toca-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             

Commission File Number: 001-38052

 

TOCAGEN INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

26 - 1243872

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

4242 Campus Point Court, Suite 500, San Diego, CA

92121

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (858) 412-8400

 

3030 Bunker Hill Street, Suite 230, San Diego, CA, 92109

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes           No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).           Yes           No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company filer

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  

As of August 3, 2018, the registrant had 19,951,158 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

 


 

TOCAGEN INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

 

FINANCIAL INFORMATION

 

1

ITEM 1.

 

FINANCIAL STATEMENTS

 

1

 

 

Condensed Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

 

1

 

 

Condensed Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

 

2

 

 

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)

 

3

 

 

Notes to Condensed Financial Statements (unaudited)

 

4

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

13

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

19

ITEM 4.

 

CONTROLS AND PROCEDURES

 

19

PART II

 

OTHER INFORMATION

 

20

ITEM 1.

 

LEGAL PROCEEDINGS

 

20

ITEM 1A.

 

RISK FACTORS

 

20

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

52

ITEM 6.

 

EXHIBITS

 

53

SIGNATURES

 

 

 

 

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

TOCAGEN INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and par value data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,613

 

 

$

35,933

 

Marketable securities

 

 

54,848

 

 

 

52,792

 

Prepaid expenses and other current assets

 

 

3,989

 

 

 

1,904

 

Total current assets

 

 

83,450

 

 

 

90,629

 

Property and equipment, net

 

 

3,652

 

 

 

1,217

 

Other assets

 

 

234

 

 

 

227

 

Total assets

 

$

87,336

 

 

$

92,073

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,500

 

 

$

1,951

 

Accrued liabilities

 

 

11,208

 

 

 

8,120

 

Notes payable, current portion

 

 

-

 

 

 

7,200

 

Deferred license revenue

 

 

1,036

 

 

 

36

 

Deferred grant funding

 

 

22

 

 

 

23

 

Total current liabilities

 

 

13,766

 

 

 

17,330

 

Notes payable, net of current portion

 

 

25,913

 

 

 

3,625

 

Deferred license revenue, net of current portion

 

 

18

 

 

 

36

 

Deferred rent, net of current portion

 

 

1,550

 

 

 

 

Total liabilities

 

 

41,247

 

 

 

20,991

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2018

  and December 31, 2017; no shares issued or outstanding at June 30, 2018

  and December 31, 2017

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized

   at June 30, 2018 and December 31, 2017; 19,951,158 and

   19,882,551 shares issued and outstanding at June 30, 2018 and

   December 31, 2017, respectively

 

 

20

 

 

 

20

 

Additional paid-in capital

 

 

242,021

 

 

 

238,025

 

Accumulated deficit

 

 

(195,898

)

 

 

(166,929

)

Accumulated other comprehensive loss

 

 

(54

)

 

 

(34

)

Total stockholders’ equity

 

 

46,089

 

 

 

71,082

 

Total liabilities and stockholders’ equity

 

$

87,336

 

 

$

92,073

 

 

See accompanying notes to these unaudited condensed financial statements.

 

 

1


 

TOCAGEN INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

License revenue

 

$

9

 

 

$

10

 

 

$

18

 

 

$

21

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,763

 

 

 

6,632

 

 

 

23,199

 

 

 

13,256

 

General and administrative

 

 

2,573

 

 

 

2,030

 

 

 

4,992

 

 

 

3,970

 

Total operating expenses

 

 

15,336

 

 

 

8,662

 

 

 

28,191

 

 

 

17,226

 

Loss from operations

 

 

(15,327

)

 

 

(8,652

)

 

 

(28,173

)

 

 

(17,205

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

331

 

 

 

103

 

 

 

646

 

 

 

140

 

Interest expense

 

 

(1,093

)

 

 

(495

)

 

 

(1,442

)

 

 

(1,111

)

Change in fair value of preferred stock warrants

 

 

 

 

 

(22

)

 

 

 

 

 

37

 

Total other expense, net

 

 

(762

)

 

 

(414

)

 

 

(796

)

 

 

(934

)

Net loss

 

 

(16,089

)

 

 

(9,066

)

 

 

(28,969

)

 

 

(18,139

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on investments

 

 

54

 

 

 

(6

)

 

 

(20

)

 

 

(7

)

Comprehensive loss

 

$

(16,035

)

 

$

(9,072

)

 

$

(28,989

)

 

$

(18,146

)

Net loss per common share, basic and diluted

 

$

(0.81

)

 

$

(0.56

)

 

$

(1.45

)

 

$

(1.95

)

Weighted-average number of common shares outstanding,

   basic and diluted

 

 

19,922,355

 

 

 

16,330,996

 

 

 

19,914,159

 

 

 

9,308,386

 

 

See accompanying notes to these unaudited condensed financial statements.

