MEIP MEI Pharma Inc

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

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding the future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, without limitation, those described in “Risk Factors” in our 2018 Annual Report, and elsewhere in this report, including, among other things:

These risks are not exhaustive. Other sections of this report and our other filings with the SEC include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors, 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.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Past performance may not be an indicator of future results. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto included in our 2018 Annual Report, as filed with the SEC. Operating results are not necessarily indicative of results that may occur in future periods.

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Overview and Recent Developments

We are a pharmaceutical company focused on leveraging our extensive development and oncology expertise to identify and advance new therapies intended to meaningfully improve the treatment of cancer. Our portfolio of drug candidates contains four clinical-stage candidates, including one candidate in an ongoing Phase 3 global registration trial and another candidate that is entering into a Phase 2 clinical trial that we intend to submit to the FDA as support for accelerated approval of a marketing application. Our common stock is listed on the NASDAQ Capital Market under the symbol “MEIP”.

Clinical Development Programs

Cancer is an intractable and highly adaptable disease capable of evading the body’s defenses and resisting treatment to grow and spread. Despite new treatments that leverage actionable insights into cancer biology, effective treatments remain elusive and even the most cutting-edge therapies still struggle to balance potency with safety. As a result, the oncology community strives to improve on existing therapies and search for new and better options to optimize benefits for patients. This approach includes medicines that not only act alone, but also work well in combination with other therapies to deliver the best possible outcomes.

We currently have four clinical-stage development programs, each of which is in active development, with diverse approaches to inhibiting cancer, including epigenetics, cell signaling and cancer metabolism:

Pracinostat: HDAC Inhibitor Candidate in a Phase 3 Global Registration Clinical Trial

Pracinostat is an oral HDAC inhibitor being evaluated in a pivotal Phase 3 global registration clinical trial for the treatment of adults with newly diagnosed acute myeloid leukemia (“AML”) who are unfit to receive intensive chemotherapy. Pracinostat is also being evaluated in a Phase 2 study in patients with high or very high-risk myelodysplastic syndrome (“MDS”). In August 2016, we entered into an exclusive worldwide license, development, manufacturing and commercialization agreement with Helsinn Healthcare SA, a Swiss pharmaceutical corporation (“Helsinn”) for pracinostat in AML, MDS and other potential indications (the “Helsinn Agreement). Under the agreement, Helsinn is primarily responsible for funding global development and commercialization costs for pracinostat. We are responsible for conducting the Phase 2 MDS study, the cost of which will be shared equally with Helsinn.

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Breakthrough Therapy Designation for pracinostat was granted by the FDA in 2016, and in January 2018 the European Medicines Agency (“EMA”) granted Orphan Drug Designation to pracinostat for the treatment of AML. The designations in the US and European Union (“EU”) are supported by data from a Phase 2 study of pracinostat plus azacitidine in elderly patients with newly diagnosed AML who are not candidates for induction chemotherapy. The study showed a median overall survival of 19.1 months and a complete remission (“CR”) rate of 42% (21 of 50 patients). These data compare favorably to an international Phase 3 study of azacitidine (AZA-001; Dombret et al. Blood. 2015 May 18), which showed a median overall survival of 10.4 months with azacitidine alone and a CR rate of 19.5% in a similar patient population. The combination of pracinostat and azacitidine was generally well tolerated, with no unexpected toxicities. The most common grade 3/4 treatment-emergent adverse events included febrile neutropenia, thrombocytopenia, anemia and fatigue.

Pracinostat Scientific Overview; Epigenetics

HDACs play a key role in epigenetic regulation of gene expression by regulating chromatin structure. Acetylation of positively charged lysine residues present in histone proteins by the histone acetyltransferase (“HATs”) reduces the affinity between histones and negatively charged DNA, resulting in the opening of the chromatin structure. This makes it easier for the transcriptional machinery to access the DNA, enhancing RNA transcription. Conversely, deacetylation by the HDACs closes the chromatin structure leading to a repression of gene transcription. In normal cells, HDACs and HATs together control histone acetylation levels to maintain a balance. In diseases such as cancer, this regulation can be disturbed. HDAC inhibitors cause accumulation of acetylated histones, enhance transcription and result in changes to a variety of cellular responses including differentiation, proliferation, migration, survival and response to metabolic and hypoxic stress. In general, tumor cells are more susceptible than normal cells to the anti-proliferative and pro-apoptotic effects of HDAC inhibitors.

