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, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

As of November 7, 2017, there were 29,758,347 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 


 

ATYR 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, 2017 (unaudited) and December 31, 2016

 

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (unaudited)

 

4

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 (unaudited)

 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)

 

6

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

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

 

15

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

 

57

Item 6. Exhibits

 

58

SIGNATURES

 

60

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

aTyr Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,765

 

 

$

38,388

 

Available-for-sale investments, short-term

 

 

60,616

 

 

 

33,759

 

Prepaid expenses and other assets

 

 

1,825

 

 

 

2,621

 

Total current assets

 

 

92,206

 

 

 

74,768

 

Available-for-sale investments, long-term

 

 

 

 

 

4,002

 

Property and equipment, net

 

 

2,191

 

 

 

1,421

 

Other assets

 

 

90

 

 

 

333

 

Total assets

 

$

94,487

 

 

$

80,524

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,592

 

 

$

2,606

 

Accrued expenses

 

 

3,861

 

 

 

5,450

 

Current portion of deferred rent

 

 

 

 

 

130

 

Current portion of long-term debt, net of issuance costs

 

 

2,267

 

 

 

339

 

Total current liabilities

 

 

9,720

 

 

 

8,525

 

Long-term debt, net of current portion and issuance costs

 

 

12,479

 

 

 

9,198

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; authorized shares – 5,000,000 at September 30, 2017 and December 31, 2016; Class X Convertible Preferred Stock issued and outstanding shares– 2,285,952 and no shares at September 30, 2017 and December 31, 2016, respectively

 

 

2

 

 

 

 

Common stock, $0.001 par value; authorized shares – 150,000,000 as of September 30, 2017 and December 31, 2016; issued and outstanding shares – 29,715,798 and 23,744,832 as of September 30, 2017 and December 31, 2016, respectively

 

 

30

 

 

 

24

 

Additional paid-in capital

 

 

325,031

 

 

 

278,832

 

Accumulated other comprehensive loss

 

 

(63

)

 

 

(76

)

Accumulated deficit

 

 

(252,712

)

 

 

(215,979

)

Total stockholders’ equity

 

 

72,288

 

 

 

62,801

 

Total liabilities and stockholders’ equity

 

$

94,487

 

 

$

80,524

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,133

 

 

$

10,395

 

 

$

24,757

 

 

$

33,702

 

General and administrative

 

 

3,694

 

 

 

3,470

 

 

 

11,188

 

 

 

11,711

 

Total operating expenses

 

 

10,827

 

 

 

13,865

 

 

 

35,945

 

 

 

45,413

 

Loss from operations

 

 

(10,827

)

 

 

(13,865

)

 

 

(35,945

)

 

 

(45,413

)

Other income (expense), net

 

 

(363

)

 

 

46

 

 

 

(788

)

 

 

124

 

Net loss

 

 

(11,190

)

 

 

(13,819

)

 

 

(36,733

)

 

 

(45,289

)

Net loss per share, basic and diluted

 

$

(0.43

)

 

$

(0.58

)

 

$

(1.50

)

 

$

(1.91

)

Weighted average common shares outstanding, basic and diluted

 

 

25,818,008

 

 

 

23,696,511

 

 

 

24,462,835

 

 

 

23,669,154

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Net loss

 

$

(11,190

)

 

$

(13,819

)

 

$

(36,733

)

 

$

(45,289

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on available for sale investments, net of tax

 

 

(6

)

 

 

(12

)

 

 

13

 

 

 

178

 

Comprehensive loss

 

$

(11,196

)

 

$

(13,831

)

 

$

(36,720

)

 

$

(45,111

)

 

See accompanying notes.

 

 

 

5


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(36,733

)

 

$

(45,289

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

552

 

 

 

679

 

Stock-based compensation

 

 

3,649

 

 

 

3,877

 

Accretion of debt discount

 

 

133

 

 

 

130

 

Amortization of premium of available-for-sale investment securities

 

 

113

 

 

 

496

 

Deferred rent

 

 

(130

)

 

 

(234

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

802

 

 

 

(937

)

Accounts payable and accrued expenses

 

 

(444

)

 

 

112

 

Net cash used in operating activities

 

 

(32,058

)

 

 

(41,166

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,152

)

 

 

(554

)

Purchases of available-for-sale investment securities

 

 

(65,302

)

 

 

(26,244

)

Maturities of available-for-sale investment securities

 

 

42,347

 

 

 

51,723

 

Net cash (used in) provided by investing activities

 

 

(24,107

)

 

 

24,925

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock through option exercises

 

 

37

 

 

 

20

 

Proceeds through employee stock purchase plan

 

 

88

 

 

 

75

 

Proceeds from borrowing, net

 

 

4,930

 

 

 

 

Proceeds from issuance of securities of Private Placement, net of issuance cost

 

 

42,487

 

 

 

 

Repayments on loans payable

 

 

 

 

 

(2,547

)

Net cash provided by (used in) financing activities

 

 

47,542

 

 

 

(2,452

)

Net change in cash and cash equivalents

 

 

(8,623

)

 

 

(18,693

)

Cash and cash equivalents at beginning of period

 

 

38,388

 

 

 

53,025

 

Cash and cash equivalents at the end of period

 

$

29,765

 

 

$

34,332

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Private Placement issuance costs included in accounts payable and accrued expenses

 

$

90

 

 

$

 

 

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.

