life-10q_20180331.htm

 

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 March 31, 2018

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 May 7, 2018, there were 29,828,723 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 March 31, 2018 (unaudited) and December 31, 2017

 

3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited)

 

4

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017 (unaudited)

 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited)

 

6

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

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

 

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

21

Item 4. Controls and Procedures

 

22

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

23

Item 1A. Risk Factors

 

23

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

 

50

Item 3. Defaults Upon Senior Securities

 

50

Item 4. Mine Safety Disclosures

 

50

Item 5. Other Information

 

50

Item 6. Exhibits

 

51

SIGNATURES

 

53

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

aTyr Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,936

 

 

$

21,091

 

Available-for-sale investments, short-term

 

 

52,164

 

 

 

64,028

 

Prepaid expenses and other assets

 

 

1,906

 

 

 

1,866

 

Total current assets

 

 

76,006

 

 

 

86,985

 

Property and equipment, net

 

 

2,374

 

 

 

2,280

 

Other assets

 

 

90

 

 

 

90

 

Total assets

 

$

78,470

 

 

$

89,355

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,462

 

 

$

2,276

 

Accrued expenses

 

 

2,533

 

 

 

3,103

 

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

 

 

7,027

 

 

 

5,012

 

Total current liabilities

 

 

11,022

 

 

 

10,391

 

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

 

 

12,950

 

 

 

14,719

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; undesignated authorized shares – 5,000,000 at March 31, 2018 and December 31 2017; Class X Convertible Preferred Stock issued and outstanding shares – 2,285,952 as of March 31, 2018 and December 31, 2017

 

 

2

 

 

 

2

 

Common stock, $0.001 par value; authorized shares – 150,000,000 as of March 31, 2018 and December 31, 2017; issued and outstanding shares – 29,828,723 and 29,789,162 as of March 31, 2018 and December 31, 2017, respectively

 

 

30

 

 

 

30

 

Additional paid-in capital

 

 

329,455

 

 

 

328,519

 

Accumulated other comprehensive loss

 

 

(136

)

 

 

(120

)

Accumulated deficit

 

 

(274,853

)

 

 

(264,186

)

Total stockholders’ equity

 

 

54,498

 

 

 

64,245

 

Total liabilities and stockholders’ equity

 

$

78,470

 

 

$

89,355

 

 

See accompanying notes.

 

 

 

3


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

6,150

 

 

$

9,204

 

General and administrative

 

$

4,070

 

 

 

4,007

 

Total operating expenses

 

 

10,220

 

 

 

13,211

 

Loss from operations

 

 

(10,220

)

 

 

(13,211

)

Total other expense, net

 

 

(447

)

 

 

(194

)

Net loss

 

 

(10,667

)

 

 

(13,405

)

Net loss per share attributable to common stock holders, basic and diluted

 

$

(0.36

)

 

$

(0.56

)

Weighted average common stock shares outstanding, basic and diluted

 

 

29,795,466

 

 

 

23,739,057

 

See accompanying notes.

 

 

 

4


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Net loss

 

$

(10,667

)

 

$

(13,405

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on available for sale investments

 

 

(17

)

 

 

8

 

Comprehensive loss

 

$

(10,684

)

 

$

(13,397

)

 

See accompanying notes.

 

 

 

5


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,667

)

 

$

(13,405

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

184

 

 

 

226

 

Stock-based compensation

 

 

928

 

 

 

1,277

 

Accretion of debt discount

 

 

81

 

 

 

37

 

Amortization (accretion) of premium (discount) of available-for-sale investment securities

 

 

(64

)

 

 

74

 

Deferred rent

 

 

 

 

 

(81

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(40

)

 

 

776

 

Accounts payable and accrued expenses

 

 

(999

)

 

 

(2,792

)

Net cash used in operating activities

 

 

(10,577

)

 

 

(13,888

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(498

)

 

 

(262

)

Purchases of available-for-sale investment securities

 

 

(7,988

)

 

 

(11,489

)

Maturities of available-for-sale investment securities

 

 

19,900

 

 

 

16,150

 

Net cash provided by investing activities

 

 

11,414

 

 

 

4,399

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock through option exercises

 

 

8

 

 

 

1

 

Net cash provided by financing activities

 

 

8

 

 

 

1

 

Net change in cash and cash equivalents

 

 

845

 

 

 

(9,488

)

Cash and cash equivalents at beginning of period

 

 

21,091

 

 

 

38,388

 

Cash and cash equivalents at the end of period

 

$

21,936

 

 

$

28,900

 

 

 

 

 

 

 

 

 

 

 

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 using our knowledge of tRNA synthetase biology.

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, 2017, contained in our Annual Report on Form 10-K filed with the SEC on March 20, 2018. 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 March 31, 2018, we had an accumulated deficit of $274.9 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 $74.1 million as of March 31, 2018 will be sufficient to meet our anticipated cash requirements for 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 to fund our operations. 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. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and ability to develop our product candidates.

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 no shares and 9,039 shares subject to repurchase from the weighted average number of common shares outstanding for the three months ended March 31, 2018 and 2017, 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, 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 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):

 

 

March 31,

 

 

 

2018

 

 

2017

 

Class X Convertible Preferred Stock (if-converted)

 

 

11,429,760

 

 

 

 

Warrants for common stock

 

 

6,682,708

 

 

 

121,512

 

Common stock options and restricted stock units

 

 

5,611,880

 

 

 

4,720,382

 

Employee stock purchase plan

 

 

31,086

 

 

 

36,837

 

 

 

 

23,755,434

 

 

 

4,878,731

 

 

Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU No. 2016-01), 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 No. 2016-01 changes the disclosure requirements for financial instruments. This guidance became effective beginning after December 15, 2017 which we adopted in January 2018. The adoption did not have a material impact on our consolidated financial position or results of operations as we did not hold any equity investments as of January 1, 2018.

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 become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted at the earliest period presented using a modified retrospective approach. We expect the implementation of ASU No. 2016-02 to have an impact on our consolidated financial statements and related disclosures as we made aggregate future minimum lease payments for our administrative offices and research laboratory located in San Diego, California. We anticipate recognition of additional assets and corresponding liabilities related to this lease on our consolidated balance sheet.

In May 2017, the FASB issued ASU No. 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 No. 2017-09 became effective beginning after December 15, 2017 which we adopted in January 2018. The adoption did not have a material impact on our consolidated financial position or results of operations.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) (ASU No. 2018-02), to amend and allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Cuts and Jobs Act”). Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in ASU No. 2018-02 also require certain disclosures about stranded tax effects. ASU No. 2018-02 will become effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. 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 February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments – overall to clarify certain aspects of the ASU 2016-01 which includes: i) equity securities without a readily determinable fair value – discontinuation; ii) equity securities without a readily determinable fair value-adjustments; iii) forward contracts and purchased options; iv) presentation requirements for certain fair value option liabilities; v) fair value option liabilities denominated in a foreign currency; and vi) transition guidance for equity securities without a readily determinable fair value. To provide a period of time to allow entities to continue their current adoption plans for ASU No. 2016-01, entities are not required to adopt these amendments until the interim period beginning after June 2018. We do not expect the adoption of this guidance will have a material impact on our consolidated financial position or results of operations.