There are currently three HDAC inhibitors, one oral and two injectable, approved by the FDA for the treatment of T-cell lymphoma and a fourth orally administered HDAC inhibitor approved for multiple myeloma. Other HDAC inhibitors are being evaluated in clinical trials as single agents and in combination for the treatment of various hematologic diseases and solid tumors.

Pracinostat is an orally available, potent HDAC inhibitor with potentially improved physicochemical, pharmaceutical and pharmacokinetic properties when compared to other compounds of this class, including increased bioavailability and increased half-life.

Clinical Program

The ongoing pivotal Phase 3 registration study, which is being run by Helsinn and was initiated in June 2017, is a randomized, double-blind, placebo-controlled study that will enroll worldwide approximately 500 adults with newly diagnosed AML who are unfit to receive intensive chemotherapy. Patients are randomized 1:1 to receive pracinostat or placebo with azacitidine as background therapy. The primary endpoint of the study is overall survival. Secondary endpoints include morphologic CR rate, event-free survival and duration of CR.

Additionally, pracinostat is being investigated in a Phase 2 dose optimization study evaluating patients with high and very high-risk MDS who are previously untreated with hypomethylating agents. This patient group represents the highest unmet need in MDS, with median survival estimates of 1.6 years and 0.8 years, respectively. The ongoing Phase 2 open-label study is evaluating a 45 mg dose of pracinostat in combination with the standard dose of azacitidine. The study is designed to improve tolerability and retain patients in the study longer than in an earlier Phase 2 study evaluating a 60 mg dose. A prolonged treatment may result in a systemic exposure to pracinostat sufficient to achieve the desired treatment effect; data from the earlier Phase 2 study suggested that insufficient exposure to treatment may have limited overall efficacy of the combination.

A pre-planned interim analysis of the Phase 2 MDS study demonstrated a 10% discontinuation rate among the first 20 evaluable patients treated, beating the predefined threshold in the first 3 treatment cycles. The 10% rate is consistent with the established discontinuation rate for azacitidine given as a monotherapy. Having met this threshold, the study expanded open-label enrollment to 60 patients. Patients will be followed for one year to evaluate safety and efficacy. The primary endpoints of the study are 1) safety and tolerability and 2) overall response rate, defined as CR, partial remission (“PR”) and marrow CR. Secondary endpoints include CR rate, overall hematologic improvement (“HI”) response rate, clinical benefit rate (defined as rate of CR + PR + HI + Marrow CR), rate of cytogenetic complete response/remission, duration of response, rate of leukemic transformation, event-free survival, progression-free survival and overall survival. Upon completion of the study, the data will be evaluated to determine the opportunity to advance pracinostat into a registration study in patients with MDS. All future development and commercialization costs after the completion of the Phase 2 study are the responsibility of Helsinn.

Pracinostat has been previously investigated in more than 300 patients in multiple Phase 1 and Phase 2 clinical trials and found to be generally well tolerated with manageable side effects often associated with drugs of this class, including fatigue, myelosuppression and gastrointestinal toxicity.

ME-401: PI3K Delta Inhibitor Entering Phase 2 Study to Support Accelerated Approval in Relapsed or Refractory Follicular Lymphoma

We own exclusive worldwide rights to ME-401, a selective oral inhibitor of PI3K delta. In the fourth quarter of calendar year 2018, we plan to initiate an ME-401 single-agent Phase 2 clinical trial for the treatment of adults with relapsed or refractory follicular lymphoma (“FL”). We intend to submit the results of this trial to the FDA for accelerated approval of the marketing application under 21 CFR Part 314, Subpart H.

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We believe ME-401 holds best-in-class potential as a PI3K delta inhibitor based on clinical data observed to date. Clinical data from an ongoing Phase 1b, open-label, dose-escalation study in relapsed/refractory FL, chronic lymphocytic leukemia (“CLL”) and small lymphocytic lymphoma (“SLL”) demonstrate an objective response rate of 90%. ME-401 was generally well-tolerated in the Phase 1b trial and no dose-limiting toxicities were identified at any dose level.

The clinical data generated to date, along with important differentiating pharmaceutical properties of ME-401, support its potential as a single-agent therapy and the potential to be used in combination with existing or emerging therapies to treat multiple difficult-to-treat oncology indications.