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, 2016, contained in our Annual Report on Form 10-K filed with the SEC on March 16, 2017. 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.

Liquidity and Financial Condition

We have incurred losses and negative cash flows from operations since our inception. As of September 30, 2017, we had an accumulated deficit of $252.7 million and we expect to continue to incur net losses for the foreseeable future. We believe that our existing cash, cash equivalents and available-for-sale investments, of $90.4 million as of September 30, 2017 will be sufficient to meet our anticipated cash requirements for at least a period of one year from the filing date of this Quarterly Report.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years at a minimum. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to raise substantial additional capital. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts and the timing and nature of the regulatory approval process for our product candidates. We anticipate that we will seek to fund our operations through public or private equity or debt financings, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates, or we may be unable to expand our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

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 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 175 and 21,871 shares subject to repurchase from the weighted average number of common shares outstanding for the three months ended September 30, 2017 and 2016, respectively. We have excluded 4,607 and 29,467 shares subject to repurchase from the weighted average number of common shares outstanding for the nine months ended September 30, 2017 and 2016, 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 convertible preferred stock, warrants for common stock, restricted stock units and options outstanding under our stock option plan and employee stock purchase 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 and Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Class X Convertible Preferred Stock (if-converted)

 

 

11,429,760

 

 

 

 

Warrants for common stock

 

 

6,642,332

 

 

 

25,970

 

Common stock options and restricted stock units

 

 

4,745,715

 

 

 

4,356,751

 

Employee stock purchase plan

 

 

38,862

 

 

 

37,944

 

 

 

 

22,856,669

 

 

 

4,420,665

 

Convertible Preferred Stock

We apply the relevant accounting standards to distinguish liabilities from equity when assessing the classification and measurement of preferred stock. Preferred shares subject to mandatory redemptions are considered liabilities and measured at fair value. Conditionally redeemable preferred shares are considered temporary equity. All other preferred shares are considered as stockholders’ equity.

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. We generally use the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Recent Accounting Pronouncements

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, 2017, and interim periods within those annual fiscal years. Early adoption is permitted for certain provisions. The adoption of ASU 2016-01 is not expected to have a material impact on our consolidated financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , 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 arrangements. The new standard will be 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 currently evaluating the impact the provisions will have on our consolidated financial position or results of operations and whether we will adopt the guidance early.

 

8


 

In May 2017, the FASB issued ASU 2017-09 , Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 will be effective for the annual periods beginning after December 15, 2017. Early adoption is permitt ed. We do not expect that the adoption of ASU 2017-09 will have a material impact on our consolidated financial position or results of operations.

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 carrying value of our Term Loans approximates its fair value. 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 are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

 

9


 

Assets 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, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

17,907

 

 

$

17,907

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

7,402

 

 

 

 

 

 

7,402

 

 

 

 

Commercial paper

 

 

21,193

 

 

 

 

 

 

21,193

 

 

 

 

Corporate debt securities

 

 

21,594

 

 

 

 

 

 

21,594

 

 

 

 

United States treasury securities

 

 

10,427

 

 

 

10,427

 

 

 

 

 

 

 

 

Sub-total short-term investments

 

 

60,616

 

 

 

10,427

 

 

 

50,189

 

 

 

 

Total assets measured at fair value

 

$

78,523

 

 

$

28,334

 

 

$

50,189

 

 

$

 

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

29,251

 

 

$

29,251

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

7,843

 

 

 

 

 

 

7,843

 

 

 

 

Corporate debt securities

 

 

20,913

 

 

 

 

 

 

20,913

 

 

 

 

United States treasury securities

 

 

5,003

 

 

 

5,003

 

 

 

 

 

 

 

Sub-total short-term investments

 

 

33,759

 

 

 

5,003

 

 

 

28,756

 

 

 

 

Available-for-sale investments, long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

4,002

 

 

 

 

 

 

4,002

 

 

 

 

Sub-total long-term investments

 

 

4,002

 

 

 

 

 

 

4,002

 

 

 

 

Total assets measured at fair value

 

$

67,012

 

 

$

34,254

 

 

$

32,758

 

 

$

 

 

 

As of September 30, 2017 and December 31, 2016 available-for-sale investments are detailed as follows (in thousands):

 

 

 

September 30, 2017

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

7,403

 

 

 

 

 

 

(1

)

 

$

7,402

 

Commercial paper

 

 

21,193

 

 

 

 

 

 

 

 

 

21,193

 

Corporate debt securities

 

 

21,601

 

 

 

 

 

 

(7

)

 

 

21,594

 

United States treasury securities

 

 

10,433

 

 

 

 

 

 

(6

)

 

 

10,427

 

 

 

$

60,630

 

 

$

 

 

$

(14

)

 

$

60,616

 

 

 

10


 

 

 

December 31, 2016

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

7,843

 

 

$

 

 

$

 

 

$

7,843

 

Corporate debt securities

 

 

20,942

 

 

 

 

 

 

(29

)

 

 

20,913

 

United States Treasury securities

 

 

5,002

 

 

 

1

 

 

 

 

 

 

5,003

 

 

 

$

33,787

 

 

$

1

 

 

$

(29

)

 

$

33,759

 

Available-for-sale investments, long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

4,001

 

 

$

1

 

 

$

 

 

$

4,002

 

 

 

$

4,001

 

 

$

1

 

 

$

 

 

$

4,002

 

 

As of September 30, 2017, all of our available-for-sale investments have effective maturity dates of less than one year. As of September 30, 2017, there are 18 available-for-sale investments in a 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 as of September 30, 2017.

