UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2020

or

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

For the transition period from                 to              

Commission File Number: 001-37378

 

ATYR PHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-3435077

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

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

92121

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (858) 731-8389

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

LIFE

The Nasdaq Capital Market

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

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

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

As of August 7, 2020, there were 9,536,938 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 June 30, 2020 (unaudited) and December 31, 2019

 

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)

 

4

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 (unaudited)

 

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019 (unaudited)

 

6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

 

7

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

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

 

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4. Controls and Procedures

 

24

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

25

Item 1A. Risk Factors

 

25

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

 

58

Item 3. Defaults Upon Senior Securities

 

58

Item 4. Mine Safety Disclosures

 

58

Item 5. Other Information

 

58

Item 6. Exhibits

 

59

SIGNATURES

 

61

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

aTyr Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,632

 

 

$

9,210

 

Available-for-sale investments

 

 

19,802

 

 

 

21,934

 

Other receivables

 

 

831

 

 

 

100

 

Prepaid expenses

 

 

1,575

 

 

 

681

 

Total current assets

 

 

43,840

 

 

 

31,925

 

Property and equipment, net

 

 

1,136

 

 

 

1,270

 

Right-of-use assets

 

 

2,461

 

 

 

2,821

 

Other assets

 

 

125

 

 

 

172

 

Total assets

 

$

47,562

 

 

$

36,188

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

603

 

 

$

847

 

Accrued expenses

 

 

2,809

 

 

 

2,376

 

Contract liability

 

 

201

 

 

 

208

 

Current portion of operating lease liability

 

 

807

 

 

 

755

 

Term loans, net of issuance costs and discount (Note 4)

 

 

4,976

 

 

 

8,737

 

Grant fund liability

 

 

403

 

 

 

 

Total current liabilities

 

 

9,799

 

 

 

12,923

 

Long-term operating lease liability, net of current portion

 

 

1,825

 

 

 

2,239

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value per share; 5,000,000 undesignated authorized shares; Class X Convertible Preferred Stock issued and outstanding shares – 0 and 1,643,961 as of June 30, 2020 (unaudited) and December 31, 2019, respectively

 

 

 

 

 

2

 

Common stock, $0.001 par value per share; 21,425,000 and 10,714,286 authorized shares as of June 30, 2020 and December 31, 2019, respectively; issued and outstanding shares – 9,383,425 and 3,891,787 as of June 30, 2020 (unaudited) and December 31, 2019, respectively

 

 

9

 

 

 

4

 

Additional paid-in capital

 

 

363,132

 

 

 

343,524

 

Accumulated other comprehensive loss

 

 

(44

)

 

 

(40

)

Accumulated deficit

 

 

(326,997

)

 

 

(322,304

)

Total aTyr Pharma stockholders’ equity

 

 

36,100

 

 

 

21,186

 

Noncontrolling interest in Pangu BioPharma Limited

 

 

(162

)

 

 

(160

)

Total stockholders' equity

 

 

35,938

 

 

 

21,026

 

Total liabilities and stockholders’ equity

 

$

47,562

 

 

$

36,188

 

 

See accompanying notes.

 

 

3


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License revenues

 

$

189

 

 

$

94

 

 

$

8,254

 

 

$

94

 

Total revenues

 

 

189

 

 

 

94

 

 

 

8,254

 

 

 

94

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,361

 

 

 

3,314

 

 

 

7,977

 

 

 

6,659

 

General and administrative

 

 

2,146

 

 

 

2,421

 

 

 

4,736

 

 

 

4,953

 

Total operating expenses

 

 

6,507

 

 

 

5,735

 

 

 

12,713

 

 

 

11,612

 

Loss from operations

 

 

(6,318

)

 

 

(5,641

)

 

 

(4,459

)

 

 

(11,518

)

Total other expense, net

 

 

(129

)

 

 

(207

)

 

 

(236

)

 

 

(467

)

Consolidated net loss

 

$

(6,447

)

 

$

(5,848

)

 

$

(4,695

)

 

$

(11,985

)

Net loss attributable to noncontrolling interest in Pangu BioPharma Limited

 

 

1

 

 

 

 

 

 

2

 

 

 

 

Net loss attributable to aTyr Pharma, Inc.