ME-401 Scientific Overview: Cell Cycle Signaling

The PI3K/AKT/mTOR pathway is an important signaling pathway for many cellular functions such as cell survival, cell cycle progression and cellular growth. PI3Ks are a family of enzymes within this pathway that have been shown to play a critical role in the proliferation and survival of certain cancer cells. There are several isoforms of PI3K that are expressed in different types of cells. The PI3K delta isoform is believed to be important for survival of certain B-cell leukemias and lymphomas.

PI3K delta Inhibitors and B-Cell Malignancies

As a class of therapies, PI3K delta inhibitors may have application across a range of B-cell malignancies and compare favorably to other therapeutic approaches.

PI3K delta inhibitors as a group demonstrate promise in the treatment of B-cell malignancies. However, the FDA and EMA approved oral PI3K delta inhibitor idealelisib (marketed as Zydelig ^® ), the FDA approved intravenous PI3K alpha/delta inhibitor copanlisib (marketed as Aliqopa ^® ), as well as other candidates in development, are challenged by treatment limiting toxicities which may compromise their overall efficacy. We believe this provides an opportunity for the development of a next generation candidate with superior pharmaceutical properties that can provide efficacy and that better maximizes the biological potential of PI3K delta without being limited by toxicities that reduce clinical utility.

Through our extensive pre-clinical and ongoing clinical work, we have demonstrated that ME-401 has important pharmaceutical properties, including prolonged target binding, preferential cellular accumulation, significant distribution throughout the body tissues, and a 28-hour half-life suitable for once daily oral administration. We believe these positive attributes support the promising clinical results observed to date and the continued clinical advancement of ME-401 as an attractive drug candidate with single-agent activity and the potential to be used in combination with existing or emerging therapies to treat multiple difficult-to-treat oncology indications.

Clinical Program

ME-401 is being evaluated in an ongoing Phase 1b dose escalation study in patients with relapsed or refractory FL, CLL and SLL. In June 2018, at the American Society of Clinical Oncology (“ASCO”) Annual Meeting, we reported data indicating that ME-401 administered as a single-agent achieved a high response rate of 90% among 30 evaluable patients as well as a high response rate of 86% in the group of 21 patients with FL. In addition to the overall high response rate, other notable observations include:

ME-401 was generally well-tolerated. No dose-limiting toxicities were identified at any dose level. Among the most common adverse events, Grade 3 adverse events of interest were diarrhea 19% (6/31), rash 13% (4/31), colitis 6% (2/31) and stomatitis 3% (1/31), all of which were reported in Cycle 3 or later cycles and all of which resolved with drug interruption and corticosteroids allowing multiple patients to resume treatment on an intermittent schedule without apparent loss of response. No opportunistic infections or non-infectious pneumonitis were reported. There have been no Grade 4-5 adverse events. Four patients discontinued due to an adverse event. Rates of adverse events across the doses studied were comparable.

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Laboratory abnormalities in the Phase 1b trial were infrequent. Grade ³ 3 laboratory abnormalities reported were: neutropenia 10% (4/31) and AST/ALT increase 6% (2/31). Myelosuppression was not associated with febrile neutropenia. Based on the data, we determined that no further dose escalation was required. An expansion cohort of up to 30 patients with FL, CLL and SLL was added to further evaluate the safety and efficacy of ME-401 as a single agent at the 60 mg dose. An additional 15 patients are enrolled in the study arm evaluating ME-401 (60 mg) in combination with rituximab (marketed as Rituxan ^® ) in patients with various B cell malignancies, including diffuse large B-cell lymphoma (“DLBCL”).

In October 2018, we announced a clinical collaboration with BeiGene. In connection with the BeiGene collaboration, we will amend the ongoing Phase 1b trial to evaluate the safety and efficacy of ME-401 in combination with BeiGene’s zanubrutinib, an investigational inhibitor of BTK, for the treatment of patients with B-cell malignancies. The cost of the combination study will be equally shared. Each company will supply its own compound. We retain all commercial rights to ME-401 and BeiGene retains all commercial rights to zanubrutinib.

Phase 2 Accelerated Approval Study

In July 2018, the Company discussed with FDA a ME-401 monotherapy accelerated approval strategy in patients with relapsed or refractory follicular lymphoma. The FDA communicated support for the Company’s proposed randomized Phase 2 trial. Accelerated approval of ME-401 will be subject to FDA review of the improvement provided by ME-401 over other therapies available at the time of the regulatory action.