In March 2018, the FASB issued ASU 2018-04, Investments – Debt Securities (Topic 320) and Regulated Operation (Topic 980) to amend SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273. This guidance is effective upon adoption of the amendments in ASU No. 2016-01 which we adopted in January 2018. The adoption did not 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 their 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 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):

 

 

9


 

 

 

 

 

 

 

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 March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

10,605

 

 

$

10,605

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

5,095

 

 

 

 

 

 

5,095

 

 

 

 

Commercial paper

 

 

9,675

 

 

 

 

 

 

9,675

 

 

 

 

Corporate debt securities

 

 

20,025

 

 

 

 

 

 

20,025

 

 

 

 

United States Treasury securities

 

 

17,369

 

 

 

17,369

 

 

 

 

 

 

 

 

Sub-total short-term investments

 

 

52,164

 

 

 

17,369

 

 

 

34,795

 

 

 

 

Total assets measured at fair value

 

$

62,769

 

 

$

27,974

 

 

$

34,795

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

9,070

 

 

$

9,070

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

6,497

 

 

 

 

 

 

6,497

 

 

 

 

Commercial paper

 

 

21,943

 

 

 

 

 

 

21,943

 

 

 

 

Corporate debt securities

 

 

18,260

 

 

 

 

 

 

18,260

 

 

 

 

United States Treasury securities

 

 

17,328

 

 

 

17,328

 

 

 

 

 

 

 

 

Sub-total short-term investments

 

 

64,028

 

 

 

17,328

 

 

 

46,700

 

 

 

 

Total assets measured at fair value

 

$

73,098

 

 

$

26,398

 

 

$

46,700

 

 

$

 

As of March 31, 2018 and December 31, 2017 available-for-sale investments are detailed as follows (in thousands):

 

 

 

March 31, 2018

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

5,100

 

 

 

 

 

 

(5

)

 

$

5,095

 

Commercial paper

 

$

9,675

 

 

 

 

 

 

 

 

 

9,675

 

Corporate debt securities

 

 

20,065

 

 

 

 

 

 

(40

)

 

 

20,025

 

United States Treasury securities

 

 

17,411

 

 

 

 

 

 

(42

)

 

 

17,369

 

 

 

$

52,251

 

 

$

 

 

$

(87

)

 

$

52,164

 

 

 

 

December 31, 2017

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

6,501

 

 

 

 

 

 

(4

)

 

$

6,497

 

Commercial paper

 

 

21,943

 

 

 

 

 

 

 

 

 

21,943

 

Corporate debt securities

 

 

18,286

 

 

 

 

 

 

(26

)

 

 

18,260

 

United States Treasury securities

 

 

17,368

 

 

 

 

 

 

(40

)

 

 

17,328

 

 

 

$

64,098

 

 

$

 

 

$

(70

)

 

$

64,028

 

 

 

10


 

As of March 31, 2018, all of our available-for-sale investments have a variety of effective maturity dates of less than one year. As of March 31, 2018, there are 20 available-for-sale investments in gross unrealized loss position, all of which had been in such position for less than twelve months.

At each reporting date, we perform an evaluation of impairment to determine if the unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and our intent and ability to hold the investment until recovery of its amortized cost basis. We intend, and have the ability, to hold our investments in unrealized loss positions until their amortized cost basis has been recovered. Based on our evaluation, we determined that the unrealized losses were not other-than-temporary as of March 31, 2018.

 

3. Debt, Commitments and Contingencies

Term Loans

In November 2016, we entered into a loan and security agreement and subsequently entered amendments (collectively, the Loan Agreement), for term loans with Silicon Valley Bank (SVB) and Solar Capital Ltd. (Solar), to borrow up to $20.0 million issuable in three separate tranches (the Term Loans), $10.0 million of which was funded in November 2016, $5.0 million of which was funded in June 2017 and $5.0 million of which was funded in December 2017.

Under the Loan Agreement, we are obligated to make interest only payments through June 1, 2018, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of November 18, 2020. 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 obligations under the Term Loans are secured by liens on our tangible personal property and we agreed to not encumber any of our intellectual property. The Term Loans include a material adverse change clause, which enables the Lenders to require immediate repayment of the outstanding debt. The material adverse change clause covers a material impairment in the perfection or priority of the lenders’ lien in the underlying collateral or in the value of such collateral, material adverse change in business operations or condition or material impairment of our prospects for repayment of any portion of the remaining debt obligation.

As of March 31, 2018, the carrying value of our Term Loans consist of $20.0 million principal outstanding less the debt issuance costs of $0.9 million. The debt issuance costs have been recorded as a debt discount which are being accreted to interest expense over the life of the Term Loans. The final maturity payment of $1.8 million is accruing over the life of the Term Loans through interest expense.

In connection with the first tranche, 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 second tranche, 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. In connection with the third tranche, we issued warrants to each of SVB and Solar to purchase an aggregate of 20,188 shares of our common stock with an exercise price of $3.72 per share. The warrants are immediately exercisable and have a maximum contractual term of seven years. The aggregate fair value of the warrants was determined to be $0.5 million using the Black-Scholes option pricing model and was recorded as debt discount which are being accreted to interest expense over the life of Term Loans.

 

11


 

Term loans and unamortized discount balances are as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Long-term debt

 

$

20,000

 

 

$

20,000

 

Less debt issuance costs and discount

 

 

(279

)

 

 

(345

)

Long-term debt, net of issuance costs and discount

 

 

19,721

 

 

 

19,655

 

Less current portion of long-term debt

 

 

(7,333

)

 

 

(5,333

)

Add accrual of final payment

 

 

562

 

 

 

397

 

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

 

$

12,950

 

 

$

14,719

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,333

 

 

$

5,333

 

Less current portion of debt issuance costs and discount

 

 

(306

)

 

 

(321

)

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

 

$

7,027

 

 

$

5,012

 

 

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

 

 

 

March 31, 2018

 

2018

 

$

5,333

 

2019

 

 

8,000

 

2020

 

 

6,667

 

 

 

$

20,000

 

 

Facility Lease

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. The lease expires in 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 March 31, 2018 and 2017 was $0.3 million and $0.2 million, respectively.

Future minimum payments under the non-cancelable operating lease as of March 31, 2018 were as follows (in thousands):

 

 

 

Operating

Lease

 

2018

 

$

836

 

2019

 

 

420

 

 

 

$

1,256

 

 

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 to provide additional funding to TSRI. For the three months ended March 31, 2018 and 2017, we recognized expense under the agreement in the amount of $0.5 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. Refer to Note 5, Subsequent Events for further discussion on this agreement.

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

 

12


 

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 to common stock 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 share of Preferred Stock is convertible into five shares of our common stock. VGO Fund will be prohibited from converting the Preferred Stock 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 Stock 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 Stock 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.

We evaluated the Preferred Stock for liability or equity classification under ASC 480, Distinguishing Liabilities from Equity (ASC480)and determined that equity treatment was appropriate because the Preferred Stock did not meet the definition of the liability instruments defined thereunder for convertible instruments. Specifically, the Preferred Stock are not mandatorily redeemable and do not embody an obligation to buy back the shares outside of our control in a manner that could require the transfer of assets. Additionally, we determined that the Preferred Stock would be recorded as permanent equity, not temporary equity, based on the guidance of ASC 480 given that they are not redeemable for cash or other assets (i) on a fixed or determinable date, (ii) at the option of the holder, and (iii) upon the occurrence of an event that is not solely within control of the Company.