 

 

2


 

TOCAGEN INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(28,969

)

 

$

(18,139

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,193

 

 

 

1,585

 

Depreciation

 

 

222

 

 

 

127

 

Noncash interest expense

 

 

873

 

 

 

293

 

Change in fair value of preferred stock warrants

 

 

 

 

 

(37

)

Amortization of discount on investments, net

 

 

(86

)

 

 

(13

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,532

)

 

 

207

 

Accounts payable

 

 

(684

)

 

 

(534

)

Accrued liabilities

 

 

2,035

 

 

 

1,621

 

Deferred license revenue

 

 

982

 

 

 

(21

)

Deferred rent

 

 

496

 

 

 

 

Deferred grant funding

 

 

(1

)

 

 

(9

)

Net cash used in operating activities

 

 

(23,471

)

 

 

(14,920

)

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from the sale/maturity of marketable securities

 

 

26,454

 

 

 

23,049

 

Purchases of marketable securities

 

 

(28,444

)

 

 

(29,844

)

Purchases of property and equipment

 

 

(877

)

 

 

(109

)

Proceeds from sale of property and equipment

 

 

 

 

 

20

 

Net cash used in investing activities

 

 

(2,867

)

 

 

(6,884

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from issuance of notes payable, net of issuance costs

 

 

26,325

 

 

 

 

Cash paid on extinguishment of debt

 

 

(8,631

)

 

 

 

Principal payments on notes payable

 

 

(3,000

)

 

 

(3,600

)

Proceeds from issuance of common stock

 

 

324

 

 

 

47

 

Proceeds from offering of common stock, net of issuance costs

 

 

 

 

 

88,615

 

Proceeds from issuance of convertible promissory notes, net of issuance costs

 

 

 

 

 

7,338

 

Net cash provided by financing activities

 

 

15,018

 

 

 

92,400

 

Net (decrease) increase in cash and cash equivalents

 

 

(11,320

)

 

 

70,596

 

Cash and cash equivalents, beginning of period

 

 

35,933

 

 

 

5,510

 

Cash and cash equivalents, end of period

 

$

24,613

 

 

$

76,106

 

NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Allowance for tenant improvements

 

$

1,054

 

 

$

 

Property and equipment purchases included in accounts payable and accrued liabilities

 

$

733

 

 

$

158

 

Fair value of common stock warrants issued in connection with notes payable

 

$

479

 

 

$

 

Convertible preferred stock converted into shares of common stock

 

$

 

 

$

131,410

 

Convertible promissory notes principal and accrued interest converted into shares of common stock

 

$

 

 

$

11,092

 

Preferred stock warrant liabilities converted into warrants to purchase shares of common stock

 

$

 

 

$

89

 

Deferred equity issuance costs paid in previous periods reclassified to equity on effective date of initial public offering

 

$

 

 

$

1,574

 

Deferred debt and equity issuance costs in accounts payable and accrued liabilities

 

$

 

 

$

99

 

 

See accompanying notes to these unaudited condensed financial statements.

 

3


 

TOCAGEN INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.

Organization and Basis of Presentation

Tocagen Inc. (Tocagen or the Company) is a clinical-stage, cancer-selective gene therapy company focused on developing first-in-class, broadly-applicable product candidates designed to activate a patient’s immune system against their own cancer. The Company’s cancer-selective gene therapy platform is built on retroviral replicating vectors which are designed to selectively deliver therapeutic genes into the DNA of cancer cells. Tocagen’s gene therapy approach is designed to fight cancer through immunotherapeutic mechanisms of action without the autoimmune toxicities commonly experienced with other immunotherapies. The Company views its operations and manages its business in one operating segment.

From inception through June 30, 2018, the Company has devoted substantially all of its efforts to developing its gene therapy platform and its lead product candidate, Toca 511 & Toca FC, as well as raising capital and building its infrastructure. The Company has not generated revenues from its principal operations.

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, from which the balance sheet information herein was derived.

Initial Public Offering

On April 19, 2017, the Company completed its initial public offering (IPO), whereby the Company sold an aggregate of 9,775,000 shares of its common stock, at $10.00 per share, resulting in net proceeds of $86.9 million after underwriting discounts, commissions and offering costs of $10.8 million, of which $9.1 million of the costs were paid during the six months ended June 30, 2017.

In addition, in connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were converted into an aggregate of 6,690,066 shares of the Company’s common stock, warrants to purchase up to 68,572 shares of the Company’s Series H convertible preferred stock were converted into warrants to purchase up to 9,936 shares of the Company’s common stock, each at an exercise price of $36.23 per share, and $11.1 million of aggregate principal and accrued interest underlying convertible promissory notes were automatically converted into an aggregate of 1,109,176 shares of the Company’s common stock at the IPO price of $10.00 per share.