 

3. Debt, Commitments and Contingencies

Term Loans

In November 2016, we entered into a loan and security agreement (the Loan Agreement) with Silicon Valley Bank (SVB) and Solar Capital Ltd. (Solar) to borrow up to $20.0 million, issuable in three separate tranches of $10.0 million, $5.0 million and $5.0 million, respectively. The first tranche of $10.0 million was funded on November 18, 2016 (Term A Loan). Under the Term A Loan, we received cash proceeds of $7.3 million, net of a $2.6 million repayment of the principal, accrued interest and the $0.5 million final payment under our previous $10.0 million loan and security agreement with SVB (SVB Loan). We did not pay any termination or other fees in connection with the repayment of amounts due under the SVB Loan.

In June 2017, we entered into an amendment of the Loan Agreement which modifies certain conditions under which we may receive and repay term loans under the Loan Agreement. The Loan Agreement, as amended, provides that (i) up to $5.0 million in the second tranche of term loans could be drawn down by us at any time before the earlier of June 30, 2017 or an event of default, at our discretion, and (ii) an additional $5.0 million in the third tranche of term loans may be drawn down by us at any time after June 30, 2017 and before the earlier of December 31, 2017 or an event of default, at our discretion, subject to achievement of certain milestones.  In connection with the amendment to the Loan Agreement, the second tranche of $5.0 million was funded on June 30, 2017 (Term B Loan). We received cash proceeds of $4.9 million, net of debt issuance cost of $0.1 million. The amendment to the Loan Agreement was not a result of a troubled debt restructuring and did not result in modifications to the terms that were substantially different.  

Pursuant to the Loan Agreement, as amended, we were originally obligated to make interest only payments through December 1, 2017, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of November 18, 2020. Upon achievement of certain milestones as set forth in the Loan Agreement, as amended, the interest only period was extended to June 1, 2018. The Term A Loan and Term B Loan (collectively, the Term Loans) bear interest at the prime rate, as reported in The Wall Street Journal on the last date of the month preceding the month in which interest will accrue, plus 4.10%. A final payment equal to 8.75% of the funded amounts is payable when the Term Loans become due or upon the prepayment of the respective outstanding balance. We have the option to prepay the outstanding balance of the loan in full, subject to a prepayment fee ranging from 1.0% to 3.0% depending upon when the prepayment occurs, including any non-usage fees. The Loan Agreement, as amended, provides for a 2.0% non-usage fee for any unfunded amount in the event we do not draw the third tranche, payable no later than the expiration date for the third tranche, as applicable, or the date of cancellation of the loan due to prepayment or an event of default. No such events have occurred or are anticipated as of September 30, 2017.

 

11


 

As of September 30, 2017, the carrying value of our Term Loans consist of $15.0 million principal outstanding less the debt issuance costs of $0. 7 million. The debt issuance costs have been recorded as a debt discount of long-term debt in our balance sheet, which are being accreted to interest expense over the life of the Term Loans. The final maturity payment of $ 1.3 million is being accrued over the life of the Term Loans t hrough interest expense.     

In connection with the Term A Loan, we issued warrants to each of SVB and Solar to purchase an aggregate of 47,771 shares of our common stock with an exercise price of $3.14 per share. In connection with the Term B Loan, we issued warrants to each of SVB and Solar to purchase an aggregate of 20,833 shares of our common stock with an exercise price of $3.60 per share. The warrants are immediately exercisable and have a maximum contractual term of seven years. These warrants are included as issuance costs against the Term Loans and are amortized using the effective interest method.

Future principal payments for the Term Loans and the final payment are as follows (in thousands):

 

 

September 30, 2017

 

2017

 

$

 

2018

 

 

3,500

 

2019

 

 

6,000

 

2020

 

 

6,813

 

 

 

$

16,313

 

 

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. In January 2017, we extended the lease for two years to May 2019.  

In April 2017, we amended our facility lease to include an additional 7,411 square feet through May 2019 for a total additional commitment of $0.7 million.

Rent expense for the three months ended September 30, 2017 and 2016 was $0.3 million and $0.1 million, respectively. Rent expense for the nine months ended September 30, 2017 and 2016 was $0.7 million and $0.3 million, respectively.

