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 September 30, 2016

OR

TRANSITION REPORT UNDER SECTION 13 OF 15(d) OR THE EXCHANGE ACT OF 1934

From the transition period from                 to                .

Commission File Number 001-37378

 

ATYR PHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-3435077

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

 

 

3545 John Hopkins Court, Suite #250, San Diego, CA

 

92121

(Address of principal executive offices)

 

(Zip Code)

(858) 731-8389

(Registrant’s telephone number, including area code)

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

 

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 November 7, 2016, there were 23,718,529 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 


 

ATY R PHARMA, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

3

Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 201 5

 

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (unaudited)

 

4

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015 (unaudited)

 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)

 

6

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

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

 

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

22

Item 4. Controls and Procedures

 

23

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

24

Item 1A. Risk Factors

 

24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

57

Item 3. Defaults Upon Senior Securities

 

57

Item 4. Mine Safety Disclosures

 

57

Item 5. Other Information

 

58

Item 6. Exhibits

 

58

SIGNATURES

 

59

 

 

2


 

PART I. FINANCI AL INFORMATION

Item 1. Financial Statements

aTyr Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,332

 

 

$

53,025

 

Available-for sale investments, short-term

 

 

36,198

 

 

 

42,510

 

Prepaid expenses and other assets

 

 

3,117

 

 

 

2,415

 

Total current assets

 

 

73,647

 

 

 

97,950

 

Available-for sale investments, long-term

 

 

10,329

 

 

 

29,814

 

Property and equipment, net

 

 

1,596

 

 

 

1,793

 

Other assets

 

 

353

 

 

 

118

 

Total assets

 

$

85,925

 

 

$

129,675

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,565

 

 

$

3,872

 

Accrued expenses and other current liabilities

 

 

5,520

 

 

 

4,595

 

Current portion of deferred rent

 

 

211

 

 

 

315

 

Current portion of commercial bank debt

 

 

2,640

 

 

 

3,366

 

Total current liabilities

 

 

11,936

 

 

 

12,148

 

Deferred rent, net of current portion

 

 

 

 

 

130

 

Commercial bank debt, net of current portion

 

 

 

 

 

1,776

 

Other long-term liabilities

 

 

 

 

 

571

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock, $0.001 par value; authorized shares – 7,285,456

   at September 30, 2016 and December 31, 2015; issued and outstanding

   shares – none at September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Undesignated preferred stock, $0.001 par value; authorized shares –  5,000,000 at

   September 30, 2016 and December 31, 2015; issued and outstanding shares –  none at

   September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock, $0.001 par value; authorized shares – 150,000,000 at

   September 30, 2016 and December 31, 2015; issued and outstanding

   shares – 23,718,529 at September 30, 2016 and 23,670,079 at

   December 31, 2015

 

 

24

 

 

 

24

 

Additional paid-in capital

 

 

277,371

 

 

 

273,321

 

Accumulated other comprehensive income (loss)

 

 

7

 

 

 

(171

)

Accumulated deficit

 

 

(203,413

)

 

 

(158,124

)

Total stockholders’ equity

 

 

73,989

 

 

 

115,050

 

Total liabilities, redeemable convertible preferred stock and stockholders’ equity

 

$

85,925

 

 

$

129,675

 

 

See accompanying notes.

 

 

 

3


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

10,395

 

 

$

7,739

 

 

$

33,702

 

 

$

21,834

 

General and administrative

 

 

3,470

 

 

 

3,574

 

 

 

11,711

 

 

 

9,299

 

Total operating expenses

 

 

13,865

 

 

 

11,313

 

 

 

45,413

 

 

 

31,133

 

Loss from operations

 

 

(13,865

)

 

 

(11,313

)

 

 

(45,413

)

 

 

(31,133

)

Other income (expense), net

 

 

46

 

 

 

(16

)

 

 

124

 

 

 

(347

)

Net loss

 

 

(13,819

)

 

 

(11,329

)

 

 

(45,289

)

 

 

(31,480

)

Accretion to redemption value of redeemable convertible

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

(15

)

Net loss attributable to common stockholders

 

$

(13,819

)

 

$

(11,329

)

 

$

(45,289

)

 

$

(31,495

)

Net loss per share, basic and diluted

 

$

(0.58

)

 

$

(0.48

)

 

$

(1.91

)

 

$

(2.38

)

Weighted average common stock shares outstanding, basic

   and diluted

 

 

23,696,511

 

 

 

23,581,001

 

 

 

23,669,154

 

 

 

13,221,551

 

 

See accompanying notes.