 

$

(6,446

)

 

$

(5,848

)

 

$

(4,693

)

 

$

(11,985

)

Net loss per share, basic and diluted

 

$

(0.69

)

 

$

(1.80

)

 

$

(0.58

)

 

$

(4.23

)

Shares used in computing net loss per share, basic and diluted

 

 

9,357,432

 

 

 

3,244,920

 

 

 

8,119,612

 

 

 

2,834,079

 

See accompanying notes.

 

 

4


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Consolidated net loss

 

$

(6,447

)

 

$

(5,848

)

 

$

(4,695

)

 

$

(11,985

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

9

 

 

 

8

 

 

 

(4

)

 

 

28

 

Comprehensive loss

 

$

(6,438

)

 

$

(5,840

)

 

$

(4,699

)

 

$

(11,957

)

Comprehensive loss attributable to noncontrolling interest Pangu BioPharma Limited

 

 

1

 

 

 

 

 

 

2

 

 

 

 

Comprehensive loss attributable to aTyr Pharma, Inc. common stockholders

 

$

(6,437

)

 

$

(5,840

)

 

$

(4,697

)

 

$

(11,957

)

 

See accompanying notes.

 

 

 

5


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

 

 

Three and Six Months Ended June 30, 2020 (unaudited)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Noncontrolling

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain/(Loss)

 

 

Deficit

 

 

Interest

 

 

Equity

 

Balance as of December 31, 2019

 

 

1,643,961

 

 

$

2

 

 

 

3,891,787

 

 

$

4

 

 

$

343,524

 

 

$

(40

)

 

$

(322,304

)

 

$

(160

)

 

$

21,026

 

Conversion of preferred stock to common stock

 

 

(1,643,961

)

 

 

(2

)

 

 

587,444

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon release of restricted stock units

 

 

 

 

 

 

 

 

2,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock from underwritten follow-on offering, net of offering costs

 

 

 

 

 

 

 

 

4,870,588

 

 

 

4

 

 

 

18,775

 

 

 

 

 

 

 

 

 

 

 

 

18,779

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

423

 

 

 

 

 

 

 

 

 

 

 

 

423

 

Net unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,753

 

 

 

(1

)

 

 

1,752

 

Balance as of March 31, 2020

 

 

 

 

$

 

 

 

9,352,498

 

 

$

9

 

 

$

362,723

 

 

$

(53

)

 

$

(320,551

)

 

$

(161

)

 

$

41,967

 

Issuance of common stock upon release of restricted stock units

 

 

 

 

 

 

 

 

5,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to employee stock purchase plan

 

 

 

 

 

 

 

 

1,780

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Issuance of common stock from at the market offerings, net of offering costs

 

 

 

 

 

 

 

 

23,148

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

25

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

378

 

 

 

 

 

 

 

 

 

 

 

 

378

 

Net unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,446

)

 

 

(1

)

 

 

(6,447

)

Balance as of June 30, 2020

 

 

 

 

$

 

 

 

9,383,425

 

 

$

9

 

 

$

363,132

 

 

$

(44

)

 

$

(326,997

)

 

$

(162

)

 

$

35,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and Six Months Ended June 30, 2019 (unaudited)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Noncontrolling

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain/(Loss)

 

 

Deficit

 

 

Interest

 

 

Equity

 

Balance as of December 31, 2018

 

 

2,285,952

 

 

$

2

 

 

 

2,186,389

 

 

$

2

 

 

$

332,407

 

 

$

(60

)

 

$

(298,701

)

 

$

 

 

$

33,650

 

Conversion of preferred stock to common stock

 

 

(641,991

)

 

 

 

 

 

229,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock from at the market offerings, net of offering costs

 

 

 

 

 

 

 

 

193,670

 

 

 

 

 

 

1,381

 

 

 

 

 

 

 

 

 

 

 

 

1,381

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

571

 

 

 

 

 

 

 

 

 

 

 

 