  Future minimum payments under the non-cancelable operating lease as of September 30, 2017 were as follows (in thousands):

 

 

Operating

Lease

 

2017

 

$

272

 

2018

 

 

1,108

 

2019

 

 

420

 

 

 

$

1,800

 

Research Agreements and Funding Obligations (Related Party Transactions)

We provide funding to The Scripps Research Institute (TSRI) pursuant to a research funding and option agreement to conduct certain research activities. We have entered into additional amendments to our research funding and option agreement in 2016 and 2017 to provide additional funding to TSRI. For the three months ended September 30, 2017, the additional funding expense recorded for TSRI was $0.3 million and zero for the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, the additional funding expense recorded for TSRI was $0.7 million and $0.4 million, respectively. Paul Schimmel, Ph.D., a member of our board of directors, is a board and faculty member at TSRI and such payments fund a portion of his research activities conducted at TSRI.

During the three months ended September 30, 2017 and 2016, we provided no charitable contributions and $0.1 million of charitable contributions, respectively, to the National Foundation for Cancer Research. During the nine months ended September 30, 2017 and 2016, we provided charitable contributions to the National Foundation for Cancer Research of $0.2 million and $0.3 million, respectively. We have requested that the contributions 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 Dr. Schimmel.

 

12


 

4. Stockholders’ Equity

Private Placement of Common Stock, Convertible Preferred Shares and Common Stock Warrants

On August 27, 2017, we entered into a Securities Purchase Agreement (Securities Purchase Agreement) for a private placement (Private Placement) with a select group of institutional investors, including Viking Global Opportunities Illiquid Investments Sub-Master, LP (VGO Fund) and other accredited investors, certain of whom are affiliated with our directors and officers (collectively, the Purchasers). Pursuant to the Securities Purchase Agreement, (i) VGO Fund purchased 1,777,784 shares of our common stock, par value $0.001 per share (the Common Shares), at a price of $2.65 per share, 2,285,952 shares of our Class X Convertible Preferred Stock (the Preferred Shares or Preferred Stock, and together with the Common Shares, the Shares), par value $0.001 per share, at a price of $13.25 per share, and warrants to purchase up to that number of additional shares of Common Stock equal to thirty seven and one half percent (37.5%) of the number of Shares purchased by VGO Fund on an if-converted basis (rounded up to the nearest whole share), and (ii) the remaining Purchasers purchased an aggregate of 4,094,336 shares of our Common Shares, at a price of $2.65 per share, and warrants to purchase up to that number of additional shares of Common Stock equal to thirty-seven and one half percent (37.5%) of the number of Common Shares purchased by such Purchaser (rounded up to the nearest whole share). The Private Placement closed on August 31, 2017 for gross proceeds of $45.8 million, and after giving effect to costs related to the Private Placement, net proceeds of $42.5 million.

Each Preferred Share is convertible into five shares of our common stock. VGO Fund will be prohibited from converting the Preferred Shares into shares of our common stock if, as a result of such conversion, VGO Fund, together with its affiliates, would own more than 9.50% of the shares of our common stock then issued and outstanding, which percentage may change at VGO Fund’s election upon 61 days’ notice to us to (i) any other number less than or equal to 19.99% or (ii) subject to approval of our stockholders to the extent required in accordance with the NASDAQ Global Market rules, any number in excess of 19.99%.

Holders of outstanding Preferred Shares are entitled to receive a dividend (on an if-converted to common stock basis), if we at any time pay a stock dividend equal to and in the same form as a dividend paid to holders of Common Shares.

In the event of our liquidation, dissolution or winding up, holders of Preferred Shares will participate in any distribution of proceeds, pro rata based on the number of shares held by each such holder on an if-converted basis. The Preferred Shares have no voting rights.

The warrants are exercisable at an exercise price of $4.64 per share, subject to adjustments as provided under the terms of the warrants. The warrants are immediately exercisable and expire on December 31, 2019. We also entered into a registration rights agreement (Registration Rights Agreement) with certain of the Purchasers, excluding those Purchasers affiliated with our directors and officers, requiring us to register for the resale of the relevant shares. We registered all of the relevant shares issued in the Private Placement for resale on a Form S-3 filed with the SEC, as required under the Registration Rights Agreement, and the registration statement was declared effective on September 27, 2017.

Common Stock Reserved for Future Issuance

Pursuant to the automatic increase provisions of our 2015 Stock Option and Incentive Plan (2015 Plan) and 2015 Employee Stock Purchase Plan (2015 ESPP), 949,793 additional shares were reserved for future issuance under the 2015 Plan on January 1, 2017 and 237,448 additional shares were reserved for future issuances under the 2015 ESPP on January 1, 2017. Common stock reserved for future issuance is as follows:

 

 

 

September 30,

 

 

 

2017

 

Class X Preferred Stock (if-converted to common stock)

 

 

11,429,760

 

Common stock warrants

 

 

6,642,332

 

Common stock options and awards outstanding

 

 

4,745,715

 

Shares available under the 2015 Plan

 

 

729,139

 

Shares available under the 2015 ESPP

 

 

614,115

 

 

 

 

24,161,061

 

 

13


 

The following table summarizes our stock option activity under all equity incentive plans for the nine months ended September 30 , 2017:

 

 

 

Number of

Outstanding

Options

 

 

Weighted

Average

Exercise Price

 

Outstanding as of December 31, 2016

 

 

4,014,988

 

 

$

6.73

 

Granted

 

 

1,041,619

 

 

$

3.27

 

Exercised

 

 

(32,221

)

 

$

1.15

 

Canceled/forfeited/expired

 

 

(327,971

)