 

 

 

4


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

Net loss

 

$

(13,819

)

 

$

(11,329

)

 

$

(45,289

)

 

$

(31,480

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale investments

 

 

(12

)

 

 

38

 

 

 

178

 

 

 

(68

)

Comprehensive loss

 

$

(13,831

)

 

$

(11,291

)

 

$

(45,111

)

 

$

(31,548

)

 

See accompanying notes.

 

 

 

5


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(45,289

)

 

$

(31,480

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

679

 

 

 

643

 

Issuance of common stock for technology

 

 

 

 

 

1,411

 

Stock-based compensation

 

 

3,877

 

 

 

2,469

 

Amortization of debt discount

 

 

130

 

 

 

238

 

Change in fair value of preferred stock warrant liability

 

 

 

 

 

(29

)

Amortization of premiums and accretion of discounts of investment securities, available-for-sale

 

 

496

 

 

 

479

 

Deferred rent

 

 

(234

)

 

 

(219

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(937

)

 

 

(1,192

)

Accounts payable and accrued expenses

 

 

112

 

 

 

718

 

Net cash used in operating activities

 

 

(41,166

)

 

 

(26,962

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(554

)

 

 

(545

)

Purchases of available-for-sale investment securities

 

 

(26,244

)

 

 

(99,408

)

Maturities of available-for-sale investment securities

 

 

51,723

 

 

 

24,055

 

Net cash provided by (used in) investing activities

 

 

24,925

 

 

 

(75,898

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of preferred stock for cash, net of issuance costs

 

 

 

 

 

75,648

 

Issuance of common stock through initial public offering, net of offering costs

 

 

 

 

 

77,246

 

Proceeds from issuance of common stock through option exercises

 

 

20

 

 

 

533

 

Proceeds from issuance of common stock pursuant to employee stock purchase plan

 

 

75

 

 

 

 

Repayments on notes payable to bank

 

 

(2,547

)

 

 

(2,413

)

Repayments of convertible debt

 

 

 

 

 

(2,000

)

Net cash (used in) provided by financing activities

 

 

(2,452

)

 

 

149,014

 

Net change in cash and cash equivalents

 

 

(18,693

)

 

 

46,154

 

Cash and cash equivalents at beginning of the period

 

 

53,025

 

 

 

13,899

 

Cash and cash equivalents at end of the period

 

$

34,332

 

 

$

60,053

 

 

See accompanying notes.

 

 

 

6


 

aTyr Pharma, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Organization, Business, Basis of Presentation and Summary of Significant Accounting Policies

Organization and Business

aTyr Pharma, Inc. (we, us, and our) was incorporated in the state of Delaware on September 8, 2005. We are focused on the discovery and clinical development of innovative medicines for patients suffering from severe rare diseases.

Initial Public Offering

On May 12, 2015, we completed our initial public offering (IPO) of 6,164,000 shares of common stock at $14.00 per share, resulting in gross proceeds of approximately $86.3 million and net proceeds of $75.9 million, after underwriting and other expenses of approximately $10.4 million (consisting of approximately $6.0 million in underwriting discounts and commissions and approximately $4.4 million in other offering expenses).

Registration Statement on Form S-3

On June 13, 2016, we filed a Registration Statement on Form S-3 (File No. 333-211998) containing two prospectuses: (i) a base prospectus which covers the offering, issuance and sale of up to $150 million in the aggregate of an indeterminate number of shares of common stock and preferred stock, an indeterminate principal amount of debt securities and such indeterminate number of warrants and units; and (ii) a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of up to $20 million of our common stock that may be sold from time to time under a sales agreement with Cowen and Company, LLC (Cowen). In accordance with the terms of such sales agreement entered with Cowen, we may offer and sell shares of our common stock having an aggregate offering price of up to $35 million from time to time through Cowen. We are required to file another prospectus supplement in the event we intend to offer more than $20 million in shares of our common stock in accordance with the sales agreement. The sales agreement prospectus amount of $20 million is included in the base prospectus amount of $150 million.