Informed by our communications with the FDA, we are planning to initiate by the end of calendar year 2018, a global randomized Phase 2 study to evaluate the efficacy, safety, and tolerability of ME-401 in patients with FL after failure of at least two prior systemic therapies including chemotherapy and an anti-CD20 antibody. The study will evaluate two different ME-401 single agent dosing regimens; in one arm, ME-401 will be administered once daily continuously and in the other arm, ME-401 will be administered once daily for two cycles (i.e., eight weeks) followed by an intermittent schedule whereby ME-401 will be administered once daily for the first seven days of a 28-day cycle followed by 21 days placebo. Approximately 150 patients will be randomized in the study and the primary efficacy endpoint will be the rate of objective response to therapy.

Voruciclib: CDK Inhibitor with CDK9 Inhibition in Phase 1 Studies

Voruciclib is an orally administered CDK inhibitor differentiated by its potent in vitro inhibition of CDK9 in addition to CDK6, 4 and 1. Voruciclib is currently being evaluated in a Phase 1b dose ranging study in patients with B-cell malignancies.

Voruciclib Scientific Overview: Cell Cycle Signaling

The CDK family of proteins are important cell cycle regulators. CDK9 is a transcriptional regulator of the myeloid leukemia cell differentiation protein (“MCL1”), a member of the family of anti-apoptotic proteins which, when elevated, may prevent the cell from undergoing cell death. Inhibition of CDK9 blocks the production of MCL1, which is an established resistance mechanism to the B-cell lymphoma (“BCL2”) inhibitor venetoclax (marketed as Venclexta™).

In pre-clinical studies voruciclib shows dose-dependent suppression of MCL1; in December 2017 a study of voruciclib published in the journal Nature Scientific Reports reported that the combination of voruciclib plus the BCL-2 inhibitor venetoclax was capable of inhibiting two master regulators of cell survival, MCL-1 and BCL-2, and achieved synergistic antitumor efficacy in an aggressive subset of DLBCL pre-clinical models. (Scientific Reports. (2017) 7:18007. DOI:10.1038/s41598-017-18368-w).

CDK9 is also a transcriptional regulator of MYC, a transcription factor regulating cell proliferation and growth which contributes to many human cancers and is frequently associated with poor prognosis and unfavorable patient survival. Targeting MYC directly has historically been difficult, but CDK9 is a transcriptional regulator of MYC and is a promising approach to target this oncogene.

Clinical Program

In January 2018, we announced the FDA cleared the voruciclib Investigational New Drug Application (“IND”) for hematologic malignancies. In August 2018 we dosed our first patient in a dose ranging Phase 1b clinical trial of voruciclib as a single agent in patients with relapsed and/or refractory B-cell malignancies after failure of prior standard therapies to determine the safety, preliminary efficacy and maximum tolerated dose. We also plan to evaluate voruciclib in combination with venetoclax to assess synergies and the opportunity for combination treatments across multiple indications.

Voruciclib was previously evaluated in more than 70 patients in multiple Phase 1 studies with a tolerability profile consistent with other drugs in its class. In pre-clinical studies, voruciclib shows dose-dependent suppression of MCL1 at concentrations achievable with doses that appear to be generally well tolerated in earlier Phase 1 studies. Pre-clinical studies additionally show inhibition of MYC protein expression.

ME-344: Mitochondrial Inhibitor with Combinatorial Potential

ME-344 is our novel and tumor selective, isoflavone-derived mitochondrial inhibitor drug candidate. It directly targets the OXPHOS complex 1, a pathway involved in ATP production in the mitochondria. ME-344 is currently in an ongoing investigator-initiated, multi-center, randomized study in combination with the vascular endothelial growth factor (“VEGF”) inhibitor bevacizumab (marketed as Avastin ^® ) in a total of 40 patients with HER2 negative breast cancer.

ME-344 Scientific Overview: Cancer Metabolism

Tumor cells often display a high metabolic rate to support cell division and growth. This heightened metabolism requires a continual supply of energy in the form of adenosine triphosphate (“ATP”). The two major sources of ATP are the specialized cellular organelles termed mitochondria and through the metabolism of carbohydrates, proteins and lipids.