 

$

6.99

 

Outstanding as of September 30, 2017

 

 

4,696,415

 

 

$

5.98

 

 

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,

 

 

2017

 

2016

 

2017

 

2016

Expected term (in years)

 

6.06

 

6.02 – 6.08

 

5.50 – 6.08

 

5.50 – 6.08

Risk-free interest rate

 

2.1%

 

1.2% – 1.4%

 

1.9% – 2.1%

 

1.2% – 1.9%

Expected volatility

 

105.9%

 

80.7% – 81.0%

 

104.0% – 124.4%

 

80.7% – 82.5%

Expected dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

The following table summarizes our restricted stock unit activity under all equity incentive plans for the nine months ended September 30, 2017:

 

 

Number of Outstanding

Restricted Stock Units

 

 

Weighted Average

Grant Date

Fair Value

 

Balance as of December 31, 2016

 

 

76,713

 

 

$

4.95

 

Granted

 

 

22,000

 

 

$

3.30

 

Released

 

 

(36,099

)

 

$

4.96

 

Forfeited

 

 

(13,314

)

 

$

4.67

 

Balance as of September 30, 2017

 

 

49,300

 

 

$

4.28

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

368

 

 

$

421

 

 

$

1,235

 

 

$

1,495

 

General and administrative

 

 

821

 

 

 

803

 

 

 

2,414

 

 

 

2,382

 

 

 

$

1,189

 

 

$

1,224

 

 

$

3,649

 

 

$

3,877

 

 

 

14


 

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 16, 2017.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended or the Exchange Act. Such forward looking statements, which represent our intent, belief or current expectations, involve risks and uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions. Factors that could cause or contribute to differences in results include, but are not limited to those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q. Except as required by law we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We engage in the discovery and clinical development of innovative medicines for patients suffering from severe, rare diseases using our knowledge of Physiocrine biology, a newly discovered set of immunological and physiological pathways.  Through our research efforts, we believe that Physiocrines evolved over billions of years to promote homeostasis in complex organisms.  We have evidence to support that some of these proteins evolved to govern and orchestrate the mammalian immune system. We believe immune imbalance is underappreciated in many disease types and may ultimately be responsible for much of the pathophysiology associated with a number of important genetic and immunology based diseases.

By focusing on immune pathways in disease, we believe our therapeutic candidates have the potential to restore patients to a healthier state, achieve homeostatic balance and ultimately lead to improved clinical outcomes.

 

Resolaris

We internally discovered and developed Resolaris, our first Physiocrine-based therapeutic candidate, based on a protein naturally secreted from muscle that acts on T-cells at the tissue level to promote healthier muscle. We believe this may translate into an innovative therapeutic for rare genetic myopathies with an immune component (e.g. T-cells in the patients’ muscle), including limb-girdle muscular dystrophy, facioscapulohumeral muscular dystrophy, and Duchenne muscular dystrophy.  Resolaris also represents an example of our first therapeutic modality – natural protein therapy – adding back a pathway that is insufficiently produced by the human body to counteract disease.

 

We have completed a robust Phase 1b/2 program with Resolaris.  Across all of our studies, 44 patients have received Resolaris for a total drug exposure of 204 patient months.  We believe the results from our Phase 1b/2 program are supportive of the advancement of Resolaris as a treatment for various rare myopathies with an immune component.  For future clinical development, initiation of a randomized placebo-controlled trial with Resolaris is contingent upon the identification of a PD assay and execution of a partnership related to one or more of our programs.

 

iMod.Fc

Our scientists successfully engineered the first fusion protein with a Physiocrine, iMod.Fc, to provide designed properties to enhance the immuno-modulatory aspects of a Physiocrine in vivo . We plan to develop iMod.Fc as a potential therapeutic for patients with rare pulmonary diseases with an immune component, including interstitial lung disease (ILD). This fusion protein, which utilizes the Fc region of an antibody, also potentially represents a novel Fc-Physiocrine platform for future Physiocrine-based therapies.  We plan to commence Phase 1/2a clinical development for the iMod.Fc program by the end of 2017.  This program will investigate the safety, tolerability, immunogenicity, pharmacokinetics and pharmacodynamics of intravenous iMod.Fc in healthy volunteers and patients with ILD.

 

15


 

ORCA   

Our third program represents a third therapeutic modality distinct from Resolaris or iMod.Fc. ORCA is a preclinical research program that targets a novel, proprietary immuno-oncology pathway using antibodies to change levels of Resokine in tumor settings. We believe tumors, across multiple tumor types, utilize Resokine to evade immune system responses.  We have evaluated the therapeutic potential of targeting this novel pathway in multiple in-vitro and in-vivo tumor models, in comparison to and in combination with incumbent check-point modulators.  Based on the tumor model data, we believe that targeting this pathway can reduce or, in some cases, reverse tumor growth either as a monotherapy or in combination therapy.