 

Principles of Consolidation

Our consolidated financial statements include our accounts and our 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma Limited (Pangu BioPharma). All intercompany transactions and balances are eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) and following the requirements of the United States Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In our opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial position and our results of operations and cash flows for periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with our financial statements and accompanying notes for the fiscal year ended December 31, 2015, contained in our Annual Report on Form 10-K filed with the SEC on March 30, 2016. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.

Use of Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes. The most significant estimates in our consolidated financial statements relate to the fair value of equity issuances and awards, and clinical trials and research and development expense accruals. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ materially from these estimates and assumptions.

 

7


 

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents and adjusted for the weighted average number of common shares outstanding that are subject to repurchase. We have excluded 21,871 and 58,280 shares subject to repurchase from the weighted average number of common shares outstanding for the three months ended September 30, 2016 and 2015, respectively. We have excluded 29,467 and 65,351 shares subject to repurchase from the weighted average number of common shares outstanding for the nine months ended September 30, 2016 and 2015, respectively. Diluted net loss per share is calculated by dividing the net loss by the weighted average number of common stock equivalents outstanding for the period determined using the treasury-stock method. Dilutive common stock equivalents are comprised of warrants for common stock and options outstanding under our stock option plan. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to our net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common share equivalents):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Warrants for common stock

 

 

25,970

 

 

 

25,970

 

 

 

25,970

 

 

 

25,970

 

Common stock options and awards

 

 

4,356,751

 

 

 

1,483,279

 

 

 

4,356,751

 

 

 

1,483,279

 

Employee stock purchase plan

 

 

37,943

 

 

 

 

 

 

37,943

 

 

 

 

 

 

 

4,420,664

 

 

 

1,509,249

 

 

 

4,420,664

 

 

 

1,509,249

 

 

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements — Going Concern. ASU 2014-15 provides that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material impact on our consolidated financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We adopted ASU 2015-03 in January 2016 and the guidance did not affect our consolidated financial position or results of operations.

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 related to a customer’s accounting for fees in a cloud computing arrangement. This guidance requires that management evaluate each cloud computing arrangement in order to determine whether it includes a software license that must be accounted for separately from hosted services. We adopted ASU 2015-03 prospectively in January 2016 and the guidance did not have a material impact in our consolidated financial position or results of operations.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. Additionally, ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for certain provisions. The adoption of ASU 2015-03 is not expected to have a material impact on our consolidated financial position or results of operations.

 

8


 

In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangeme nts. The new standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted at the earliest period presented using a modified retrospective approach. We are curr ently evaluating the impact the provisions will have on our consolidated financial statements and whether we will adopt the guidance early.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation, which involves several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will be effective for the annual periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the provisions will have on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, which provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will be effective for the annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted beginning after December 15, 2018. We are currently evaluating the impact the provisions will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments which addresses eight specific cash flow issues to reduce the existing diversity in practice. The cash flow issues include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 will be effective for the annual periods beginning after December 15, 2017 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the provisions will have on our consolidated financial statements.

 

2. Fair Value Measurements

The carrying amounts of cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to us for loans with similar terms, which is considered a Level 2 input, we believe that the fair value of our commercial bank debt approximate their carrying values. Investment securities are recorded at fair value.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets measured at fair value on a recurring basis consist of investment securities. Investment securities are recorded at fair value, defined as the exit price in the principal market in which we would transact, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Level 2 securities are valued using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques and include our investments in corporate debt securities and commercial paper. We have no financial liabilities measured at fair value on a recurring basis. None of our non-financial assets and liabilities is recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

 

9


 

Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices   in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

As of September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

25,285

 

 

$

25,285

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

11,975

 

 

 

 

 

 

11,975

 

 

 

 

United States Treasury securities

 

 

5,008

 

 

 

5,008

 

 

 

 

 

 

 

Corporate debt securities

 

 

19,215

 

 

 

 

 

 

19,215

 

 

 

 

Sub-total available-for-sale investments, short-term

 

 

