following Registration Statements:
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
(1)Registration Statement (Form S-8 No. 333-263591) pertaining to the Amended and Restated 2015 Equity Incentive Plan and Amended
and Restated 2015 Employee Stock Purchase Plan of TRACON Pharmaceuticals, Inc.,
(2)Registration Statement (Form S-8 No. 333-258077) pertaining to the Amended and Restated 2015 Equity Incentive Plan of TRACON
Pharmaceuticals, Inc.,
(3)Registration Statement (Form S-8 No. 333-253546) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase
Plan of TRACON Pharmaceuticals, Inc.,
(4)Registration Statement (Form S-8 No. 333-236732) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase
Plan of TRACON Pharmaceuticals, Inc.,
(5)Registration Statement (Form S-8 No. 333-229988) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase
Plan of TRACON Pharmaceuticals, Inc.,
(6)Registration Statement (Form S-8 No. 333-223333) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase
Plan of TRACON Pharmaceuticals, Inc.,
(7)Registration Statement (Form S-8 No. 333-216347) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase
Plan of TRACON Pharmaceuticals, Inc.,
(8)Registration Statement (Form S-8 No. 333-209592) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase
Plan of TRACON Pharmaceuticals, Inc.,
(9)Registration Statement (Form S-8 No. 333-201808) pertaining to the 2011 Equity Incentive Plan, 2015 Equity Incentive Plan and 2015
Employee Stock Purchase Plan of TRACON Pharmaceuticals, Inc.,
(10)Registration Statement (Form S-1 No. 333-239574) of TRACON Pharmaceuticals, Inc.,
(11)Registration Statement (Form S-1 No. 333-234651) of TRACON Pharmaceuticals, Inc.,
(12)Registration Statement (Form S-3 No. 333-263590) of TRACON Pharmaceuticals, Inc.,
(13)Registration Statement (Form S-3 No. 333-248593) of TRACON Pharmaceuticals, Inc., and
(14)Registration Statement (Form S-3 No. 333-224809) of TRACON Pharmaceuticals, Inc.
of our report dated March 8, 2023, with respect to the consolidated financial statements of TRACON Pharmaceuticals, Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 2022.
San Diego, California
March 8, 2023
/s/ Ernst & Young LLP
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles P. Theuer, M.D., Ph.D., certify that:
1. I have reviewed this Annual Report on Form 10-K of TRACON Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 8, 2023
/s/ Charles P. Theuer, M.D., Ph.D.
Charles P. Theuer, M.D., Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott B. Brown, CPA, certify that:
1. I have reviewed this Annual Report on Form 10-K of TRACON Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 8, 2023
/s/ Scott B. Brown, CPA
Scott B. Brown, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles P. Theuer, M.D., PhD., President and Chief Executive Officer of TRACON Pharmaceuticals, Inc. (the “Registrant”), do hereby certify in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
this Annual Report on Form 10-K of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the
(1)
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 8, 2023
/s/ Charles P. Theuer, M.D., Ph.D.
Charles P. Theuer, M.D., Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of TRACON Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott B. Brown, CPA, Chief Financial Officer of TRACON Pharmaceuticals, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
this Annual Report on Form 10-K of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the
(1)
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 8, 2023
/s/ Scott B. Brown, CPA
Scott B. Brown, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of TRACON Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.