Our expansive Physiocrine patent estate provides us with potential product protection as we pioneer this new and important area of human biology. To protect our industry unique pipeline based on our proprietary new biology, we have built an intellectual property estate comprising over 220 issued patents or allowed patent applications that are owned or exclusively licensed by us, including over 300 potential Physiocrine-based protein compositions. We believe it is in the best interest of our stakeholders, including patients, caregivers, and our stockholders, to advance one or more of our three current programs based on Physiocrine biology with the expertise of or funding from appropriate strategic partners. Since our inception in 2005, we have devoted substantially all of our resources to the therapeutic application of Physiocrines, including the preclinical development of and clinical trials for Resolaris, the creation, licensing and protection of related intellectual property and the provision of general and administrative support for these operations. We have not generated any revenue from product sales and, through September 30, 2017, have funded our operations primarily with the aggregate proceeds from the sales of our common stock in our initial public offering (IPO), private placements of our capital stock, convertible promissory notes, commercial bank debt and a convertible promissory note issued to our landlord and term loans.

In May 2015, we completed our IPO whereby we sold 6,164,000 shares of common stock at a public offering price of $14.00 per share. As a result of the IPO, we raised a total of $75.9 million in net proceeds after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $4.4 million. In addition, in connection with the IPO, all outstanding redeemable convertible preferred stock converted into 16,279,859 shares of our common stock.

In June 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 $150.0 million in the aggregate of an indeterminate number of shares of common stock and preferred stock, an indeterminate principal amount of debt securities and an 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 $20.0 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 $35.0 million from time to time through Cowen. To date, no shares of common stock have been sold pursuant to such sales agreement. We will be required to file another prospectus supplement in the event we intend to offer more than $20.0 million in shares of our common stock in accordance with the sales agreement. The sales agreement prospectus amount of $20.0 million is included in the base prospectus amount of $150.0 million.

In August 2017, we completed our Private Placement in which a select group of institutional investors and other accredited investors, certain of whom are affiliated with our directors and officers, purchased our equity securities. Pursuant to the Securities Purchase Agreement, we sold (i) an aggregate of 5,872,120 shares of our common stock at a price of $2.65 per unit (each common stock unit consisting of one share of our common stock and a warrant to purchase 0.375 shares of our common stock), (ii) an aggregate of 2,285,952 Preferred Shares at a price of $13.25 per unit (each preferred stock unit consisting of one Preferred Share and a warrant to purchase 1.875 shares of our common stock) and (iii) warrants to purchase up to an aggregate of 6,488,205 shares of our common stock at an exercise price of $4.64 per share that expire on December 31, 2019. The gross proceeds from the Private Placement were $45.8 million. After giving effect to the costs related to the Private Placement, the net proceeds were $42.5 million.

We have never been profitable and have incurred net losses in each annual and quarterly period since our inception. For the nine months ended September 30, 2017 and 2016, we have incurred consolidated net losses of $36.7 million and $45.3 million, respectively. As of September 30, 2017, we had an accumulated deficit of $252.7 million.

 

16


 

Substantially all of our net losses resulted from costs incurred in connection with our development of and clinical trials for Resolaris, our other research and development programs (including iMod.Fc and ORCA) and from gene ral and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses for the foreseeable future, at least until we apply for and receive regulatory approval for Resolaris, iMod.Fc , product ca ndidates from our ORCA program or another product candidate and generate substantial revenues from its commercialization, if ever. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the nature and extent of our research and development expe nses and clinical trials. We expect our expenses will fluctuate in connection with our ongoing activities as we:

 

conduct clinical trials of Resolaris, iMod.Fc and any additional product candidates we may develop, including any product candidates from our ORCA program;

 

continue our research and product development efforts;

 

manufacture preclinical study and clinical trial materials;

 

expand, protect and maintain our intellectual property portfolio;

 

seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

hire additional staff, including clinical, operational, financial and technical personnel, if and when necessary, to execute on our business plan and create additional infrastructure to support our operations as a public company; and

 

implement operational, financial and management systems.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years at a minimum. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to raise substantial additional capital. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts and the timing and nature of the regulatory approval process for our product candidates. We anticipate that we will seek to fund our operations through public or private equity or debt financings, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all.  If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates, or we may be unable to expand our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

Financial Operations Overview

Organization and Business; Principles of Consolidation and Affiliates

We conduct substantially all of our activities through aTyr Pharma, Inc., a Delaware corporation, at our facility in San Diego, California. aTyr Pharma, Inc. was incorporated in the state of Delaware in September 2005. The consolidated financial statements include our accounts and our 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma Limited as of September 30, 2017. All intercompany transactions and balances are eliminated in consolidation.

Research and Development Expenses

To date, our research and development expenses have related primarily to the development of and clinical trials for Resolaris and to research efforts targeting the potential therapeutic application of other Physiocrine-based immuno-modulators in rare disease indications. These expenses consist primarily of:

 

salaries and employee-related expenses, including stock-based compensation and benefits for personnel in research and product development functions;

 

costs associated with conducting our preclinical, development and regulatory activities, including fees paid to third-party professional consultants, service providers and our scientific, therapeutic and clinical advisory board;

 

costs to acquire, develop and manufacture preclinical study and clinical trial materials;

 

costs incurred under clinical trial agreements with clinical research organizations, or CROs, and investigative sites;

 

costs for laboratory supplies;

 

17


 

 

payments and stock issuances related to licensed products and technologies; and

 

allocated facilities, depreciation and other allocable expenses.