36,198

 

 

 

5,008

 

 

 

31,190

 

 

 

 

Available-for-sale investments, long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

7,010

 

 

 

 

 

 

7,010

 

 

 

 

Corporate debt securities

 

 

3,319

 

 

 

 

 

 

3,319

 

 

 

 

Sub-total available-for-sale investments, long-term

 

 

10,329

 

 

 

 

 

 

10,329

 

 

 

 

Total assets measured at fair value

 

$

71,812

 

 

$

30,293

 

 

$

41,519

 

 

$

 

As of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

46,545

 

 

$

46,545

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

2,996

 

 

 

 

 

 

2,996

 

 

 

 

Corporate debt securities

 

 

39,514

 

 

 

 

 

 

39,514

 

 

 

 

Sub-total available-for-sale investments, short-term

 

 

42,510

 

 

 

 

 

 

42,510

 

 

 

 

Available-for-sale investments, long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States Treasury securities

 

 

1,999

 

 

 

1,999

 

 

 

 

 

 

 

Asset-backed securities

 

 

10,912

 

 

 

 

 

 

10,912

 

 

 

 

Corporate debt securities

 

 

16,903

 

 

 

 

 

 

16,903

 

 

 

 

Sub-total available-for-sale investments, long-term

 

 

29,814

 

 

 

1,999

 

 

 

27,815

 

 

 

 

Total assets measured at fair value

 

$

118,869

 

 

$

48,544

 

 

$

70,325

 

 

$

 

 

As of September 30, 2016 and December 31, 2015 available-for-sale investments are detailed as follows (in thousands):

 

 

 

September 30, 2016

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

11,975

 

 

$

 

 

$

 

 

$

11,975

 

United States Treasury securities

 

 

5,004

 

 

 

4

 

 

 

 

 

 

5,008

 

Corporate debt securities

 

 

19,216

 

 

 

10

 

 

 

(11

)

 

 

19,215

 

 

 

$

36,195

 

 

$

14

 

 

$

(11

)

 

$

36,198

 

Available-for-sale investments, long-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

7,005

 

 

 

5

 

 

 

 

 

 

7,010

 

Corporate debt securities

 

 

3,320

 

 

 

 

 

 

(1

)

 

 

3,319

 

 

 

$

10,325

 

 

$

5

 

 

$

(1

)

 

$

10,329

 

 

 

10


 

 

 

December 31, 2015

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

2,996

 

 

$

 

 

$

 

 

$

2,996

 

Corporate debt securities

 

 

39,575

 

 

 

 

 

 

(61

)

 

 

39,514

 

 

 

$

42,571

 

 

$

 

 

$

(61

)

 

$

42,510

 

Available-for-sale investments, short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States Treasury securities

 

$

2,006

 

 

$

 

 

$

(7

)

 

$

1,999

 

Asset-backed securities

 

 

10,928

 

 

 

 

 

 

(16

)

 

 

10,912

 

Corporate debt securities

 

 

16,990

 

 

 

 

 

 

(87

)

 

 

16,903

 

 

 

$

29,924

 

 

$

 

 

$

(110

)

 

$

29,814

 

 

Available-for-sale investments that are in an unrealized loss position as of September 30, 2016 are as follows (in thousands):

 

 

 

Estimated   Fair

Value

 

 

Gross Unrealized

Losses

 

Corporate debt securities

 

$

15,869

 

 

$

(12

)

 

As of September 30, 2016, our available-for-sale investments have a variety of effective maturity dates of less than 2 years. As of September 30, 2016, there are 7 available-for-sale investments in gross unrealized loss position, all of which had been in such position for less than twelve months.

At each reporting date, we perform an evaluation of impairment to determine if the unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and our intent and ability to hold the investment until recovery of its amortized cost basis. We intend, and have the ability, to hold our investments in unrealized loss positions until their amortized cost basis has been recovered. Based on our evaluation, we determined that the unrealized losses were not other-than-temporary at September 30, 2016.

