TG THERAPEUTICS, INC. quarterly report, Q3 FY2014

TG Therapeutics, Inc. — Q3 2014 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014. The unaudited filing describes a development-stage biopharmaceutical company focused on treatments for cancer and autoimmune diseases. Its lead programs were ublituximab (TG-1101) and TGR-1202 for hematologic malignancies, plus preclinical IRAK-4 inhibitors. The company had no approved products and generated no product sales.

Financial performance and position

Metric	Three months ended September 30	Nine months ended September 30
License revenue	$38,096 in both 2014 and 2013	$114,286 in both 2014 and 2013
Total costs and expenses	$17.48 million in 2014; $4.69 million in 2013	$37.11 million in 2014; $15.10 million in 2013
Operating loss	$17.44 million in 2014; $4.65 million in 2013	$37.00 million in 2014; $14.99 million in 2013
Net loss	$17.45 million in 2014; $4.56 million in 2013	$36.98 million in 2014; $14.81 million in 2013
Basic and diluted loss per share	$0.51 in 2014; $0.16 in 2013	$1.14 in 2014; $0.62 in 2013

Revenue consisted of amortization of the $2 million Ildong sublicense upfront payment; the company said it would recognize that payment through December 2025. With no commercial sales and ongoing losses, operating or gross margins are not meaningful indicators of commercial performance.

• Cash and liquidity: At September 30, cash and cash equivalents were $53.23 million, short-term investments $14.01 million, and interest receivable $53,821—approximately $67.29 million combined. Total current assets were $76.67 million versus current liabilities of $8.90 million.
• Cash flow: Nine-month operating cash use was $19.95 million, compared with $5.92 million in 2013. Financing provided $41.92 million, primarily from stock sales and warrant exercises; investing used $9.22 million, mainly for short-term securities. Cash and cash equivalents ended the period at $53.23 million.
• Debt: Notes payable were carried at $183,144, all current, versus $742,307 total at year-end 2013. The remaining 5% notes had approximately $19.31 million of face principal and accrued interest, but the filing says the company’s obligations are limited to 50% of any specified legacy-product cash flows and the conversion feature; no payments had been made. The ICON note was settled in January 2014.
• Equity and accumulated losses: Total equity was $67.08 million, and accumulated deficit was $76.39 million. Common shares issued increased from 34.34 million at December 31, 2013 to 41.48 million at September 30, 2014. Weighted-average shares also increased year over year.

Material changes and notable transactions

• Losses increased substantially year over year. Nine-month R&D rose to $24.95 million from $9.91 million, and G&A to $12.16 million from $5.20 million. Drivers included increased clinical-development activity, the TGR-1202 license exercise, and higher noncash compensation.
• Noncash compensation totaled $16.07 million for the first nine months of 2014, compared with $4.26 million in 2013. The company attributed much of the increase to milestone-based vesting of restricted stock. It also recorded $5.35 million of noncash R&D expense for shares issued in connection with in-licensing agreements.
• In September, the company exercised its option for global TGR-1202 rights from Rhizen. Terms included $4 million cash and 371,530 shares upfront, approximately $175 million of potential milestones, and royalties or, in specified circumstances, a share of sublicensing revenue. The cash milestone was paid in October; it was accrued at September 30.
• The June IRAK-4 license from Ligand included 125,000 shares upfront, potential milestones of approximately $207 million, and royalties. Opus Point Partners, whose managing member was Executive Chairman and Interim CEO Michael Weiss, was entitled to a 1% royalty on annual sales up to $1 billion for identifying and advising on the opportunity.
• Equity financing included approximately $16.8 million of net proceeds from a March public offering and $22.8 million net from ATM sales in August and September. Subsequent to quarter-end through November 7, the ATM generated another approximately $26.1 million net. The company reported the $50 million ATM capacity fully used and approximately $67 million remaining under its shelf registration statement.

Outlook, risks, and contingencies

• Management estimated that September 30 cash, cash equivalents, and investments would fund anticipated operating cash requirements for more than 24 months from that date. It also stated that significant future financing would be needed to execute its strategy, and warned that actual cash needs depend on clinical-trial timing, design, and conduct.
• Management expected R&D costs to increase modestly for the remainder of 2014 as trial enrollment grew; other G&A was expected to remain at a comparable level. The company expected operating losses to continue and could not predict if or when it would become profitable.
• The company announced an FDA Special Protocol Assessment for a planned Phase 3 trial of ublituximab plus ibrutinib versus ibrutinib alone in high-risk CLL, expected to launch before year-end 2014. The approximately 330-patient study was intended to support an accelerated-approval filing based on response data, with progression-free survival follow-up. An SPA does not guarantee FDA approval.
• Key risks include clinical-trial failure or delay, safety and combination-therapy risks, regulatory uncertainty, reliance on licensors and third-party manufacturers, competition, intellectual-property disputes, and dependence on future capital. Management noted that the IRAK-4 program was preclinical and had no active IND at the time of filing.
• On October 3, the company entered a desk-space agreement for about 40% of a 15-year office lease, with estimated average annual rent and other costs of $1.1 million; the space was expected to be available in late 2015 or early 2016. Weiss was also a director and executive officer of the lessor. The company paid $80,000 and agreed in October to pledge $0.6 million as security.
• The company adopted a stockholder rights plan in July, with rights generally becoming exercisable following an acquiring-person trigger. It reported no material pending legal proceedings, and management concluded disclosure controls were effective as of September 30.

Important facts for investors to verify

• Clinical progress, enrollment, safety, and results for TG-1101 and TGR-1202, including the planned Phase 3 study and the FDA’s eventual review of any submission.
• Actual cash burn against management’s greater-than-24-month estimate, future financing needs, and dilution after the ATM issuance and any further shelf offerings.
• Full economics and obligations under the Rhizen and Ligand licenses, including milestone, royalty, manufacturing, and sublicensing terms.
• The nature and potential effect of the 5% notes’ conversion feature and contingent product-cash-flow obligations, despite their low reported fair-value carrying amount.
• Related-party arrangements, including the Opus royalty and office-sharing arrangements, and the potential lease commitment with Coronado Biosciences.
• Whether stock-based compensation, clinical-trial accrual estimates, or other noncash and unusual items materially affect comparisons of reported losses and cash use.