Research and development costs are expensed as incurred. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed. We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers. We adjust our accrual as actual costs become known.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that the levels of our research and development expenses will decrease in the current year and will consist primarily of costs related to advancing our iMod.Fc program into clinical development and research, discovery and development activities relating to our discovery engine for therapeutics based on Physiocrine biology, including our ORCA program.

We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development and given the early stage of our programs, we are unable to estimate with any certainty the costs we will incur or the timelines we will require in the continued development of Resolaris, iMod.Fc and any other product candidates that we may develop, including product candidates from our ORCA program. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. In addition, we cannot forecast which programs or product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance and administration, corporate development and administrative support functions, including stock-based compensation expenses and benefits. Other significant general and administrative expenses include accounting, legal services, expenses associated with applying for and maintaining patents, costs of insurance, costs of various consultants, occupancy costs, information systems costs and depreciation.

Other Income (Expense)

Other income (expense) consists primarily of interest income earned on cash and cash equivalents and available-for-sale investments and interest expense on our Term Loans outstanding with Silicon Valley Bank (SVB) and Solar Capital Ltd. (Solar).

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported expenses during the reporting periods. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

We discuss our accounting policies and assumptions that involve a higher degree of judgment and complexity within Note 2 to our audited consolidated financial statements in our Annual Report on Form 10-K. Except for changes disclosed in Note 1 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part 1 of this Quarterly Report on Form 10-Q, management believes there have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K.

 

18


 

Results of Operations

Comparison of the Three Months Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Increase /

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

Research and development expenses

 

$

7,133

 

 

$

10,395

 

 

$

(3,262

)

General and administrative expenses

 

 

3,694

 

 

 

3,470

 

 

 

224

 

Other income (expense)

 

 

(363

)

 

 

46

 

 

 

(409

)

 

Research and development expenses. Research and development expenses were $7.1 million and $10.4 million for the three months ended September 30, 2017 and 2016, respectively. The decrease of $3.3 million was due primarily to a $2.2 million decrease related to manufacturing costs incurred in support of Resolaris and a $1.8 million decrease as a result of the completion of clinical trials related to Resolaris. The decrease was partially offset by a $0.3 million increase related to discovery research efforts, a $0.2 million increase in iMod.Fc research and non-clinical development costs and $0.2 million increase related to ORCA research activities.

General and administrative expenses. General and administrative expenses remained relatively consistent at $3.7 million versus $3.5 million for the three months ended September 30, 2017 and 2016, respectively.

Other income (expense), net. Other expense was $0.4 million for the three months ended September 30, 2017 and other income was $46,000 for the three months ended September 30, 2016. The change was primarily a result of increased interest expense related to our Term Loans.

Comparison of the Nine Months Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

Increase /

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

Research and development expenses

 

$

24,757

 

 

$

33,702

 

 

$

(8,945

)

General and administrative expenses

 

 

11,188

 

 

 

11,711

 

 

 

(523

)

Other income (expense)

 

 

(788

)

 

 

124

 

 

 

(912

)

 

Research and development expenses. Research and development expenses were $24.8 million and $33.7 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease of $8.9 million was due primarily to $6.5 million decrease related to manufacturing costs incurred in support of Resolaris, a $4.0 million decrease as a result of the completion of clinical trials related to Resolaris, a $0.3 million decrease in discovery projects, and a $0.3 million decrease in stock based compensation. The decrease was partially offset by a $1.1 million increase related to research and non-clinical development costs incurred for iMod.Fc and a $1.1 million increase related to ORCA research activities.  

General and administrative expenses. General and administrative expenses were $11.2 million and $11.7 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease of $0.5 million was due primarily to a decrease in professional fees.

Other income (expense), net. Other expense was $0.8 million for the nine months ended September 30, 2017 and other income was $0.1 million for the nine months ended September 30, 2016. The change was primarily a result of increased interest expense related to our Term Loans.

 

19


 

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations since our inception. As of September 30, 2017, we had an accumulated deficit of $252.7 million and we expect to continue to incur net losses for the foreseeable future.   We believe that our existing cash, cash equivalents and available-for-sale investments, of $90.4 million as of September 30, 2017 will be sufficient to meet our anticipated cash requirements for a period of one year from the filing date of this Quarterly Report.

 

Sources of Liquidity

From our inception through September 30, 2017, we have funded our operations primarily with aggregate proceeds from the sales of our common stock in our IPO, private placements of our capital stock, convertible promissory notes, commercial bank debt and a convertible promissory note issued to our landlord and term loans.

Debt Financing

In November 2016, we entered into a loan and security agreement (the Loan Agreement) with SVB and Solar to borrow to $20.0 million, issuable in three separate tranches of $10.0 million, $5.0 million and $5.0 million, respectively. The first tranche of $10.0 million was funded on November 18, 2016 (Term A Loan). Under the Term A Loan, we received cash proceeds of $7.3 million, net of a $2.6 million repayment of the principal, accrued interest and $0.5 million final payment under our previous $10.0 million loan and security agreement with SVB (SVB Loan). We did not pay any termination or other fees in connection with the repayment of amounts due under the SVB Loan.