 

 

3. Debt, Commitments and Contingencies

Commercial Bank Debt

Commercial bank debt and unamortized discount balances are as follows (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Commercial bank debt

 

$

2,655

 

 

$

5,202

 

Less debt discount, net of current portion

 

 

 

 

 

(6

)

Commercial bank debt, net of debt discount

 

 

2,655

 

 

 

5,196

 

Less current portion of commercial bank debt

 

 

(2,655

)

 

 

(3,420

)

Commercial bank debt, net of current portion

 

$

 

 

$

1,776

 

Current portion of commercial bank debt

 

$

2,655

 

 

$

3,420

 

Current portion of debt discount

 

 

(15

)

 

 

(54

)

Current portion of commercial bank debt, net of debt discount

 

$

2,640

 

 

$

3,366

 

 

Future minimum principal and interest payments under our loan and security agreement with Silicon Valley Bank, including the final payment, are as follows (in thousands):

 

 

 

September 30, 2016

 

2016

 

$

905

 

2017

 

 

2,310

 

 

 

 

3,215

 

Less interest and final payment

 

 

(560

)

Commercial bank debt

 

$

2,655

 

 

 

11


 

Facility Lease

In December 2011, we entered into a noncancelable operating lease that included certain tenant improvement allowances and is subject to base lease payments, which escalate over the term of the lease, additional charges for common area maintenance and other costs. The lease expires in May 2017 and we have an option to extend the lease for a period of five years. Rent expense for the three months ended September 30, 2016 and 2015 was $0.1 million. Rent expense for the nine months ended September 30, 2016 and 2015 was $0.3 million.

In conjunction with this lease, we borrowed $2.0 million under a subordinated unsecured convertible promissory note issued to the venture arm of our landlord. The convertible promissory note carried an annual interest rate of 8.0% and matured at the earlier of (i) May 2015, (ii) a liquidation event, or (iii) the closing of an initial firm commitment underwritten public offering of our common stock pursuant to a registration statement under the Act, at which time all outstanding principal and accrued interest amounts would be due, unless previously converted. In May 2015, the $2.0 million outstanding principal balance of the convertible promissory note and the $0.5 million accrued interest on the convertible promissory note was repaid in full in connection with our IPO.

In June 2016, we entered into a sublease agreement with a tenant of our landlord for additional facility space in our existing building that commenced in August 2016 and will expire in June 2017.

Future minimum payments under the non-cancelable operating lease as of September 30, 2016 were as follows (in thousands):

 

 

 

Operating

Lease

 

2016

 

$

232

 

2017

 

 

386

 

Total

 

$

618

 

 

Research Agreements and Funding Obligations

In October 2007, we entered into a research funding and option agreement for certain technologies from The Scripps Research Institute (TSRI). Under the agreement, we provide funding to TSRI to conduct certain research activities. The agreement renews automatically for successive 12 month periods starting on May 31st of each year unless we provide 30 days’ prior written notice to terminate the agreement. TSRI has the right to terminate the agreement if we fail to make any payment under the agreement or for breach or insolvency. Under the research funding and option agreement, TSRI has granted us options to enter into license agreements to acquire rights and exclusive licenses to develop, make, have made, use, have used, import, have imported, offer to sell, sell, and have sold certain licensed products, processes and services based on certain technology arising from the sponsored research activities. Pursuant to the terms of these license agreements, TSRI is entitled to receive tiered royalties as a percentage of net sales and a percentage of nonroyalty revenue we may receive from our sublicensees or partners, with the amount owed decreasing if we enter into the applicable sublicense or partnering agreement after meeting a specified clinical milestone. In addition, we are obligated to pay TSRI up to an aggregate of $2.75 million under each license agreement upon the achievement of specific clinical and regulatory milestone events. In January 2015, we and TSRI entered into an amended and restated research funding and option agreement pursuant to which we agreed to issue 119,840 shares of our common stock to TSRI in consideration for the adjustment of sublicense payments and the assignment of certain intellectual property rights by TSRI to us. The $1.4 million fair value of the common stock issued to TSRI was recorded to research and development expense. We issued the shares of common stock to TSRI on March 31, 2015. We provided $0.4 million of additional funding to TSRI for research conducted between January 2016 through May 2016.