Liquidity

The Company has a limited operating history and the sales and income potential of the Company’s business and patient markets are unproven. The Company has experienced net losses and negative cash flows from operating activities since its inception. As of June 30, 2018, the Company had an accumulated deficit of $195.9 million and working capital of $69.7 million available to fund future operations. As the Company continues to incur net losses, its transition to profitability is dependent upon the successful development, approval, and commercialization of its product candidates and achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. The Company plans to continue to fund its losses from operations and capital funding needs through debt and equity financing, or through collaborations or partnerships with other entities. Debt or equity financing, or collaborations and partnerships with other entities may not be available on a timely basis on terms acceptable to the Company, or at all.  

As of June 30, 2018, the Company had cash, cash equivalents and marketable securities of $79.5 million. The Company has evaluated and concluded that there are no conditions or events, considered individually or in the aggregate, that raises substantial doubt about our ability to continue as a going concern for a period of one year following the date that these financial statements are issued.

Use of Estimates

The Company’s financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and

4


 

liabilities in the financial statements and accompanying notes. Significant estimates in the Company’s financial statements relate to clinical trial accruals, the valuation of equity awards, and the development period used for license revenue recognition. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results may differ from these estimates under different assumptions or conditions.

2.

Summary of Significant Accounting Policies  

Clinical Trial Accruals

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense balance accordingly. Historically, the Company’s estimated accrued liabilities have materially approximated actual expense incurred.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contract with Customers (Topic 606), using the modified retrospective transition method. There was no impact to opening retained earnings or revenue as of January 1, 2018 related to the adoption of Topic 606. Revenue generally consists of license revenue with upfront payments.

Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to receive from its customers in exchange for those goods and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the transaction price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the Company satisfies the performance obligation(s).

At contract inception, the Company assesses the goods and services promised within each contract and assesses whether each promised good or service is distinct and determines that those are performance obligations. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The Company considers a performance obligation satisfied once the Company has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when the Company determines there are no uncertainties regarding payment terms or transfer of control.

Collaborative Arrangements

The Company enters into collaborative arrangements with partners that may include payment to the Company of one or more of the following: (i) license fees; (ii) payments related to the achievement of developmental, regulatory, or commercial milestones; and (iii) royalties on net sales of licensed products.  Where a portion of non‑refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as contract liabilities and recognized as revenue when (or as) the underlying performance obligation is satisfied.  

As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation(s). The stand-alone selling price may include items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

5


 

License Fees

If a 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 from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, 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. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Milestone Payments

At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. If it is probable that a milestone event would occur at the inception of the arrangement, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each reporting period, the Company evaluates the probability of achievement of such milestones and any related constraint(s), and if necessary, may adjust the Company’s estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which 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 its collaborative arrangement with Siemens Healthcare Diagnostics Inc.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of stock awards, including stock options, and stock purchase rights granted to employees and members of the Company’s board of directors. For awards with time-based vesting provisions, the Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model and recognizes the expense over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis. For awards with performance-based vesting provisions, the Company estimates the fair value of stock option grants on the date of grant, or the date when all of the terms of the grant have been agreed to, if later, and recognizes the expense based on the probability of the occurrence of the individual milestones at each reporting period. The expense is recognized over the implicit service period that commences once management believes the performance criteria are probable of being met.  For purchase rights, the Company estimates the fair value of the purchase as of the plan enrollment date and recognizes expense on a straight-line basis over the applicable offering period.  The Company accounts for forfeitures when they occur, and reverses any compensation cost previously recognized for awards for which the requisite service has not been completed, in the period that the award is forfeited.

The Company accounts for stock options granted to non-employees using the Black-Scholes option pricing model with assumptions generally consistent with those used for employee stock options, with the exception of expected term, which is over the contractual life. These option grants are subject to periodic revaluation over their vesting term.

Net Loss Per Share

Basic and diluted net loss per common share for the periods presented is computed by dividing net loss by the weighted-average number of common shares outstanding during the respective periods, without consideration of common stock equivalents as they are anti-dilutive. Common stock equivalents that could potentially dilute earnings in the future are comprised of shares issuable upon the conversion of all outstanding principal and accrued interest related to convertible promissory notes payable, shares issuable upon the conversion of convertible preferred stock, options to purchase shares of common stock outstanding under the Company’s equity incentive plan and warrants for the purchase of shares of common stock. 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.