We also evaluated the Preferred Stock in accordance with the provisions of ASC 815, Derivatives and Hedging, including the consideration of embedded derivatives requiring bifurcation from the equity host. Based on this assessment, we determined that the conversion option is closely related to the equity host, and thus, bifurcation is not required.

The issuance of convertible preferred stock could generate a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in-the-money) at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock on the commitment date. The fair value of our common stock was $2.37 on August 31, 2017, the commitment date, using the Black-Scholes valuation model. After the proceeds allocation, the Preferred Stock had an effective conversion price of $2.37 per common share, which was equal to the fair value of our common stock on the commitment date.  Therefore, no BCF is present.  

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 securities. We registered all of the relevant securities 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.

We evaluated the warrants for liability or equity classification under ASC 815, Derivative and Hedging (ASC 815) and determined that equity treatment was appropriate because the warrants are indexed to our common stock and no cash settlement is required except for (i) liquidation of the Company, or (ii) a change in control in which the common stockholders also received cash.

 

13


 

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), 1,191,566 additional shares were reserved for future issuance under the 2015 Plan on January 1, 2018 and 297,891 additional shares were reserved for future issuances under the 2015 ESPP on January 1, 2018. Common stock reserved for future issuance is as follows:

 

 

March 31, 2018

 

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

 

 

11,429,760

 

Common stock warrants

 

 

6,682,708

 

Common stock options and awards outstanding

 

 

5,611,880

 

Shares available under the 2015 Plan

 

 

971,911

 

Shares available under the 2015 ESPP

 

 

881,710

 

 

 

 

25,577,969

 

 

The following table summarizes our stock option activity under all equity incentive plans for the three months ended March 31, 2018:

 

 

 

Number of

Outstanding

Options

 

 

Weighted

Average

Exercise Price

 

Outstanding as of December 31, 2017

 

 

4,617,059

 

 

$

5.52

 

Granted

 

 

1,250,761

 

 

$

3.31

 

Exercised

 

 

(3,593

)

 

$

2.02

 

Canceled/forfeited/expired

 

 

(259,013

)

 

$

6.21

 

Outstanding as of March 31, 2018

 

 

5,605,214

 

 

$

5.00

 

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 March 31,

 

 

 

2018

 

 

2017

 

Expected term (in years)

 

5.77 – 6.08

 

 

6.02 – 6.06

 

Risk-free interest rate

 

2.3% – 2.7%

 

 

2.0% – 2.1%

 

Expected volatility

 

89.2% – 98.4%

 

 

104.0% – 105.2%

 

Expected dividend yield

 

 

0.0

%

 

 

0.0

%

 

The following table summarizes our restricted stock unit activity under all equity incentive plans for the three months ended March 31, 2018:

 

 

Number of Outstanding

Restricted Stock Units

 

 

Weighted Average

Grant Date

Fair Value

 

Balance as of December 31, 2017

 

 

49,300

 

 

$

4.28

 

Granted

 

 

 

 

$

 

Released

 

 

(35,968

)

 

$

4.64

 

Forfeited

 

 

(6,666

)

 

$

3.30

 

Balance as of March 31, 2018

 

 

6,666

 

 

$

3.30

 

 

14


 

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 March 31,

 

 

 

2018

 

 

2017

 

Research and development

 

$

324

 

 

$

444

 

General and administrative

 

 

604

 

 

 

833

 

 

 

$

928

 

 

$

1,277

 

 

5. Subsequent Events

On May 10, 2018, we approved the implementation of a corporate restructuring and program prioritization plan (the Restructuring Plan) to streamline our operations and concentrate our development efforts on the advancement of ATYR1923. In connection with the Restructuring Plan, we committed to a reduction in our total workforce by approximately 30% to 42 full-time employees. The Restructuring Plan was approved by our management team (with authorization delegated by our Board of Directors), and affected employees were informed on May 11, 2018. We estimate that we will record charges of approximately $0.9 million for employee severance and other related termination benefits and approximately $0.4 million in one-time, non-cash stock-based compensation charges due to the acceleration of time-based vesting provisions of outstanding equity awards in accordance with our Executive Severance and Change in Control Policy. Severance payments are expected to be paid in full by the end of July 2018.

On May 10, 2018, we provided TSRI with written notice of termination of our research funding and option agreement effective as of November 10, 2018.

 

 

 

 

15


 

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, 2017 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 20, 2018.

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 using our knowledge of tRNA synthetase biology. We have discovered novel extracellular functions of proteins derived from a number of tRNA synthetase genes, a family of more than 20 genes that influence immune function, and other activities, in previously unknown ways. Built on more than a decade of foundational science on extracellular tRNA synthetase biology and its effect on immune responses, we have built a global intellectual property estate directed to all 20 human tRNA synthetases as well as our product candidates.

Today, we focus on the therapeutic translation of the Resokine pathway, comprised of extracellular proteins derived from the histidyl tRNA synthetase (HARS) gene family, which has fueled a pipeline of novel drug candidate programs addressing disease areas of high unmet medical need. We refer to these proteins as Resokine proteins. Our current programs include:

ATYR1923 (iMod.Fc)

Our scientists successfully engineered the first fusion protein with a Resokine protein, ATYR1923, to provide designed properties to enhance the immuno-modulatory aspects in vivo. We plan to develop ATYR1923 as a potential therapeutic for patients with interstitial lung diseases (ILD). This fusion protein, which utilizes the Fc region of an antibody, also potentially represents a novel Fc fusion platform for future tRNA synthetase based therapies.  We are currently conducting a first-in-human Phase 1 clinical trial of ATYR1923. This randomized, double-blind, placebo-controlled study will investigate the safety, tolerability, immunogenicity, and pharmacokinetics of intravenous ATYR1923 in healthy volunteers. We anticipate learning more about the safety profile and tolerability of ATYR1923 as well as some characteristics of its pharmacokinetics and dosing potential. In parallel, we are expanding our knowledge base of the therapeutic potential of ATYR1923 by conducting several in vivo and in vitro models to further elucidate its potential clinical utility. These data, as well as the Phase 1 clinical trial results, will help inform selection of the indication for future clinical trials for our ATYR1923 program.

ORCA  

Our ORCA program is a preclinical immuno-oncology research program that targets the Resokine pathway using antibodies to bind to Resokine in tumor settings. We believe tumors, across multiple tumor types, may utilize Resokine to aid in the evasion of host anti-tumor immune responses.  We have evaluated the therapeutic potential of targeting this novel pathway in multiple in vitro and in vivo tumor models. We have decided not to proceed with IND-enabling activities, including GMP manufacturing, for the panel of antibodies identified in our ORCA program, as recent pre-clinical data did not show sufficient efficacy to justify further development at this time. We are continuing early research efforts for this program.

ATYR1940 (Resolaris)

We internally discovered and developed ATYR1940, our first therapeutic candidate based on a protein naturally secreted from muscle (Resokine) that may act to influence T-cell activation at the tissue level to promote healthier muscle. There is potential that ATYR1940 may translate into an innovative therapeutic for rare genetic myopathies with an immune component. At this time, we are not pursuing additional clinical development of ATYR1940 without a significant collaboration or strategic partnership.

 

16


 

Our 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 250 issued patents or allowed patent applications that are owned or exclusively licensed by us, including over 300 potential protein compositions.