During the three months ended September 30, 2016 and 2015, we recognized expense under the agreement in the amount of $0.2 million. During the nine months ended September 30, 2016 and 2015, excluding the fair value of the common stock issued to TSRI described above, we recognized expense under the agreement in the amount of $0.9 million and $0.5 million, respectively. A member of our board of directors is a faculty member at TSRI and such payments fund a portion of his research activities conducted at TSRI.

During the three months ended September 30, 2016 and 2015, we provided charitable donations to the National Foundation for Cancer Research of $0.1 million. During the nine months ended September 30, 2016 and 2015, we provided charitable donations to the National Foundation for Cancer Research of $0.3 million. We have requested that the donations be restricted to certain basic research in cancer biology and therapeutics, a portion of which funds research activities conducted at TSRI in the laboratory of a member of our board of directors.

 

12


 

Contract Manufacturing Agreements

In June 2015, we entered into a Master Services Agreement (MSA) with FUJIFILM Diosynth Biotechnologies U.S.A., Inc. (Fujifilm) to complete the development of the manufacturing process and for the production of the drug substance for Resolaris, our drug in clinical development. Pursuant to the MSA, Fujifilm will provide the drug substance for Resolaris to support future clinical trials, including potential pivotal trials. Under the initial scope of work executed pursuant to the MSA, Fujifilm will conduct process optimization, scale-up and demonstration, and cGMP manufacturing of the drug substance of Resolaris, and we are required to pay Fujifilm based on development and production milestones up to the total payment in the mid seven figures. In addition, we are billed for consumables on a pass-through basis. In the next 12 months, we are committed to pay Fujifilm approximately $2.0 million based on development and production milestones. During the three months ended September 30, 2016 and 2015, expenses associated with this agreement, excluding pass through consumables, were $1.6 million and $0.7 million, respectively. During the nine months ended September 30, 2016 and 2015, expenses associated with this agreement, excluding pass through consumables, were $4.6 million and $0.7 million, respectively.

In August 2016, we entered into a MSA with a third party contract manufacturing organization to complete the development of the manufacturing process and for the production of drug substance for iMod.Fc. We are required to pay the third party contract manufacturer a total payment in the low seven figures subject to certain rights of cancellation. In the next 12 months, we are committed to pay the third party contract manufacturing organization  approximately $1.6 million based on development and production milestones.  As of September 30, 2016, expenses associated with this agreement were $0.2 million.

 

 

4. Stockholders’ Equity

Stock Option and Incentive Plans

2014 Stock Plan

We adopted a stock option plan in 2007 (the 2007 Plan), which was subsequently amended, restated and renamed in July 2014 (the 2014 Plan) to provide for the incentive stock options, nonstatutory stock options, stock and rights to purchase restricted stock to eligible recipients. Recipients of incentive stock options are eligible to purchase shares of our common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options under the 2014 Plan is ten years. Options granted generally vest over four years.

2015 Stock Plan

In April 2015, our board of directors adopted, and our stockholders approved, the 2015 Plan. The 2015 Plan became effective on May 6, 2015 and we ceased granting any new awards under our 2014 Plan. Awards granted under the 2014 Plan prior to our IPO that are forfeited, canceled, reacquired by us prior to vesting satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan. A total of 1,574,566 shares of our common stock were initially reserved for issuance under the 2015 Plan. In addition, the number of shares reserved and available for issuance under the 2015 Plan will automatically increase each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by the lesser of (i) 1,840,000 shares, (ii) 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or (iii) an amount determined by our board of directors. Shares underlying any awards under the 2015 Plan that are forfeited, canceled, reacquired by us prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan. We have granted incentive stock options, nonstatutory stock options and restricted stock units under the 2015 Plan.

Inducement Grant

In September 2016, we granted a non-qualified option to purchase 145,000 shares of our common stock at an exercise price of $3.29 per share as an inducement award in connection with the hiring of our Senior Vice President, Research.  This option will vest over a period of four (4) years, with 25% vesting on the one year anniversary of the grant date and the remaining 75% vesting on a monthly basis over three years thereafter, subject to continuous employment. This option was an inducement grant issued outside of the 2015 Plan in accordance with NASDAQ Listing Rule 5635(c)(4). We intend to file a registration statement on Form S-8 to register the shares of common stock underlying this option prior to the time at which this option becomes exercisable.  In addition, from time to time, we may make inducement grants of stock options to new employees.