6


 

Common stock equivalents from potentially dilutive securities that are not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Common stock options

 

 

3,548,847

 

 

 

2,540,896

 

 

 

3,548,847

 

 

 

2,540,896

 

Common stock warrants

 

 

67,238

 

 

 

10,660

 

 

 

67,238

 

 

 

10,660

 

Total

 

 

3,616,085

 

 

 

2,551,556

 

 

 

3,616,085

 

 

 

2,551,556

 

 

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). The new standard amends the existing accounting standards for leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is still in the process of evaluating the effect of adoption on its financial statements and expects to adopt the standard on January 1, 2019. The adoption will lead to an increase in the assets and liabilities recorded on the balance sheets primarily due to the lease agreement attributable to leased laboratory and office space.

In June 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by aligning the accounting for share-based payment awards issued to employees and non-employees as it relates to the measurement date and impact of performance conditions. The ASU will become effective January 1, 2019 and is not expected to have a material impact to the overall financial statements of the Company.

3.

Fair Value of Financial Instruments

Fair Values of Assets Measured on a Recurring Basis

The following tables summarize the Company’s assets that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at End of Period Using:

 

 

 

Total

 

 

Quoted Market

Prices for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

5,579

 

 

$

 

 

$

5,579

 

 

$

 

Corporate debt securities

 

 

1,498

 

 

 

 

 

 

1,498

 

 

 

 

 

 

$

7,077

 

 

$

 

 

$

7,077

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

23,629

 

 

$

 

 

$

23,629

 

 

$

 

Commercial paper

 

 

21,222

 

 

 

 

 

 

21,222

 

 

 

 

Asset-backed securities

 

 

8,677

 

 

 

 

 

 

8,677

 

 

 

 

Certificates of deposit

 

 

1,320

 

 

 

 

 

 

1,320

 

 

 

 

 

 

$

54,848

 

 

$

 

 

$

54,848

 

 

$

 

7


 

 

 

 

 

 

 

 

Fair Value Measurements at End of Period Using:

 

 

 

Total

 

 

Quoted Market

Prices for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

8,274

 

 

$

 

 

$

8,274

 

 

$

 

Repurchase agreements

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

 

 

 

$

13,274

 

 

$

 

 

$

13,274

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

24,713

 

 

$

 

 

$

24,713

 

 

$

 

Certificates of deposit

 

 

13,651

 

 

 

 

 

 

13,651

 

 

 

 

Commercial paper

 

 

12,329

 

 

 

 

 

 

12,329

 

 

 

 

Asset-backed securities

 

 

2,099

 

 

 

 

 

 

2,099

 

 

 

 

 

 

$

52,792

 

 

$

 

 

$

52,792

 

 

$

 

 

Fair values determined by Level 2 inputs, which utilize data points that are observable such as quoted prices, interest rates and yield curves, require the exercise of judgment and use of estimates, that if changed, could significantly affect the Company’s financial position and results of operations. Investments in corporate debt securities, certificates of deposit, commercial paper, repurchase agreements and asset-backed securities are valued using Level 2 inputs. Level 2 securities are initially valued at the transaction price and subsequently valued and reported utilizing inputs other than quoted prices that are observable either directly or indirectly, such as quotes from third-party pricing vendors.

There were no transfers in or out of Level 1 and Level 2 fair value measurements during the six months ended June 30, 2018 or 2017.

At June 30, 2018 and December 31, 2017, the Company had investments in money market funds of $15.6 million and $20.2 million, respectively, that were measured at fair value using the net asset value per share (or its equivalent) that have not been classified in the fair value hierarchy. The funds invest primarily in U.S. government securities. Refer to Note 4 for information regarding our investments.

 

Fair Values of Other Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and accounts payable, approximate their respective fair values due to their short-term nature. The carrying amount of the Company’s notes payable of $25.9 million at June 30, 2018 approximated their fair value as the terms of the notes are consistent with the market terms of transactions with similar profiles (Level 2 inputs).

8


 

4.

Certain Financial Statement Caption Information

Marketable Securities

The following tables summarize the Company’s marketable securities (in thousands):

 

  

 

Maturity

(in years)

 

Amortized Cost

 

 

Unrealized Gain

 

 

Unrealized Loss

 

 

Fair Value

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

1 or less

 

$

17,551

 

 

$

 

 

$

(32

)

 

$

17,519

 

Corporate debt securities

 

>1 and <5

 

 

6,128

 

 

 

 

 

 

(18

)

 

 

6,110

 

Commercial paper

 

1 or less

 

 

21,224

 

 

 

1

 

 

 

(2

)

 

 

21,222

 

Certificates of deposit

 

1 or less

 

 

480

 

 

 

 

 

 

 

 

 

480

 

Certificates of deposit

 

>1 and <5

 

 

840

 

 

 

 

 

 

 

 

 

840

 

Asset-backed securities

 

1 or less

 

 

6,889

 

 

 

 

 

 

(3

)

 

 

6,886

 

Asset-backed securities

 

>1 and <5

 

 

1,791

 

 

 

 

 

 

 

 

 

1,791

 

 

 