Since our inception in 2005, we have devoted substantially all of our resources to the therapeutic potential of tRNA synthetase biology, including the preclinical development of and clinical trials for ATYR1940 and ATYR1923, 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 March 31, 2018, 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, a convertible promissory note issued to our landlord and term loans.

We have never been profitable and have incurred net losses in each annual and quarterly period since our inception. For the three months ended March 31, 2018 and 2017, we have incurred consolidated net losses of $10.7 million and $13.4 million, respectively. As of March 31, 2018, we had an accumulated deficit of $274.9 million.

Substantially all of our net losses resulted from costs incurred in connection with our development of and clinical trials for ATYR1940 and ATYR1923, our other research and development programs (including ORCA) and from general 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 our product candidates 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 expenses and clinical trials. We expect our expenses will fluctuate in connection with our ongoing activities as we:

 

conduct clinical trials of ATYR1923 and any additional product candidates we may develop;

 

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 March 31, 2018. All intercompany transactions and balances are eliminated in consolidation.

 

17


 

Research and Development Expenses

To date, our research and development expenses have related primarily to the development of and clinical trials for ATYR1940, ATYR1923, research and development activities related to our ORCA program and to research efforts targeting the potential therapeutic application of other Physiocrine-based immuno-modulators (including funding of our research collaborations with The Scripps Research Institute). 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;

 

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 future levels of our research and development expenses will consist primarily of costs related to advancing our ATYR1923 program into patient clinical trials and research, discovery and development activities relating to our discovery engine for therapeutics based on tRNA synthetase 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 our product candidates. 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, cost of insurance, cost 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).

 

18


 

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. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K.

Results of Operations

Comparison of the Three Months Ended March 31, 2018 and 2017

The following table summarizes our results of operations for the three months ended March 31, 2018 and 2017 (in thousands):

 

 

 

Quarter Ended March 31,

 

 

Increase /

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

Research and development expenses

 

$

6,150

 

 

$

9,204

 

 

$

(3,054

)

General and administrative expenses

 

 

4,070

 

 

 

4,007

 

 

 

63

 

Other income (expense)

 

 

(447

)

 

 

(194

)

 

 

(253

)

 

Research and development expenses. Research and development expenses were $6.2 million and $9.2 million for the three months ended March 31, 2018 and 2017, respectively. The decrease of $3.1 million was due primarily to a $1.9 million decrease related to the completion of ATYR1940 clinical studies, and a decrease of $1.1 million related to lower product manufacturing costs.

General and administrative expenses. General and administrative expenses were at $4.1 million and $4.0 million for the three months ended March 31, 2018 and 2017, respectively.

Other income (expense), net. Other income (expense) was $0.4 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively. The change was primarily a result of increased interest expense related to our Term Loans.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations since our inception. As of March 31, 2018, we had an accumulated deficit of $274.9 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 $74.1 million as of March 31, 2018 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 March 31, 2018, we have funded our operations primarily with aggregate proceeds from the sales of our common stock through our IPO, the private placement of our capital stock, promissory notes, venture debt, a convertible promissory note issued to our landlord and term loans.

Debt Financing

In November 2016, we entered into a loan and security agreement and subsequently entered amendments (collectively, the Loan Agreement), for term loans with SVB and Solar, to borrow up to $20.0 million issuable in three separate tranches (the Term Loans), $10.0 million of which was funded in November 2016, $5.0 million of which was funded in June 2017 and $5.0 million of which was funded in December 2017.

 

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Under the Loan Agreement, we are obligated to make interest only payments through June 1, 2018, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of November 18, 2020. 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.

In connection with the first tranche, 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 second tranche, 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. In connection with the third tranche, we issued warrants to each of SVB and Solar to purchase an aggregate of 20,188 shares of our common stock with an exercise price of $3.72 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):

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(10,577

)

 

$

(13,888

)

Investing activities

 

 

11,414

 

 

 

4,399

 

Financing activities

 

 

8

 

 

 

1

 

Net decrease in cash

 

$

845

 

 

$

(9,488

)

 

Operating activities. Net cash used in operating activities was $10.6 million and $13.9 million for the three months ended March 31, 2018 and 2017, respectively. Net cash used in operating activities for the three months ended March 31, 2018 was primarily related to our net loss of $10.7 million, adjusted for non-cash share-based compensation expense of $0.9 million and net cash outflows from the changes in our operating assets and liabilities of $1.0 million. Net cash used in operating activities for the three months ended March 31, 2017 was primarily related to our net loss of $13.4 million, adjusted for non-cash share-based compensation expense of $1.3 million and net cash outflows from the changes in our operating assets and liabilities of $2.0 million.

Investing activities. Net cash provided by investing activities for the three months ended March 31, 2018 and 2017 was primarily due to net maturities of investment securities of $11.9 million and $4.7 million, respectively. 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 three months ended March 31, 2018 and 2017 was $8,000 and $1,000, respectively and consisted of proceeds from stock option exercises.

Funding Requirements

To date, we have not generated any revenues from product sales. We expect our expenses to fluctuate in connection with our ongoing activities, particularly as we continue to advance ATYR1923 in clinical development, continue our research and development activities with respect to potential tRNA synthetase-based therapeutics, including early efforts for our ORCA program, and seek marketing approval for product candidates that we may develop. 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 planned clinical trials of ATYR1923;

 

the scope, progress, results and costs of our research and preclinical and clinical development for our other product candidates;

 

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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 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.

Contractual Obligations and Commitments

We enter into contracts in the normal course of business with clinical trial sites and clinical supply manufacturing organizations and with vendors for preclinical safety and research studies, research supplies and other services and products purposes.  These contracts generally provide for termination after a notice period, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments. Our contractual obligations have not materially changed outside the ordinary course of our business during the three months ended March 31, 2018, as compared to those disclosed in our Annual Report on Form 10-K filed for the year ending December 31, 2017.

Recent Accounting Pronouncements

For discussion of recently issued accounting pronouncements, refer to Item 1 of Part I, Notes to Condensed Consolidated Financial Statements (unaudited) – Note 1 – Recent Accounting Pronouncements.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. As of March 31, 2018, we had cash and cash equivalents, and available-for-sale investments totaling of $74.1 million. We invest our excess cash in investment-grade, interest-bearing securities. The primary objective of our investment activities is to preserve principal and liquidity. To achieve this objective, we invest in money market funds, U.S. treasury and high quality marketable debt instruments of corporations and financial institutions, government sponsored and asset backed securities with contractual maturity dates of less than two years. If interest rates were to increase instantaneously and uniformly by 100 basis points, compared to interest rates as of March 31, 2018, the increase would not have had a material effect on the fair market value of our portfolio.

We do not believe that our cash, cash equivalents and investments have significant risk of default or illiquidity. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

 

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Our Term Loans bear interest at variable rates equal to the sum of 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%. Accordingly, increases in these published rates would increase our interest payments under the Term Loans. A one percentage point increase in interest rates would increase expense by approximately $0.2 million annually and would not materially affect our results of operations.  