 

13


 

Stock option activity (including inducement options) is summarized as follows:

 

 

 

Number of Outstanding

Options

 

 

Weighted

Average

Price

 

Balance as of December 31, 2015

 

 

2,625,280

 

 

$

8.83

 

Granted

 

 

2,262,919

 

 

$

5.56

 

Exercised

 

 

(15,892

)

 

$

1.24

 

Canceled/forfeited/expired

 

 

(623,469

)

 

$

10.79

 

Balance as of September 30, 2016

 

 

4,248,838

 

 

$

6.83

 

 

 

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected term (in years)

 

6.02 – 6.08

 

 

5.50 – 6.08

 

 

5.50 – 6.08

 

 

5.77 – 6.08

 

Risk-free interest rate

 

1.20% – 1.41

%

 

1.69%-1.92

%

 

1.20% – 1.90

%

 

1.47% – 1.92

%

Expected volatility

 

80.66% – 80.96

%

 

79.28% – 81.01

%

 

80.66% – 82.53

%

 

79.28% – 100.90

%

Expected dividend yield

 

0.00

%

 

0.00

%

 

0.00

%

 

0.00

%

 

In January 2016, we granted to our executives, employees and certain consultants performance options with a market condition to purchase up to an aggregate 396,960 shares of common stock at an exercise price of $9.13. Upon achievement of specified goals by January 4, 2018, such performance options shall begin to vest over four years in equal monthly installments, otherwise the options will be subject to forfeiture. The fair value of the performance options with a market condition is estimated on the date of the grant using a Monte Carlo simulation, based on the market price of the underlying common stock, expected performance measurement period, expected peer group stock price volatility and expected risk-free interest rate. The weighted average grant date fair value was $1.93. The performance options with market conditions grants are expensed using the accelerated attribution method over the requisite service period of 5.06 years regardless of whether the market condition is achieved or earned and vest.

 

The assumptions used at grant date to determine the fair value of the performance options with a market condition were as follows:

 

Expected term (in years)

 

5.06

 

 

Risk-free interest rate

 

2.24

 

%

Expected volatility

 

83.26

 

%

Expected dividend yield

 

 

0.00

 

%

 

During the nine months ended September 30, 2016, we granted restricted stock units to employees. Restricted stock unit activity is summarized as follows:

 

 

 

Number of Outstanding

Restricted Stock Units

 

 

Weighted Average

Grant Date

Fair Value

 

Balance as of December 31, 2015

 

 

 

 

$

 

Granted

 

 

131,593

 

 

$

4.96

 

Released

 

 

(2,080

)

 

$

5.48

 

Forfeited

 

 

(21,600

)

 

$

4.95

 

Balance as of September 30, 2016

 

 

107,913

 

 

$

4.95

 

 

14


 

Employee Stock Purchase Plan

In April 2015, our board of directors adopted, and our stockholders approved, our 2015 Employee Stock Purchase Plan (the 2015 ESPP). The 2015 ESPP became effective on May 6, 2015. A total of 227,623 shares of our common stock were initially reserved for issuance under the 2015 ESPP. In addition, the number of shares reserved and available for purchase under the 2015 ESPP will automatically increase each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by 1% of the outstanding number of shares of our common stock on the immediately preceding December 31 or such lesser number of shares as determined by the administrator of the 2015 ESPP.

The first purchase under the 2015 ESPP occurred on May 15, 2016 for a total of 30,478 shares at a purchase price of $2.47 per share.

Stock-based Compensation

 

The allocation of stock-based compensation for all options, including performance options with a market condition, 2015 ESPP and restricted stock units is as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

 

$

421

 

 

$

492

 

 

$

1,495

 

 

$

1,288

 

General and administrative

 

 

803

 

 

 

558

 

 

 

2,382

 

 

 

1,181

 

 

 

$

1,224

 

 

$

1,050

 

 

$

3,877

 

 

$

2,469

 

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance is as follows:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Common stock warrants

 

 

25,970

 

 

 

25,970

 

Common stock options and awards outstanding

 

 

4,356,751

 

 

 

2,625,280

 

Shares available under the 2014 Plan

 

 

984,357

 

 

 

984,357