 

 

$

54,903

 

 

$

1

 

 

$

(55

)

 

$

54,848

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

1 or less

 

$

21,097

 

 

$

 

 

$

(16

)

 

$

21,081

 

Corporate debt securities

 

>1 and <5

 

 

3,636

 

 

 

 

 

 

(4

)

 

 

3,632

 

Certificates of deposit

 

1 or less

 

 

13,658

 

 

 

 

 

 

(7

)

 

 

13,651

 

Commercial paper

 

1 or less

 

 

12,333

 

 

 

 

 

 

(4

)

 

 

12,329

 

Asset-backed securities

 

1 or less

 

 

2,099

 

 

 

 

 

 

 

 

 

2,099

 

 

 

 

 

$

52,823

 

 

$

-

 

 

$

(31

)

 

$

52,792

 

 

The Company has classified all of its available-for-sale investment securities, including those with maturity greater than one year, as current assets on the balance sheet based on the highly liquid nature of these investment securities and because these investment securities are considered available for use in current operations.

There were no impairments considered other-than-temporary during the periods presented, as it is management’s intention and ability to hold the securities until a recovery of the cost basis or recovery of fair value. Gross realized gains and losses on sales of marketable securities were immaterial for all periods presented.

Accrued Liabilities

Accrued liabilities are comprised of (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Clinical trial expenses

 

$

4,816

 

 

$

2,809

 

Contract manufacturing services

 

 

2,518

 

 

 

1,536

 

Payroll and other employee-related expenses

 

 

1,563

 

 

 

2,489

 

Interest payable

 

 

187

 

 

 

77

 

Professional fees

 

 

83

 

 

 

276

 

Other

 

 

2,041

 

 

 

933

 

Total accrued liabilities

 

$

11,208

 

 

$

8,120

 

 

5.

Notes Payable

Loan Agreement

On October 30, 2015, the Company entered into a Loan and Security Agreement (Prior Agreement) with two lenders whereby it borrowed $18.0 million (the Initial Loans). Balances under the Prior Agreement were due in monthly principal and interest payments, with final maturity of the Loans in May 2019. Each Initial Loan included a final payment fee of 7.95% of the original principal amount due upon maturity.

On May 18, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the Loan Agreement) with the two lenders pursuant to which the lenders agreed to lend the Company $26.5 million as term loans (the Term Loans).Of the

9


 

total proceeds, $8.6 million was applied to the repayment of outstanding principal, interest and final payment owed pursuant to the Initial Loans.

The Company evaluated the amendment in accordance with ASC Topic 470, which requires modification of debt instruments to be evaluated to assess whether the modification is considered a substantial modification, in which case the modification shall be accounted for as a debt extinguishment. Based on the Company’s evaluation, the modification was considered substantial and therefore the unamortized discount associated with the Prior Agreement was written off through interest expense and the principal balance of the Prior Agreement was written off.

The Term Loans will mature on December 1, 2022 (the Maturity Date) and the Company will have interest-only payments through January 1, 2020, followed by 36 equal monthly payments of principal and interest; provided that the Term Loans will be interest-only (and the number of principal and interest payments will be correspondingly reduced) through (i) July 1, 2020 if the Company submits a Biologics License Application (BLA) for the Company’s product candidate, Toca 511 & Toca FC, to the United States Food and Drug Administration (FDA) prior to January 1, 2020, but not yet received FDA approval of such BLA prior to July 1, 2020 and (ii) January 1, 2021 if following such BLA submission to the FDA prior to January 1, 2020, the Company receives FDA approval of such BLA prior to July 1, 2020.

The Term Loans bear interest at a floating per annum rate equal to the greater of (i) 8.50% and (ii) the sum of (a) the prime rate reported in the Wall Street Journal on the last business day of the month that immediately proceeds the month in which the interest will accrue, plus (b) 3.75%. The Company will be required to make a final payment of 7.95% of the principal amount of the Term Loans payable on the earlier of (i) the Maturity Date, (ii) the acceleration of any Term Loans, or (iii) the prepayment of the Term Loans. The Company may prepay all, but not less than all, of the Term Loans upon 10 days written notice provided the Company will be obligated to pay a prepayment fee equal to (i) 3.00% of the principal amount of the applicable Term Loan prepaid on or before the first anniversary of the effective date of the Loan Agreement, (ii) 2.00% of the principal amount of the applicable Term Loan prepaid on or before the second anniversary of the effective date of the Loan Agreement, and (iii) 1.00% of the principal amount of the applicable Term Loan prepaid thereafter, but prior to the Maturity Date.