Foreign Currency Exchange Risk

We incur expenses, including for clinical research organizations and clinical trial sites, outside the United States based on contractual obligations denominated in currencies other than the U.S. dollar, including Pounds Sterling, Euro and Australian dollar. At the end of each reporting period, these liabilities are converted to U.S. dollars at the then-applicable foreign exchange rate. As a result, our business is affected by fluctuations in exchange rates between the U.S. dollar and foreign currencies. We do not enter into foreign currency hedging transactions to mitigate our exposure to foreign currency exchange risks. Exchange rate fluctuations may adversely affect our expenses, results of operations, financial position and cash flows. The Pounds Sterling has experienced higher volatility as a result of the British political decision to leave the European Union (Brexit). However, to date, fluctuations including those related to Brexit have not had a significant impact to us and a movement of 10% in the U.S. dollar to Pounds Sterling or U.S. dollar to Euro exchange rates as of March 31, 2018, would not have a material effect on our results of operations or financial condition.

Effects of Inflation

Inflation generally affects us by increasing our cost of labor, manufacturing, clinical trial, and other research and development and administration costs. We do not believe that inflation has had a material effect on our results of operations or financial condition during the periods presented.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2018. Based on this evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings at this time. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial condition. Regardless of the outcome, litigation can have an adverse effect on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors

You should carefully consider the following risk factors, as well as the other information in this report and in our other public filings. The occurrence of any of these risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described in our public filings when evaluating our business.  

Risks related to our financial condition and need for additional capital

We will need to raise additional capital or enter into strategic partnering relationships to fund our operations.

We are currently advancing two therapeutic programs in different therapeutic areas.   The development of therapeutic product candidates is expensive, and we expect our research and development expenses to increase.

As of March 31, 2018, our cash, cash equivalents and available-for-sale investments were approximately $74.1 million. We expect that our existing cash, cash equivalents and available-for-sale investments will be sufficient to fund our current operations through at least the next 12 months. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity offerings or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. Our future funding requirements will depend on many factors, including but not limited to:

 

the number and characteristics of product candidates that we pursue;

 

the scope, rate of progress, results and cost of our clinical trials, nonclinical testing, and other related activities;

 

the cost of manufacturing clinical supplies, and establishing commercial supplies, of our product candidates and any products that we may develop;

 

the cost, timing, and outcomes of regulatory review of our product candidates;

 

the cost and timing of establishing sales, marketing, and distribution capabilities; and

 

the terms and timing of any collaborative, licensing, and other arrangements that we may establish, including any required milestone and royalty payments thereunder.

In any event, we will require additional capital to complete additional clinical trials, including larger, pivotal clinical trials, to obtain regulatory approval for, and to commercialize, our product candidates.

Raising funds in the current economic environment may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations. 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.

The terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would cause dilution to all of our stockholders. The incurrence of additional indebtedness would increase our fixed payment obligations and may require us to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and

 

23


 

other operating restrictions that could adversely impact our ability to conduct our business. In addition, any fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates.

For some of our programs and product candidates, we may decide to enter into strategic partnerships, including collaborations with pharmaceutical and biotechnology companies, to enhance and accelerate the development and potential commercialization of our product candidates.  For example, we have decided not to pursue additional clinical development of ATYR1940 without a significant collaboration or strategic partnership for this program.  We face significant competition in seeking appropriate partners, and the negotiation process is time-consuming and complex.  Moreover, we may not be successful in our efforts to establish a strategic partnership or other collaborative arrangement for ATYR1940 or any of our other product candidates and programs for a variety of reasons, including strategic fit with partners and differences in analysis of commercial value and regulatory risk. We may not be able to negotiate strategic partnerships on a timely basis, on acceptable terms or at all.  We are unable to predict when, if ever, we will enter into any strategic partnership because of the numerous risks and uncertainties associated with establishing strategic partnerships.  Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such strategic partnerships if, for example, we encounter unfavorable results or delays during development or approval of a product candidate or sales of an approved product are lower than expectations.  

 

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a clinical stage biotherapeutics company, and we have not yet generated any revenues from product sales. We have incurred net losses in each year since our inception in 2005, including net losses of $10.7 million, and $13.4 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we had an accumulated deficit of $274.9 million.

We have devoted most of our financial resources to research and development, including our clinical and preclinical development activities. To date, we have financed our operations primarily through the sale of equity securities and convertible debt and through venture debt and term loans. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, grant funding or strategic collaborations. We have not commenced pivotal clinical trials for any product candidate and it will be several years, if ever, before we have a product candidate ready for commercialization. Even if we obtain regulatory approval to market a product candidate, our future revenues will depend upon the size of any markets in which our product candidates have received approval, and our ability to achieve sufficient market acceptance, reimbursement from third-party payors and adequate market share for our product candidates in those markets.

We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will fluctuate in connection with our ongoing activities as we: continue our research and preclinical and clinical development of ATYR1923 or any other product candidates that we may develop; further develop the manufacturing process for our product candidates; seek regulatory approvals for our product candidates that successfully complete clinical trials; ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; seek to identify and validate additional product candidates; maintain, protect and expand our intellectual property portfolio; acquire or in-license other product candidates and technologies; attract and retain skilled personnel; and create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts.

The net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our stock price to decline.

We have never generated any revenue from product sales and may never be profitable.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize our product candidates. We do not anticipate generating revenues from product sales for the foreseeable future, if ever. Our ability to generate future revenues from product sales depends heavily on our success in:

 

completing research, preclinical development and clinical development of our product candidates, potentially with a strategic partner in one or more of our programs;

 

seeking and obtaining regulatory approvals for product candidates for which we complete clinical trials;

 

developing a sustainable, scalable, reproducible, and transferable manufacturing process for our product candidates and establish supply and manufacturing relationships with third parties;

 

24


 

 

launching and commercializing product candidates for which we obtain regulatory approval, either by collaborating with a partner or, if launched independently, by establishing a sales force, marketing and distribution infrastructure;

 

maintaining, protecting and expanding our intellectual property portfolio;

 

obtaining market acceptance of tRNA synthetase-based therapeutics and our product candidates as viable treatment options for our target indications;

 

identifying and validating new therapeutic product candidates based on tRNA synthetase biology;

 

attracting, hiring and retaining qualified personnel; and

 

negotiating favorable terms in any licensing, collaboration or other arrangements into which we may enter.

Even if one of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any such approved product candidate. Our expenses could increase beyond expectations if we are required by the FDA or other regulatory agencies, domestic or foreign, to perform clinical trials and other studies in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

We have a significant amount of debt that may cause risks that could adversely affect our business, operating results and financial condition. 

In November 2016, we entered into a loan and security agreement, or Loan Agreement, for term loans with Silicon Valley Bank and Solar Capital Ltd., to borrow up to $20.0 million principal in new term loans, $10.0 million of which was funded in November 2016, $5.0 million of which was funded in June 2017 and $5.0 million of which was funded in December 2017. The Term Loans are secured by substantially all of our assets and the assets of our domestic subsidiaries, except that the collateral does not include any intellectual property held by us or our respective subsidiaries or more than 65% of any voting securities in our foreign subsidiaries owned or held of record by us. However, pursuant to the terms of a negative pledge arrangement, we have agreed not to encumber any of the intellectual property of ours or our subsidiaries. The level and nature of our indebtedness could, among other things:

 

make it difficult for us to obtain any necessary financing in the future;

 

limit our flexibility in planning for or reacting to changes in our business;

 

reduce funds available for use in our operations and corporate development initiatives;

 

impair our ability to incur additional debt because of financial and other restrictive covenants or the liens on our assets that secure our current debt;

 

hinder our ability to raise equity capital, because in the event of a liquidation of our business, debt holders receive a priority before equity holders;

 

make us more vulnerable in the event of a downturn in our business; and

 

place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.