ME-344 was identified through a screen of more than 400 new chemical structures originally created based on the central design of naturally occurring plant isoflavones. We believe that some of these synthetic compounds, including our drug candidate ME-344, interact with specific mitochondrial enzyme targets, resulting in the inhibition of ATP generation. When these compounds interact with their target, a rapid reduction in ATP occurs, which leads to a cascade of biochemical events within the cell and ultimately to cell death.

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Clinical Program

ME-344 demonstrated evidence of single agent activity against refractory solid tumors in a Phase 1 study, and in pre-clinical studies tumor cells treated with ME-344 resulted in a rapid loss of ATP and cancer cell death. In addition to single agent activity, ME-344 may also have significant potential in combination with anti-angiogenic therapeutics. While anti-angiogenics reduce the rate of glycolysis in tumors as a mechanism to block growth, tumor metabolism often shifts to mitochondrial metabolism to continue energy production to support continued tumor proliferation. In such cases of tumor plasticity in the presence of treatment with anti-angiogenics, targeting the alternative metabolic source with ME-344 may open an important therapeutic opportunity.

We are investigating this approach in an ongoing, multicenter, investigator-initiated, randomized, open-label, clinical trial, which is evaluating ME-344 in a total of up to 40 patients with HER2-negative breast cancer in combination with the VEGF inhibitor bevacizumab (marketed as Avastin ^® ). Patients are randomized one-to-one to either ME-344 in combination with bevacizumab or saline in combination with bevacizumab. The interim data review was predefined to take place after 20 patients were randomized. The primary efficacy endpoint is inhibition of cell proliferation as measured by Ki-67 reductions.

Interim data presented from the study at the ASCO Annual Meeting in June 2018 demonstrate evidence of inhibition of tumor proliferation. Mean absolute (relative) Ki-67 decreases were 5.13 (29%) and 1.2 (9%) in the active versus control arms (P=0.06). Patients with standardized uptake values via PET scan ³ 10% experienced an absolute average Ki-67 decrease of 16.6 vs. 2.3 in the active versus control arms (P=0.19). Treatment was generally well tolerated; two Grade 3 adverse events (high blood pressure) were reported, one in each arm, and deemed related to bevacizumab. These interim data are consistent with pre-clinical results indicating ME-344’s potential to reverse resistance to anti-angiogenic therapy, thereby warranting the continuation of the ongoing study.

Results from our earlier, first-in-human, single-agent Phase 1 clinical trial of ME-344 in patients with refractory solid tumors were published in the April 1, 2015 issue of Cancer . The results indicated that eight of 21 evaluable patients (38%) treated with ME-344 achieved stable disease or better, including five who experienced progression-free survival that was at least twice the duration of their last prior treatment before entry into the study. In addition, one of these patients, a heavily pre-treated patient with small cell lung cancer, achieved a confirmed partial response and remained on study for two years. ME-344 was generally well tolerated at doses equal to or less than 10 mg/kg delivered on a weekly schedule for extended durations. Treatment-related adverse events included nausea, dizziness and fatigue. Dose-limiting toxicities were observed at both the 15 mg/kg and 20 mg/kg dose levels, consisting primarily of grade three peripheral neuropathy.

In June 2016, pre-clinical data from a collaboration with the Spanish National Cancer Research Centre in Madrid showing mitochondria-specific effects of ME-344 in cancer cells, including substantially enhanced anti-tumor activity when combined with agents that inhibit the activity of VEGF, were published in Cell Reports . These data demonstrate that the anti-cancer effects when combining ME-344 with a VEGF inhibitor are due to an inhibition of both mitochondrial and glycolytic metabolism and provided a basis for commencement the ongoing investigator-initiated study of ME-344 in combination with the VEGF inhibitor bevacizumab (marketed as Avastin ^® ) in HER2 negative breast cancer patients.

Results of Operations

Three Months Ended September 30, 2018 and 2017

We had a net loss of $14.5 million for the three months ended September 30, 2018 compared to a net loss of $8.8 million for the three months ended September 30, 2017. Our net loss for the three months ended September 30, 2018 includes a non-cash expense of $5.0 million related to our warrant liability, as described below.