In conjunction with the Loan Agreement, the Company issued the lenders warrants exercisable for 56,578 shares of common stock (the Warrants). The Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $9.35. The Warrants will terminate on the earlier of May 18, 2028 or the closing of a certain merger or consolidation transaction. The Company recorded the Warrants as a debt discount, as a contra-liability against debt, and is amortizing the balance over the life of the underlying debt. The offset to the contra-liability is recorded as additional paid in capital in the Company’s balance sheet as the Warrants were determined to be an equity instrument. The Company determined the fair value of the Warrants at the date of issuance was $0.5 million using the Black-Scholes option pricing model (“Black-Scholes”) based on significant unobservable inputs (Level 3) with an expected term of 10 years, volatility of 85.6%, risk free fate of 3.1% and expected dividend of 0% .  

The costs incurred to issue the Term Loans of $0.1 million were deferred and are included in the discount to the carrying value of the Term Loans in the accompanying balance sheet. The deferred costs and the final payment fee are amortized to interest expense over the expected term of the Term Loans using the effective interest method with an effective interest rate of 10.7%.

The aggregate carrying amounts of the Term Loans and Initial Loans are comprised of the following, as applicable (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Principal

 

$

26,450

 

 

$

10,200

 

Add: accreted liability for final payment fee

 

 

52

 

 

 

869

 

Less: unamortized discount

 

 

(589

)

 

 

(244

)

 

 

$

25,913

 

 

$

10,825

 

 

The Term Loans are secured by substantially all of the Company’s assets other than its intellectual property, except rights to payment from the sale, licensing or disposition of such intellectual property. The Company is also required to maintain its primary operating accounts at all times with one of the lenders. The Agreement contains customary conditions of borrowing, events of default and covenants, including covenants that restrict the Company’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of its capital stock. Should an event of default occur, including the occurrence of a material adverse change, the Company could be liable for immediate repayment of all obligations under the Agreement. At June 30, 2018, the Company was in compliance with the covenants contained in the Agreement.

10


 

Future maturities of the Term Loans, including the final payment fee, as of June 30, 2018 are as follows (in thousands):

 

 

 

June 30,

2018

 

Year ending December 31, 2018

 

$

 

Year ending December 31, 2019

 

 

 

Year ending December 31, 2020

 

 

8,817

 

Year ending December 31, 2021

 

 

8,817

 

Year ending December 31, 2022

 

 

10,919

 

 

 

 

28,553

 

Unaccreted balance for final payment fee on Loans

 

 

(2,051

)

Unamortized discounts

 

 

(589

)

 

 

 

25,913

 

Less current portion

 

 

 

Noncurrent portion

 

$

25,913

 

 

6.

Stockholders’ Equity

Upon completion of the Company’s IPO, all of the Company’s outstanding shares of convertible preferred stock were converted into an aggregate of 6,690,066 shares of the Company’s common stock.  As of June 30, 2018, the Company’s authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance as of June 30, 2018 is as follows:

 

Issued and Outstanding:

 

 

 

 

Stock options

 

 

3,548,847

 

Warrants for common stock

 

 

67,238

 

Shares reserved for issuance under the ESPP

 

 

363,340

 

Shares reserved for future award grants

 

 

315,894

 

Total

 

 

4,295,319

 

 

Stock-Based Compensation

The Company has not recognized non-cash stock-based compensation expense for outstanding options to purchase 188,651 shares of common stock with performance-based vesting provisions after its evaluation that the occurrence of the individual milestones is not probable as of June 30, 2018.

The following table summarizes the allocation of the Company’s non-cash stock-based compensation expense for all stock awards during the periods presented (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

788

 

 

$

430

 

 

$

1,535

 

 

$

572

 

General and administrative

 

 

884

 

 

 

626

 

 

 

1,658

 

 

 

1,013

 

Total

 

$

1,672

 

 

$

1,056

 

 

$

3,193

 

 

$

1,585

 

 

7.

Collaborative Arrangements

On April 18, 2018, the Company entered into a License Agreement (the License Agreement) with Beijing Apollo Venus Biomedical Technology Limited and ApolloBio Corp. (collectively, ApolloBio), which became effective in July 2018, pursuant to which the Company granted to ApolloBio an exclusive license to develop and commercialize Toca 511 & Toca FC within the greater China region, including mainland China, Hong Kong, Macao and Taiwan (the Licensed Territory).

11


 

Under the License Agreement, the Company received an aggregate upfront payment of $16.0 million (the Upfront Payment), consisting of $1.0 million in May 2018 and $15.0 million in July 2018. Full payment of the Upfront Payment was a condition to the effectiveness of the license and other rights granted under the License Agreement. Therefore, the License Agreement became effective in July 2018.