We may also incur significantly more debt in the future, which will increase each of the risks described above related to our indebtedness.

The Loan Agreement restricts, among other things, our ability to: convey, sell, lease, transfer, assign or otherwise dispose of certain of our assets; engage in any business other than the businesses we currently engage in or reasonably related thereto or reasonable extensions thereof; undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness;  grant certain liens; pay dividends and make certain other restricted payments; make certain investments; enter into any material transactions with any affiliates, with certain exceptions; or permit certain of our subsidiaries to hold or maintain certain assets in excess of certain specified amounts. The Loan Agreement includes a material adverse change clause, which enables the Lenders to require immediate repayment of the outstanding debt. The material adverse change clause covers a material impairment in the perfection or priority of the lenders’ lien in the underlying collateral or in the value of such collateral, material adverse change in business operations or condition or material impairment of our prospects for repayment of any portion of the remaining debt obligation.

The operating restrictions and covenants in the Loan Agreement, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies.

 

25


 

Our ability to comply with these covenants may be affected by events beyond our control and we may not be able to meet those covenants. A breach of any of the covenants under the Loan Agreement could result in a default under the Loan Agreement, which could cause all of the outstanding indebtedness under the Term Loans to become immediately due and payable.

Risks related to the discovery, development and regulation of our product candidates based on tRNA synthetase biology

Our current product candidates and any other product candidates that we may develop from our discovery engine represent novel therapeutic approaches, which may cause significant delays or may not result in any commercially viable drugs.

We have concentrated our research and development efforts on extracellular functions of tRNA synthetase biology, a newly discovered area of biology. Our future success is highly dependent on the successful development of product candidates based on tRNA synthetase biology, including our current product candidates and additional product candidates arising from the Resokine pathway or other pathways. Extracellular tRNA synthetase-based biology represents a novel approach to drug discovery and development, and to our knowledge, no drugs have been developed using, or based upon, this approach. Despite the successful development of other naturally occurring proteins, such as erythropoietin and insulin, as therapeutics, proteins and related antibodies from the Resokine pathway and from other tRNA synthetase pathways represent a novel class of protein therapeutics, and our development of these therapeutics is based on our new understanding of human physiology. In particular, the mechanism of action of tRNA synthetases and their role in immuno-modulation and tissue regeneration have not been studied extensively, nor has the safety of this class of protein therapeutics been evaluated extensively in humans. The therapeutic product candidates that we elect to develop may not have the physiological functions that we currently ascribe to them, may have limited or no therapeutic applications, or may present safety problems of which we are not yet aware. We cannot be sure that our discovery engine will yield therapeutic product candidates that are safe, effective, approvable by regulatory authorities, manufacturable, scalable, or profitable.

Because our work in tRNA synthetase biology and our product candidates represent a new therapeutic approach, developing and commercializing our product candidates subjects us to a number of challenges, including:

 

defining indications within our targeted diseases and clinical endpoints within each indication that are appropriate to support regulatory approval;

 

obtaining regulatory approval from the U.S. Food and Drug Administration, or the FDA, and other regulatory authorities that have little or no experience with the development of extracellular tRNA synthetase-based therapeutics;

 

educating medical personnel regarding the potential side effect profile of each of our product candidates, such as the potential for the development of antibodies against our purified protein therapeutics;

 

developing processes for the safe administration of these product candidates, including long-term follow-up for all patients who receive our product candidates;

 

sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process our product candidates;

 

developing a manufacturing process and distribution network that ensures consistent manufacture of our product candidates in compliance with current Good Manufacturing Practices, or cGMPs, and related requirements, with a cost of goods that allows for an attractive return on investment;

 

establishing sales and marketing capabilities after obtaining any regulatory approval to gain market acceptance; and

 

developing therapeutics for diseases or indications beyond those addressed by our current product candidates.

Moreover, public perception of safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical trials, or if approved, of physicians to adopt and prescribe novel therapeutics. Physicians, hospitals and third-party payors often are slow to adopt new products, technologies and treatment practices. Physicians may decide the therapy is too complex or unproven to adopt and may choose not to administer the therapy. Based on these and other factors, healthcare providers and payors may decide that the benefits of any therapeutic candidates for which we receive regulatory approval do not or will not outweigh its costs. Any inability to successfully develop commercially viable drugs would have an adverse impact on our business, prospects, financial condition and results of operations.

Data generated in our preclinical studies and patient sample data relating to the Resokine pathway may not be predictive or indicative of the immuno-modulatory activity or therapeutic effects, if any, of our product candidates in patients.

Our scientists discovered the Resokine pathway using in vivo screening systems designed to test potential immuno-modulatory activity in animal models of severe immune activity or inflammation, combined with data relating to the potential blockade of the Resokine pathway in a population of patients with myopathy that occurs in a particular rare disease, anti-synthetase syndrome, with Jo-1 antibodies. Translational medicine, or the application of basic scientific findings to develop therapeutics that promote human

 

26


 

health, is subject to a number of inherent risks. In particular, scientific hypotheses formed from nonclinical observations may prove to be incorrect, and the data generated in animal models or observed in limited patient populations may be of limited value, and may not be applicable in clinical trials conducted under the controlled conditions required by applicable regulatory requirements and our protocols. Our knowledge of the activity of this pathway in Jo-1 antibody patients may not be applicable to our target patient populations. In addition, our classification of diseases based on the existence of excessive immune cell activation or lack thereof and our hypothesis that these represent potential indications for our product candidates may not prove to be therapeutically relevant. Accordingly, the conclusions that we have drawn from animal studies and patient sample data regarding the potential immuno-modulatory activity of molecules containing the immuno-modulatory domain, or iMod domain, may not be substantiated in other animal models or in clinical trials. Any failure to demonstrate in controlled clinical trials the requisite safety and efficacy of our product candidates will adversely affect our business, prospects, financial condition and results of operations.

If we are unable to successfully complete or otherwise advance clinical development, obtain regulatory or marketing approval for, or successfully commercialize our therapeutic product candidates or experience significant delays in doing so, our business will be materially harmed.

To date, we have expended significant time, resources and effort on the discovery and development of product candidates related to the Resokine pathway, including conducting preclinical studies and clinical trials. We have not yet commenced or completed any evaluation of our product candidates in human clinical trials designed to demonstrate efficacy to the satisfaction of the FDA. Before we can market or sell our therapeutic candidates in the United States or foreign jurisdictions, we will need to commence and complete additional clinical trials (including larger, pivotal trials, which we have not yet commenced), manage clinical and manufacturing activities, obtain necessary regulatory approvals from the FDA in the United States and from similar regulatory authorities in other jurisdictions, obtain adequate clinical and commercial manufacturing supplies, build commercial capabilities, which may include entering into a marketing collaboration with a third party, and in some jurisdictions, obtain reimbursement authorization, among other things. We cannot assure you that we will be able to successfully complete the necessary clinical trials, obtain regulatory approvals, secure an adequate commercial supply for, or otherwise successfully commercialize our therapeutic candidates. If we do not receive regulatory approvals for our product candidates, and even if we do obtain regulatory approvals, we may never generate significant revenues, if any, from commercial sales. If we fail to successfully commercialize our therapeutic candidates, we may be unable to generate sufficient revenues to sustain and grow our company, and our business, prospects, financial condition and results of operations will be adversely affected.