571

 

Net unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

20

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,137

)

 

 

 

 

 

(6,137

)

Balance as of March 31, 2019

 

 

1,643,961

 

 

$

2

 

 

 

2,609,342

 

 

$

2

 

 

$

334,359

 

 

$

(40

)

 

$

(304,838

)

 

$

 

 

$

29,485

 

Issuance of common stock upon release of restricted stock units

 

 

 

 

 

 

 

 

7,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to employee stock purchase plan

 

 

 

 

 

 

 

 

1,515

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Issuance of common stock from at the market offerings, net of offering costs

 

 

 

 

 

 

 

 

252,872

 

 

 

 

 

 

1,146

 

 

 

 

 

 

 

 

 

 

 

 

1,146

 

Issuance of common stock from registered direct offering, net of offering costs

 

 

 

 

 

 

 

 

660,154

 

 

 

1

 

 

 

4,917

 

 

 

 

 

 

 

 

 

 

 

 

4,918

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

509

 

 

 

 

 

 

 

 

 

 

 

 

509

 

Net unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,848

)

 

 

 

 

 

(5,848

)

Balance as of June 30, 2019

 

 

1,643,961

 

 

$

2

 

 

 

3,531,370

 

 

$

3

 

 

$

340,939

 

 

$

(32

)

 

$

(310,686

)

 

$

 

 

$

30,226

 

 

 

See accompanying notes.

6


 

 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

(unaudited)

 

Consolidated net loss

 

$

(4,695

)

 

$

(11,985

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

313

 

 

 

324

 

Stock-based compensation

 

 

801

 

 

 

1,080

 

Debt discount accretion and non-cash interest expense

 

 

239

 

 

 

387

 

Accretion of discount of available-for-sale investment securities

 

 

(11

)

 

 

(200

)

Amortization of right-of-use assets

 

 

407

 

 

 

349

 

Loss (gain) on disposal of property and equipment

 

 

6

 

 

 

(3

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Other receivables

 

 

(731

)

 

 

63

 

Prepaid expenses and other assets

 

 

(894

)

 

 

(424

)

Accounts payable and accrued expenses

 

 

186

 

 

 

(816

)

Contract liability

 

 

(7

)

 

 

536

 

Operating lease liability

 

 

(362

)

 

 

(155

)

Grant funding liability

 

 

403

 

 

 

 

Net cash used in operating activities

 

 

(4,345

)

 

 

(10,844

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(185

)

 

 

(10

)

Purchases of available-for-sale investment securities

 

 

(18,011

)

 

 

(30,080

)

Maturities of available-for-sale investment securities

 

 

20,150

 

 

 

29,000

 

Proceeds from sale of property and equipment

 

 

3

 

 

 

26

 

Net cash provided by (used in) investing activities

 

 

1,957

 

 

 

(1,064

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock through employee stock purchase plan

 

 

6

 

 

 

8

 

Proceeds from issuance of common stock through at the market offerings, net of offering costs

 

 

25

 

 

 

2,527

 

Proceeds from issuance of common stock through registered direct offering, net of offering costs

 

 

 

 

 

4,918

 

Proceeds from issuance of common stock through underwritten follow-on offering, net of offering costs

 

 

18,779

 

 

 

 

Repayments on borrowings

 

 

(4,000

)

 

 

(4,000

)

Net cash provided by financing activities

 

 

14,810

 

 

 

3,453

 

Net change in cash and cash equivalents

 

 

12,422

 

 

 

(8,455

)

Cash and cash equivalents at beginning of period

 

 

9,210

 

 

 

22,962

 

Cash and cash equivalents at the end of period

 

$

21,632

 

 

$

14,507

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

7


 

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 development of innovative medicines based on novel immunological pathways.

Principles of Consolidation

Our condensed 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 follow 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, 2019, contained in our Annual Report on Form 10-K filed with the SEC on March 26, 2020. 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.

Risks and Uncertainties

 

The global pandemic resulting from the disease known as COVID-19, caused by a novel strain of coronavirus, SARS-CoV-2, has caused national and global economic and financial market disruptions. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will continue to cause significant disruptions to the global economy, as well as businesses and capital markets around the world.