In addition to the Upfront Payment, the Company is eligible to receive up to an aggregate $111.0 million, less withholding and other taxes, upon the achievement of specified development and commercial milestones, the most near-term of which is the completion of enrollment in the Toca 5 study.  The Company is also eligible for low double-digit tiered royalty payments based on annual net sales of licensed products in the Licensed Territory, subject to reduction under specified circumstances. ApolloBio will be responsible for all development and commercialization costs in the Licensed Territory. Future payments by ApolloBio are subject to the People’s Republic of China (PRC) currency exchange approval and may be subject to other approvals by PRC authorities.

Unless earlier terminated, the License Agreement will expire upon the expiration of the last-to-expire royalty term for any and all licensed products, which royalty term is, with respect to a licensed product in a particular region (i.e., mainland China, Hong Kong, Macao and Taiwan) of the Licensed Territory (each, a Region), the latest of (i) 10 years after the first commercial sale of such licensed product in such Region, (ii) the expiration of all regulatory exclusivity as to such licensed product in such Region and (iii) the date of expiration of the last valid patent claim covering such licensed product in such Region. Either party may terminate the License Agreement upon a material breach by the other party that remains uncured following 60 days (or, with respect to any payment breach, 10 days) after the date of written notice of such breach. ApolloBio may terminate the License Agreement at any time by providing 90 days’ prior written notice to the Company. In addition, the Company may terminate the License Agreement upon written notice to ApolloBio under specified circumstances if ApolloBio challenges the licensed patent rights.

The effective date of the License Agreement corresponds with the final portion of the Upfront Payment received in July 2018. Therefore the $1.0 million portion of the Upfront Payment received in May 2018 was recorded as deferred revenue on the condensed balance sheet as of June 30, 2018.

 

 

 

12


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K  filed with the Securities and Exchange Commission, or SEC, on March 9, 2018, or Annual Report on Form 10-K.  Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” refer to Tocagen Inc.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are a clinical-stage, cancer-selective gene therapy company focused on developing first-in-class, broadly-applicable product candidates designed to activate a patient’s immune system against their own cancer. Our cancer-selective gene therapy platform is built on retroviral replicating vectors, or RRVs, which are designed to selectively deliver therapeutic genes into the DNA of cancer cells. Our gene therapy approach is designed to fight cancer through immunotherapeutic mechanisms of action without the autoimmune toxicities commonly experienced with other immunotherapies.

We are developing our lead product candidate, Toca 511 (vocimagene amiretrorepvec) & Toca FC (extended-release flucytosine), initially for the treatment of recurrent high grade glioma, or HGG, a brain cancer with limited treatment options, low survival rates and, therefore, a significant unmet medical need. We are conducting a randomized, controlled Phase 3 clinical trial of Toca 511 & Toca FC in patients with recurrent HGG, which is designed to serve as a registrational trial. In February 2017, the U.S. Food and Drug Administration, or FDA, granted Toca 511 & Toca FC Breakthrough Therapy Designation for the treatment of patients with recurrent HGG and in June 2017 the European Medicines Agency, or EMA, granted Toca 511 Priority Medicines, or PRIME, Designation for the treatment of patients with glioma. Breakthrough Therapy Designation indicates that preliminary clinical evidence demonstrates the drug may have substantial improvement on one or more clinically significant endpoints over available therapy. PRIME Designation indicates that there is a potential to benefit patients with unmet medical needs based on early clinical data. We also have Fast Track Designation (which may lead to expedited regulatory review of new products that treat serious diseases or conditions and demonstrate the potential to address an unmet medical need) from the FDA for Toca 511 & Toca FC for the treatment of recurrent HGG. We also received Orphan-Drug Designation from the FDA for the treatment of HGG. Orphan-Drug Designation is a designation for a product that treats a rare disease or condition and which, if the product receives the first FDA approval for that disease or condition, may result in a period of regulatory exclusivity, subject to some exceptions. The Committee for Orphan Medicinal Products of the EMA has designated both flucytosine and vocimagene amiretrorepvec as orphan medicinal products indicated for the treatment of glioma. The EMA provides several benefits to drug developers for developing drugs for orphan diseases.

In April 2018, we entered into a license agreement, or License Agreement, with Beijing Apollo Venus Biomedical Technology Limited and ApolloBio Corp., or collectively ApolloBio which became effective in July 2018, pursuant to which we granted to ApolloBio an exclusive license to develop and commercialize Toca 511 & Toca FC within the greater China region, including mainland China, Hong Kong, Macao and Taiwan, or the Licensed Territory. Under the License Agreement, we received an aggregate upfront payment of $16.0 million consisting of $1.0 million received in May 2018 and $15.0 million received in July 2018 and we are eligible to receive up to $111.0 million in future payments upon the achievement of specified development and commercial milestones. In addition, we are also eligible for low double-digit tiered royalty payments based on annual net sales of licensed products in the Licensed Territory, subject to reduction under specified circumstances.