Research and Development Revenue: We recognized research and development revenue of $0.5 million for the three months ended September 30, 2018 compared to $0.3 million for the three months ended September 30, 2017. Research and development revenue resulted from the recognition of fees allocated to research and development activities in accordance with the Helsinn License Agreement. Revenue increased due to higher levels of research and development activities during the three months ended September 30, 2018.

Cost of Research and Development Revenue: We recognized cost of research and development revenue of $1.0 million for the three months ended September 30, 2018 compared to $0.6 million for the three months ended September 30, 2017. The cost of research and development revenue includes external costs paid to third-party contractors to perform research, conduct clinical trials and develop and manufacture drug materials, and internal compensation and related personnel expenses to support our research and development revenue. All costs of research and development revenue relate to expenses for pracinostat incurred in connection with our development activities in accordance with the Helsinn License Agreement, including both Helsinn’s share and our share of costs related to the POC study, which we are responsible for conducting.

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Research and Development : The following is a summary of our research and development expenses to supplement the more detailed discussion below. The dollar values in the following table are in thousands.

Research and development expenses consist primarily of clinical trial costs (including payments to clinical research organizations), pre-clinical study costs, and costs to manufacture our drug candidates for non-clinical and clinical studies. Other research and development expenses consist primarily of salaries and personnel costs, share-based compensation, legal costs, and other costs not allocated to specific drug programs. Research and development expenses were $6.1 million for the three months ended September 30, 2018 compared to $6.1 million for the three months ended September 30, 2017. Costs related to ME-401 were higher for the three months ended September 30, 2018 due to increased clinical trial costs and drug manufacturing. Costs related to voruciclib were lower for the three months ended September 30, 2018 because we expensed a license fee payment of $2.9 million during the three months ended September 30, 2017. Other research and development costs increased year over year due to higher levels of salaries and share-based compensation associated with increased headcount to support our clinical activities.

General and Administrative : General and administrative expenses increased by $0.9 million to $3.4 million for the three months ended September 30, 2018 compared to $2.5 million for the three months ended September 30, 2017. The increase is primarily due to $0.6 million in increased share-based compensation, $0.1 million in increased professional services expenses, and $0.2 million in increased general corporate expenses during the three months ended September 30, 2018.

Other income or expense: We recorded a $5.0 million expense during the three months ended September 30, 2018 due to a change in the fair value of our warrant liability for warrants issued in May 2018 as part of our private placement. The change in the warrant liability is primarily due to changes in our stock price. Additionally, we received interest and dividend income of $0.5 million for the three months ended September 30, 2018 compared to $0.1 million for the three months ended September 30, 2017. The increase was due to higher investment balances and higher yields during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

Liquidity and Capital Resources

We have accumulated losses of $228.9 million since inception and expect to incur operating losses and generate negative cash flows from operations for the foreseeable future. As of September 30, 2018, we had $90.8 million in cash, cash equivalents and short-term investments, which we believe will be sufficient to fund our operations through at least fiscal year 2020. Our current business operations are focused on continuing the clinical development of our drug candidates. Changes to our research and development plans or other changes affecting our operating expenses may affect actual future use of existing cash resources. To date, we have obtained cash and funded our operations primarily through equity financings. In order to continue the development of our drug candidates, at some point in the future we expect to pursue one or more capital transactions, whether through the sale of equity securities, license agreements or entry into strategic partnerships.

Sources and Uses of Our Cash

Net cash used in operating activities for the three months ended September 30, 2018 was $12.8 million. This compares to $6.6 million used in operating activities for the three months ended September 30, 2017. The increase in cash used in operating activities primarily relates to changes in working capital associated with our clinical development programs, including start-up costs related to the ME-401 Phase 2 accelerated approval study.

Net cash provided by investing activities for the three months ended September 30, 2018 was $4.8 million compared to net cash provided by investing activities of $5.0 million in the three months ended September 30, 2017. Cash provided by investing activities represents maturities of investments in short-term U.S. government securities in excess of purchases. Cash used in investing activities represents purchases of investments in short-term U.S. government securities in excess of maturities.

Net cash provided by financing activities for the three months ended September 30, 2018 was $0.8 million compared to $20,000 for the three months ended September 30, 2017. Cash provided during the three months ended September 30, 2018 primarily represents proceeds from the exercises of warrants and stock options.