We may encounter substantial delays and other challenges in our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical trials are expensive, time-consuming, often delayed and uncertain as to outcome. We cannot guarantee that any clinical trials that we are conducting or may plan to conduct, will be initiated or conducted as planned or completed on schedule, if at all. For example, following our submission of an investigational new drug application, or IND, to the FDA to evaluate ATYR1940 in our Phase 1b/2 trial in adult patients with FSHD in the United States, our IND was placed on full clinical hold to address the issue of the comparability of the drug substance used in our preclinical toxicology studies to that previously used with that proposed for use in the U.S. clinical trial. After we submitted our response, in January 2015, FDA removed our IND from full clinical hold, allowing us to initiate the Phase 1b/2 trial in the United States. Our IND was placed on partial clinical hold, which prohibited the evaluation of ATYR1940 at doses higher than 3.0 mg/kg. The FDA lifted the partial clinical hold in December 2016.  We cannot assure you that our product candidates will not be subject to new clinical holds or significant delay in the future.  Any inability to initiate or complete our clinical trials of our product candidates in the United States, as a result of clinical holds or otherwise, would delay our clinical development plans, may require us to incur additional clinical development costs and could impair our ability to obtain U.S. regulatory approval for such product candidates.

A failure of one or more clinical trials can occur at any stage of testing, and our clinical trials may not be successful. Events that may prevent successful or timely completion of clinical development include, but are not limited to:

 

inability to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation of human clinical trials, including trials of certain dosages;

 

delays in reaching consensus with regulatory agencies on trial design;

 

delays in reaching agreement on acceptable terms with prospective clinical contract research organizations, or CROs, and clinical trial sites;

 

delays in obtaining required Institutional Review Board, or IRB, or Ethics Committee approval at each clinical trial site;

 

delays in recruiting suitable patients to participate in our clinical trials, or delays that may result if the number of patients required for a clinical trial is larger than we anticipate;

 

27


 

 

imposition of a clinical hold by regulatory agencies, which may occur after our submission of data to these agencies or an inspection of our clinical trial operations or trial sites;

 

failure by our CROs, investigators, other third parties or us to adhere to clinical trial requirements;

 

failure to perform in accordance with the FDA’s good clinical practices, or GCPs, or applicable regulatory requirements in other countries;

 

delays in the testing, validation, manufacturing and delivery of our product candidates to the clinical sites;

 

delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

disagreements with regulators regarding our interpretation of data from preclinical studies or clinical trials;

 

occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits; or

 

changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

Any delay in or inability to successfully complete preclinical and clinical development could result in additional costs to us and impair our ability to generate revenue. In addition, if we make manufacturing or formulation changes to our product candidates (as we did with ATYR1940 with changes in our contract manufacturer, production capacity and manufacturing cell line), we may need to conduct additional studies to bridge our modified product candidates to earlier versions.

If the results of our clinical trials are perceived to be negative or inconclusive, or if there are safety concerns or adverse events associated with our product candidates, we may be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements; be delayed in obtaining marketing approval for our product candidates, if at all; obtain approval for indications or patient populations that are not as broad as intended or desired; obtain approval with labeling that includes significant use or distribution restrictions or safety warnings; be subject to changes in the way the product is manufactured or administered; have regulatory authorities withdraw their approval of the product or impose restrictions on its distribution in the form of a modified risk evaluation and mitigation strategy, or REMS; be subject to litigation; or experience damage to our reputation.

To date, the safety and efficacy of tRNA synthetase-based therapeutics in humans has not been studied to any significant extent. Accordingly, our product candidates could potentially cause adverse events that have not yet been predicted. In addition, the inclusion of critically ill patients in our clinical trials may result in deaths or other adverse medical events due to the natural progression of the disease. As described above, any of these events could prevent us from successfully completing the clinical development of our product candidates and impair our ability to commercialize any products.

Our therapeutic product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates, or safety, tolerability or toxicity issues that may occur in our preclinical studies, clinical trials or in the future, could cause us or regulatory authorities to interrupt, restrict, delay, or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities.

In our Phase 1b/2 clinical trials for ATYR1940, we observed low levels of antibodies to ATYR1940 in some subjects in response to the administration of ATYR1940. Although such elevated antibody observations were without associated clinical symptoms, the development of higher levels of such antibodies over a longer course of treatment may ultimately limit the efficacy of ATYR1940 and trigger a negative autoimmune response, including the development of anti-synthetase syndrome. Anti-synthetase syndrome can include one or more of the following clinical features: ILD, inflammatory myopathy and inflammatory polyarthritis. Some patients in our Phase 1b/2 clinical trials of ATYR1940 experienced generalized infusion related reactions, or IRRs, and discontinued dosing. We established procedural measures, including a decreased concentration and intravenous delivery rate of ATYR1940, in an effort to minimize the occurrence of generalized IRRs and the formation of anti-drug antibodies. After implementation of these procedures, we did observe a decreased rate of IRRs in our clinical trials, but we cannot assure that these measures will be effective in minimizing the occurrence of generalized IRRs or the formation of anti-drug antibodies in any future clinical trials, or result in the retention of patients in future clinical trials. Generalized IRRs and other complications or side effects could harm further development and/or commercialization of our product candidates. Additionally, our product candidates are designed to be administered by intravenous injection, which may cause side effects, including acute immune responses and injection site reactions. The risk of adverse immune responses remains a significant concern for protein therapeutics, and we cannot assure that these or other risks will not occur in any of our clinical trials our product candidates. There is also a risk of delayed adverse events as a result of long-term exposure to protein therapeutics that must be administered repeatedly for the management of chronic conditions, such as the development of antibodies, which may occur over time. If any such adverse events occur, which may include the

 

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development of anti-synthetase syndrome from antibodies or the occurrence of IRRs associated with antibodies, further advancement of our clinical trials could be halted or delayed, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

If one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects or other safety concerns caused by such products, a number of potentially significant negative consequences could result.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, prospects, financial condition and results of operations.

We may not be successful in our efforts to identify or discover additional product candidates.

A key element of our strategy is to leverage our discovery engine to identify extracellular proteins derived from tRNA synthetases (or antibodies targeting tRNA synthetase biology) to develop product candidates that are suitable for therapeutic application. A significant portion of the research that we are conducting involves new compounds and drug discovery methods, including our proprietary technology. Our drug discovery activities using our proprietary technology may not be successful in identifying product candidates that are useful in treating diseases. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:

 

the research methodology used may not be successful in identifying appropriate potential product candidates; or

 

potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be product candidates that will receive marketing approval and achieve market acceptance.

Research programs to identify new product candidates require substantial technical, financial and human resources. We may choose to focus our efforts and resources on a potential product candidate that ultimately proves to be unsuccessful. If we are unable to identify suitable product candidates for preclinical and clinical development and regulatory approval, we will not be able to generate product revenues, which would have an adverse impact on our business, prospects, financial condition and results of operations.

We may encounter difficulties enrolling patients in our clinical trials for a variety of reasons, including the limited number of patients who have the diseases for which certain of our product candidates are being studied, which could delay or halt the clinical development of our product candidates.