13


 

We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through the private placement of our convertible preferred stock, from which we received net proceeds of $131.4 million and our initial public offering in April 2017, from which we received net proceeds of $86.9 million. We have also received $44.0 million in net proceeds from term loans, $16.5 million from upfront payments under our license and collaboration agreements ,$10.9 million from the issuance of our convertible promissory notes payable and $2.1 million from private and federal grants.

Since our inception in August 2007, we have devoted substantially all of our efforts to developing our gene therapy platform and our lead product candidate, Toca 511 & Toca FC. We have never been profitable and have incurred significant operating losses in each year since our inception. We had an accumulated deficit of $195.9 million as of June 30, 2018. Substantially all of our net losses resulted from costs incurred in connection with our research, preclinical, clinical, product, regulatory and business development activities, as well as raising capital and building our infrastructure.

We expect to continue to incur significant expenses and increasing net operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities as we continue to develop and seek regulatory approval of our product candidates and operate as a public company. To fund further operations, we will need to raise additional capital.

Accordingly, we will seek to fund our operations through equity and/or debt financings. We may also consider new collaborations or selectively partnering our technology or programs. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. In addition, subject to limited exceptions, our Loan and Security Agreement also prohibits us from incurring indebtedness without the prior written consent of the lenders. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

Financial Operations Overview

Revenue

We currently have no products approved for sale, and have not generated any revenues from the sale of products. We have not submitted any product candidate for regulatory approval. Our revenue has been derived from our license and collaboration arrangement we entered into with Siemens Healthcare Diagnostics Inc., or Siemens in 2011, under which we received a nonrefundable, non-creditable, lump-sum, upfront license payment of $0.5 million for our sublicense to Siemens of certain diagnostic assay technology and the License Agreement, under which we received $1.0 million of the total upfront payment due thereunder in April 2018 and the remaining upfront payment due thereunder of $15.0 million in July 2018, upon which the license agreement became effective. As of June 30, 2018, no revenue was recognized related to the License Agreement.

In the future, we may generate revenue from a combination of product sales, royalties and milestones in connection with our Siemens agreement, the License Agreement and any future marketing and distribution arrangements and other collaborations, strategic alliances and license arrangements, or a combination of these approaches. However, we do not expect to receive additional revenues unless and until we receive regulatory approval for product candidates or potentially enter into collaboration agreements. We expect that any revenue we generate will fluctuate from quarter to quarter and year to year as a result of the timing and amount of license fees, milestone and other payments, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval of them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related expenses for personnel, including non-cash stock-based compensation costs, preclinical costs, clinical trial costs, costs related to acquiring and manufacturing clinical trial materials, contract services, facilities costs, overhead costs and depreciation. These activities also include research and development related to our gene therapy platform development. All research and development costs are expensed as incurred.

14


 

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

 

per patient trial costs;

 

the number of patients that participate in the trials;

 

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 drop-out or discontinuation rates of patients;

 

the potential for additional safety monitoring or other clinical trials requested by regulatory agencies;

 

significant and changing government regulation; and

 

the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.

The following table sets forth our research and development expense by project (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Toca 511 & Toca FC

 

$

11,983

 

 

$

6,342

 

 

$

21,396

 

 

$

12,726

 

Vector technology

 

 

780

 

 

 

290

 

 

 

1,803

 

 

 

530

 

Total

 

$

12,763

 

 

$

6,632

 

 

$

23,199

 

 

$

13,256

 

 

We expect our research and development expenses to increase for the foreseeable future as we scale up our clinical trial and manufacturing activities and seek regulatory approval of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for personnel, including non-cash stock-based compensation costs and travel expenses for our employees in executive, operational, finance and business development functions. Other general and administrative expenses include facility-related costs, consulting fees, information technology, insurance, professional fees for accounting and legal services, expenses associated with obtaining and maintaining patents and costs associated with being a public company.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our expanding research and development and potential commercialization of our product candidates. We also anticipate continued increases in expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company. Additionally, if we believe a regulatory approval of our lead product candidate appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to establishing a sales force and other expenses related to the sale and marketing of our product candidates.

15


 

Interest Income

Interest income consists primarily of interest income earned on cash, cash equivalents and marketable securities.

Interest Expense

Interest expense consists primarily of stated interest and the amortization of related debt issuance costs incurred on the outstanding principal amount of our borrowings under our notes payable and convertible promissory notes payable.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes to our critical accounting policies since December 31, 2017 besides the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which amended the existing accounting standards for revenue recognition. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our unaudited condensed financial statements, refer to Item 7 in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to our financial statements contained in our Annual Report on Form 10-K and Note 2 to our unaudited condensed financial statements contained in this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

We have reviewed all recently issued standards and have determined that other than as disclosed in Note 2 to our unaudited condensed financial statements included herein, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2018 and 2017

The following table summarizes our results of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017