In June 2017, we entered into an amendment of the Loan Agreement which modified certain conditions under which we may receive and repay term loans under the Loan Agreement. The Loan Agreement, as amended, provides that (i) up to $5.0 million in the second tranche of term loans could be drawn down by us at any time before the earlier of June 30, 2017 or an event of default, at our discretion, and (ii) an additional $5.0 million in the third tranche of term loans may be drawn down by us at any time after June 30, 2017 and before the earlier of December 31, 2017 or an event of default, at our discretion, subject to achievement of certain milestones. In connection with the amendment to the Loan Agreement, the second tranche of $5.0 million was funded on June 30, 2017 (Term B Loan). We received cash proceeds of $4.9 million, net of debt issuance costs of $0.1 million.

Pursuant to the Loan Agreement, as amended, we were originally obligated to make interest only payments through December 1, 2017, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of November 18, 2020. The interest only period was extended to June 1, 2018 upon achievement of certain milestones as set forth in the Loan Agreement, as amended. The Term A Loan and Term B Loan (collectively, as Term Loans) bear interest at the prime rate, as reported in The Wall Street Journal on the last date of the month preceding the month in which interest will accrue, plus 4.10%. A final payment equal to 8.75% of the funded amounts is payable when the Term Loans become due or upon the prepayment of the respective outstanding balance. We have the option to prepay the outstanding balance of the loan in full, subject to a prepayment fee ranging from 1.0% to 3.0% depending upon when the prepayment occurs, including any non-usage fees. The Loan Agreement, as amended, provides for a 2.0% non-usage fee for any unfunded amount in the event we do not draw the third tranche, payable no later than the expiration date for the third tranche, as applicable, or the date of cancellation of the loan due to prepayment or an event of default. No such events have occurred or are anticipated as of September 30, 2017.

In connection with the Term A Loan, we issued warrants to each of SVB and Solar to purchase an aggregate of 47,771 shares of our common stock with an exercise price of $3.14 per share. In connection with the Term B Loan, we issued warrants to each of SVB and Solar to purchase an aggregate of 20,833 shares of our common stock with an exercise price of $3.60 per share. The warrants are immediately exercisable and have a maximum contractual term of seven years.

Cash Flows

The following table sets forth a summary of the net cash flow activity for each of the periods indicated (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(32,058

)

 

$

(41,166

)

Investing activities

 

 

(24,107

)

 

 

24,925

 

Financing activities

 

 

47,542

 

 

 

(2,452

)

Net decrease in cash

 

$

(8,623

)

 

$

(18,693

)

 

 

20


 

Operating activities. Net cash used in operating activities was $32.1 million and $41.2 million for the nine months ended September 30 , 2017 and 2016, respectively. The difference between net cash used in operating activities and ou r net loss during the nine month ended Septem ber 30, 2017 was due primarily to our net losses of $ 36.7 million , partially offset by non-cash-cha r ges consisting primarily of $ 3.6 million for stock-based compensation and $0. 6 million for depreciation and amortization and a decrease in our operating ass ets and liabilities of $0.4 million. The difference between net cash used in operating activities and our net loss during the nine months ended September 30 , 2016 was due primarily to our net losses of $ 45.3 million and a n increase in our operating assets and liabilities of $0.8 million, partially offset by non-cash cha r ges consisting of $ 3.9 million for stock-based compensation and $0. 7 million for depreciation and amortization .

Investing activities. Net cash used in investing activities for the nine months ended September 30, 2017 was primarily due to purchases of $65.3 million of investment securities and $1.2 million of property and equipment offset by the maturity of $42.3 million of investment securities. Net cash provided by investing activities for the nine months ended September 30, 2016 was due primarily to the maturities of $51.7 million of investment securities offset by the purchases of $26.2 million of investment securities and $0.6 million of property and equipment. We invest cash in excess of our immediate operating requirements with various maturities to optimize our return on investment while satisfying our liquidity needs.

Financing activities. Net cash provided by financing activities for the nine months ended September 30, 2017 was $47.5 million and consisted primarily of proceeds of $42.5 million from the private placement, net of offering costs paid in the period and $4.9 million from the Term B Loan, net of issuance cost. Net cash used in financing activities for the nine months ended September 30, 2016 was $2.5 million and consisted primarily of principal payments on the SVB Loan.

Funding Requirements

To date, we have not generated any revenues from product sales. We expect our expenses to increase in connection with our ongoing activities, particularly as we advance our product candidates in clinical development, continue our research and development activities with respect to potential therapeutics based on Physiocrine biology, and seek marketing approval for Resolaris, iMod.Fc and other product candidates that we may develop, including product candidates from our ORCA program. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We currently have no sales or marketing capabilities and would need to expand our organization to support these activities. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

our ability to initiate, and the progress and results of, our clinical trials of Resolaris and iMod.Fc;

 

the scope, progress, results and costs of preclinical development, and clinical trials for our other product candidates, including product candidates from our ORCA program;

 

the costs, timing and outcome of regulatory review of our product candidates;

 

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

 

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; and

 

the extent to which we acquire or in-license other products and technologies.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic partnerships and/or licensing arrangements. To the extent we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our other technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity offerings or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

 

21


 

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2017:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than 1 Year

 

 

1-3 Yea