Impacts to our business have included the delay in enrollment of our Phase 1b/2a clinical trial in patients with pulmonary sarcoidosis and the discontinuation of some patients in that trial, temporary closures of portions of our facilities and those of our licensees and collaborators, disruptions or restrictions on our employee's ability to travel and delays in certain research and development activities. Other potential impacts to our business include, but are not limited to, disruptions to or delays in other clinical trials, third-party manufacturing supply and other operations, the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, interruptions or delays in the operations of the U.S. Food and Drug Administration or other regulatory authorities, and our ability to raise capital and conduct business development activities.

Liquidity and Financial Condition

Other than the net income generated in the three months ended March 31, 2020, we have incurred losses and negative cash flows from operations since our inception. As of June 30, 2020, we had an accumulated deficit of $327.0 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 $41.4 million as of June 30, 2020, will be sufficient to meet our anticipated cash requirements for a period of one year from the filing date of this Quarterly Report.

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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 to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including, but not limited to, 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 equity offerings, grant funding, collaborations, strategic partnerships and/or licensing arrangements, and when we are closer to commercialization of our product candidates potentially through debt financings. However, we may be unable to raise additional capital or enter into such arrangements when needed on favorable terms or at all. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets continue to deteriorate, it may make any additional debt or equity financing more difficult, more costly and more dilutive. Our failure to raise capital or enter into applicable arrangements when needed would have a negative impact on our financial condition and ability to develop our product candidates.

Use of Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed 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 condensed consolidated financial statements and accompanying notes. The most significant estimates in our condensed consolidated financial statements relate to the clinical trials and research and development expenses. 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. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to us in our critical accounting estimates.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications were not material to the condensed consolidated financial statements.

Leases

We follow Accounting Standards Codification (ASC) Topic 842, Leases in recording our operating and financing leases. For our long-term operating leases, we recognized a right-of-use asset and a lease liability in our condensed consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determine the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise. We also made accounting policy elections not to apply the recognition requirements under Topic 842 to any of our short-term leases and to account for each separate lease and associated non-lease components as a single lease component for all of our leases. Under Topic 842 we determine if an arrangement is a lease at inception. Our right-of-use assets consist of an operating lease for our facility headquarters. We have 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.

We do not separate lease and non-lease components for our long-term leases.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses in our condensed consolidated statements of operations.

Revenue Recognition

We evaluate our agreements under ASC Topic 606, Revenue from Contracts with Customers and ASC Topic 808, Collaborative Arrangements. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreement, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified

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in the contract. We use key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide research and development services. We recognize revenue at a point in time when we transfer control of a distinct performance obligation to our partner. For example, if a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license.

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. 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, options and restricted stock units outstanding under our stock option plan and estimated shares to be purchased under our 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, as the assumed exercise or settlement of stock options, restricted stock units, and warrants, or the conversion of preferred stock are anti-dilutive.

Potentially dilutive securities not considered for the calculation of diluted net loss per share are as follows (in common stock equivalents):

 

 

Three and Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

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

 

 

 

 

 

587,445

 

Common stock warrants

 

 

13,904

 

 

 

477,639

 

Common stock options and restricted stock units

 

 

693,670

 

 

 

409,568

 

Employee stock purchase plan

 

 

1,780

 

 

 

2,067

 

 

 

 

709,354

 

 

 

1,476,719

 

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), to provide 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 Topic 326 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. Topic 326 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for small reporting companies. We are currently evaluating the impact of Topic 326 and do not expect the adoption of this guidance will have a material impact on our condensed consolidated financial position or results of operations.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes to identify, evaluate, and improve areas of GAAP for which costs and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments for Topic 740 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Topic 740 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. An entity that elects early adoption must adopt all the amendments in the same period. We are currently evaluating the impact of Topic 740 and do not expect the adoption of this guidance will have a material impact on our condensed 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 long-term debt approximates their fair value. Investment securities are recorded at fair value.

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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.

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

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

As of June 30, 2020