Identifying and qualifying patients to participate in clinical trials for our product candidates is critical to our success. Certain of the conditions for which we may elect to evaluate our product candidates may be rare diseases with limited patient pools from which to draw for clinical trials. The eligibility criteria for our clinical trials may further limit the pool of available participants in our trials. We may be unable to identify and enroll a sufficient number of patients with the disease in question and who meet the eligibility criteria for, and are willing to participate in, our clinical trials. Once enrolled, patients may decide or be required to discontinue from our clinical trials due to inconvenience, burden of trial requirements, adverse events associated with our product candidates or limitations required by trial protocols.

Our ability to identify, recruit, enroll and maintain a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical trials in a timely manner may also be affected by other factors, including:

 

proximity and availability of clinical trial sites for prospective patients;

 

severity of the disease under investigation;

 

design of the study protocol and the burdens to patients of compliance with our study protocols;

 

perceived risks and benefits of the product candidate under study;

 

availability of competing therapies and clinical trials for the patient populations and indications under study;

 

efforts to facilitate timely enrollment in clinical trials;

 

patient referral practices of physicians; and

 

ability to monitor patients adequately during and after treatment.

 

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We plan to seek initial marketing approval in the United States. We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible patients to participate in the clinical trials required by the FDA or other regulatory agencies. Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including:

 

difficulty in establishing or managing relationships with CROs and physicians;

 

different requirements and standards for the conduct of clinical trials;

 

our inability to locate qualified local consultants, physicians and partners; and

 

the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.

Additionally, if patients are unwilling to participate in our clinical trials because of negative publicity from adverse events in our clinical trials or in the biotechnology or protein therapeutics industries or for other reasons, including competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential products may be delayed. These delays could result in increased costs, delays in advancing our product development or termination of our clinical trials altogether. If we have difficulty enrolling and maintaining a sufficient number of patients to conduct our clinical trials as planned for any reason, we may need to delay, limit or terminate clinical trials, any of which would have an adverse effect on our business, prospects, financial condition and results of operations.

We may face manufacturing stoppages and other challenges associated with the clinical or commercial manufacture of our tRNA synthetase-based therapeutics.

All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contracted development and manufacturing organizations (CDMOs) for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or use in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our CDMOs must supply all necessary documentation in support of a biologics license application, or BLA, or a new drug application, or NDA, on a timely basis and must adhere to the FDA’s GLP and cGMP regulations enforced by the FDA through its facilities inspection program. The facilities and quality systems of our CDMOs and other CROs must pass a pre-approval inspection for compliance with applicable regulations as a condition of regulatory approval of our product candidates. If these facilities do not pass a pre-approval plant inspection, FDA approval of the products will not be granted.

The regulatory authorities also may, at any time following approval of a product for sale, audit the facilities in which the product is manufactured. If any such inspection or audit of our facilities or those of our CDMOs and CROs identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independently of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly or time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business.

If we or any of our CDMOs and CROs fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new biologic product or drug product, or revocation of a pre-existing approval. Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in clinical or commercial supply. An alternative manufacturer would need to be qualified through a BLA or NDA supplement which could result in further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

In addition, the manufacture of our tRNA synthetase-based therapeutic candidates presents challenges associated with biologics production, including the inherent instability of larger, more complex molecules and the need to ensure uniformity of the drug substance produced in different facilities or across different batches. For example, we changed cell lines for the production of ATYR1940 in connection with the engagement of a new CDMO and a commercial chemistry, manufacturing and controls specification, which may present production challenges or delays. The process of manufacturing biologics is extremely susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error.  Even minor deviations from normal manufacturing and distribution processes for any of our product candidates could result in reduced

 

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production yields, product defects, and other supply disruptions. Furthermore, although tRNA synthetases represent a class of proteins that may share immuno-modulatory properties in various physiological pathways, each tRNA synthetase has a different structure and may have unique manufacturing requirements that are not applicable across the entire class. For example, Fc fusion proteins, such as ATYR1923, include an additional antibody domain to improve pharmacokinetic, or PK, characteristics, and may therefore require a more complex and time-consuming manufacturing process than other tRNA synthetase-based therapeutic candidates. Currently, we are producing our ATYR1923 molecule in E.coli by expression in inclusion bodies and refolding to recreate the native structure. The manufacturing processes for one of our product candidates may not be readily adaptable to other product candidates that we develop, and we may need to engage multiple third-party manufacturers to produce our product candidates. Any adverse developments affecting manufacturing operations for our product candidates may result in shipment delays, inventory shortages, lot failures, withdrawals or recalls or other interruptions in the supply of our drug substance and drug product which could delay the development of our product candidates.  We may also have to write off inventory, incur other charges and expenses for supply of drug product that fails to meet specifications, undertake costly remediation efforts, or seek more costly manufacturing alternatives. Any manufacturing stoppage or delay, or any inability to consistently manufacture adequate supplies of our product candidates for our clinical trials or on a commercial scale will harm our business, prospects, financial condition and results of operations.

Even if we complete the necessary preclinical studies and clinical trials, we cannot predict when or if we will obtain regulatory approval to commercialize a product candidate, and the scope of any approval may be narrower than we expect.

We cannot commercialize a product until the appropriate regulatory authorities have reviewed and approved the product candidate. Even if our product candidates demonstrate safety and efficacy in clinical trials, the regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical trials and the review process. Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested, may impose restrictions on dosing or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

Although the FDA and the European Commission have granted orphan drug designation to ATYR1940 for the treatment of facioscapulohumeral muscular dystrophy (FSHD) and limb-girdle muscular dystrophy (LGMD), we may not receive orphan drug designation for ATYR1940 in other jurisdictions or for other indications that we may pursue, or for any other of our product candidates under any new applications for orphan drug designation that we may submit, and any orphan drug designations that we have received or may receive may not confer marketing exclusivity or other expected commercial benefits.

The FDA and the European Commission have each granted orphan drug designations to ATYR1940 for the treatment of FSHD and for the treatment of LGMD. We may also apply for orphan drug designation for other product candidates and for ATYR1940, if we are able to engage a collaborative or strategic partner for further development, in other territories and for other indications. Orphan drug status confers up to ten years of marketing exclusivity in Europe, and up to seven years of marketing exclusivity in the United States, for a particular product in a specified indication. To date, we have been granted orphan drug designation for only one product candidate in the United States and the European Union for two indications. We cannot assure you that we will be able to obtain orphan drug designation, or rely on orphan drug or similar designations to exclude other companies from manufacturing or selling products using the same principal mechanisms of action for the same indications that we pursue beyond these timeframes. Furthermore, marketing exclusivity in Europe can be reduced from ten years to six years if the initial designation criteria have significantly changed since the market authorization of the orphan product. Even if we are the first to obtain marketing authorization for an orphan drug indication, there are circumstances under which a competing product may be approved for the same indication during the period of marketing exclusivity, such as if the later product is shown to be clinically superior to the orphan product, or if the later product is deemed a different product than ours. Further, the marketing exclusivity would not prevent competitors from obtaining approval of the same product candidate as ours for indications other than those in which we have been granted orphan drug designation, or for the use of other types of products in the same indications as our orphan product.

A breakthrough therapy or fast track designation by the FDA may not lead to expedited development or regulatory review or approval.

In October 2016 and January 2017, the FDA granted ATYR1940 fast track designations for the treatment of FSHD and LGMD2B, respectively. We may also seek, from time to time, breakthrough therapy or fast track designation for our other pro