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Contractual Obligations

We have contracted with various consultants and third parties to assist us in pre-clinical research and development and clinical trials work for our leading drug compounds. The contracts are terminable at any time, but obligate us to reimburse the providers for any time or costs incurred through the date of termination. Additionally, we have employment agreements with certain of our current employees that provide for severance payments and accelerated vesting for share-based awards if their employment is terminated under specified circumstances.     

We have leased approximately 13,700 square feet of office space, located at 3611 Valley Centre Drive, San Diego, California 92130. The location houses our executive and administrative offices. The lease commenced in June 2017. The monthly rental rate is approximately $46,000 over the remaining lease term, plus a pro rata share of certain building expenses. In September 2018, we entered into a lease agreement for approximately 7,000 additional square feet of office space at the same location, at a rental rate of approximately $21,000 per month, plus a pro rata share of certain building expenses. Each lease term expires in May 2020. The remaining contractual obligations for the two leases are $0.9 million and $0.4 million, respectively.

Presage License Agreement

In September 2017, we entered into the Presage License Agreement. Under the terms of the Presage License Agreement, Presage granted to us exclusive worldwide rights to develop, manufacture and commercialize voruciclib, a clinical-stage, oral and selective CDK inhibitor, and related compounds. In exchange, we paid Presage $2.9 million. With respect to the first indication, an incremental $2.0 million payment, due upon dosing the first subject in the first registration trial will be owed to Presage, for total payments of $4.9 million up to receipt of marketing approval of the first indication in the U.S., E.U. or Japan. Additional potential payments of up to $179 million will be due upon the achievement of certain development, regulatory and commercial milestones. We will also pay mid-single-digit tiered royalties on the net sales of any product successfully developed. As an alternative to milestone and royalty payments related to countries in which we sublicense product rights, we will pay to Presage a tiered percent (which decreases as product development progresses) of amounts received from such sublicensees. As of September 30, 2018, we have not accrued any amounts for potential future payments.

S*Bio Purchase Agreement

We are party to a definitive asset purchase agreement with S*Bio, pursuant to which we acquired certain assets comprised of intellectual property and technology including rights to pracinostat. We agreed to make certain milestone payments to S*Bio based on the achievement of certain clinical, regulatory and net sales-based milestones, as well as to make certain contingent earnout payments to S*Bio. Milestone payments will be made to S*Bio up to an aggregate amount of $75.2 million if certain U.S., E.U. and Japanese regulatory approvals are obtained and if certain net sales thresholds are met in North America, the E.U. and Japan. The first milestone payment of $200,000 plus 166,527 shares of our common stock having a value of $500,000 was paid in August 2017 upon the first dosing of a patient in a Phase 3 clinical trial. Subsequent milestone payments will be due upon certain regulatory approvals and sales-based events. As of September 30, 2018, we have not accrued any amounts for potential future payments.

CyDex License Agreement

We are party to a license agreement with CyDex. Under the license agreement, CyDex granted to us an exclusive, nontransferable license to intellectual property rights relating to Captisol ^® for use with our two isoflavone-based drug compounds (currently ME-344). We agreed to pay to CyDex a non-refundable license issuance fee, future milestone payments, and royalties at a low, single-digit percentage rate on future sales of our approved drugs utilizing Captisol. Contemporaneously with the license agreement, CyDex entered into a commercial supply agreement with us, pursuant to which we agreed to purchase 100% of our requirements for Captisol from CyDex. We may terminate both the license agreement and the supply agreement for convenience at any time upon 90 days’ prior written notice. As of September 30, 2018, we have not accrued any amounts for potential future payments.

Critical Accounting Policies and Management Estimates

We describe our significant accounting policies in Note 1, The Company and Summary of Significant Accounting Policies, of the notes to financial statements included in our 2018 Annual Report. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our 2018 Annual Report. There have been no changes in our significant accounting policies or critical accounting estimates since June 30, 2018.

Recent Accounting Pronouncements

See Note 1 to the Financial Statements included in Item 1 of this Quarterly Report.

We place our cash deposits with high credit quality financial institutions and by policy limit the amount of credit exposure to any one corporation or bank. These deposits are in excess of the FDIC insurance limits. We are adverse to principal loss and we ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. We seek to mitigate default risk by depositing funds with high credit quality financial institutions, by limiting the amount of credit exposure to any one corporation or bank, by purchasing short-term investments consisting of U.S. government securities, and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any such financial institution.

We do not consider the effects of interest rate movements to be a material risk to our financial condition.