life-10q_20180930.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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

 

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

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

As of November 8, 2018, there were 30,023,543 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 


 

ATYR PHARMA, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

3

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

3

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2018 and 2017 (unaudited)

 

4

Condensed Consolidated Statements of Comprehensive Loss for the three months and nine months ended September 30, 2018 and 2017 (unaudited)

 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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

 

52

Item 3. Defaults Upon Senior Securities

 

52

Item 4. Mine Safety Disclosures

 

52

Item 5. Other Information

 

52

Item 6. Exhibits

 

53

SIGNATURES

 

55

 

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

aTyr Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,547

 

 

$

21,091

 

Available-for-sale investments, short-term

 

 

24,414

 

 

 

64,028

 

Prepaid expenses and other assets

 

 

1,684

 

 

 

1,866

 

Total current assets

 

 

57,645

 

 

 

86,985

 

Property and equipment, net

 

 

2,039

 

 

 

2,280

 

Other assets

 

 

90

 

 

 

90

 

Total assets

 

$

59,774

 

 

$

89,355

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

599

 

 

$

2,276

 

Accrued expenses

 

 

2,382

 

 

 

3,103

 

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

 

 

7,742

 

 

 

5,012

 

Total current liabilities

 

 

10,723

 

 

 

10,391

 

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

 

 

10,065

 

 

 

14,719

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; undesignated authorized shares – 5,000,000 at September 30, 2018 and December 31 2017; Class X Convertible Preferred Stock issued and outstanding shares – 2,285,952 as of September 30, 2018 and December 31, 2017

 

 

2

 

 

 

2

 

Common stock, $0.001 par value; authorized shares – 150,000,000 as of September 30, 2018 and December 31, 2017; issued and outstanding shares – 29,865,509 and 29,789,162 as of September 30, 2018 and December 31, 2017, respectively

 

 

30

 

 

 

30

 

Additional paid-in capital

 

 

331,390

 

 

 

328,519

 

Accumulated other comprehensive loss

 

 

(57

)

 

 

(120

)

Accumulated deficit

 

 

(292,379

)

 

 

(264,186

)

Total stockholders’ equity

 

 

38,986

 

 

 

64,245

 

Total liabilities and stockholders’ equity

 

$

59,774

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,202

 

 

$

7,133

 

 

$

16,836

 

 

$

24,757

 

General and administrative

 

 

2,475

 

 

 

3,694

 

 

 

10,021

 

 

 

11,188

 

Total operating expenses

 

 

6,677

 

 

 

10,827

 

 

 

26,857

 

 

 

35,945

 

Loss from operations

 

 

(6,677

)

 

 

(10,827

)

 

 

(26,857

)

 

 

(35,945

)

Total other expense, net

 

 

(437

)

 

 

(363

)

 

 

(1,336

)

 

 

(788

)

Net loss

 

 

(7,114

)

 

 

(11,190

)

 

 

(28,193

)

 

 

(36,733

)

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

 

$

(0.24

)

 

$

(0.43

)

 

$

(0.95

)

 

$

(1.50

)

Weighted average common stock shares outstanding, basic and diluted

 

 

29,858,393

 

 

 

25,818,008

 

 

 

29,832,424

 

 

 

24,462,835

 

See accompanying notes.

 

 

 

4


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Net loss

 

$

(7,114

)

 

$

(11,190

)

 

$

(28,193

)

 

$

(36,733

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

28

 

 

 

(6

)

 

 

63

 

 

 

13

 

Comprehensive loss

 

$

(7,086

)

 

$

(11,196

)

 

$

(28,130

)

 

$

(36,720

)

 

See accompanying notes.

 

 

 

5


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(28,193

)

 

$

(36,733

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

567

 

 

 

552

 

Stock-based compensation

 

 

2,829

 

 

 

3,649

 

Debt discount accretion and non-cash interest expense

 

 

743

 

 

 

414

 

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

 

 

(213

)

 

 

113

 

Deferred rent

 

 

 

 

 

(130

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

182

 

 

 

802

 

Accounts payable and accrued expenses

 

 

(2,139

)

 

 

(725

)

Net cash used in operating activities

 

 

(26,224

)

 

 

(32,058

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(585

)

 

 

(1,152

)

Purchases of available-for-sale investment securities

 

 

(23,375

)

 

 

(65,302

)

Maturities of available-for-sale investment securities

 

 

63,265

 

 

 

42,347

 

Net cash provided by (used in) investing activities

 

 

39,305

 

 

 

(24,107

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock through option exercises

 

 

14

 

 

 

37

 

Proceeds from issuance of common stock through employee purchase plan

 

 

28

 

 

 

88

 

Proceeds from borrowing, net

 

 

 

 

 

4,930

 

Repayment on borrowing

 

 

(2,667

)

 

 

 

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

 

 

 

 

 

42,487

 

Net cash (used in) provided by financing activities

 

 

(2,625

)

 

 

47,542

 

Net change in cash and cash equivalents

 

 

10,456

 

 

 

(8,623

)

Cash and cash equivalents at beginning of period

 

 

21,091

 

 

 

38,388

 

Cash and cash equivalents at the end of period

 

$

31,547

 

 

$

29,765

 

 

 

 

 

 

 

 

 

 

 

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 development of innovative medicines based on novel immunological pathways.

In May 2018, we implemented a corporate restructuring and program prioritization plan (Restructuring Plan) to streamline our operations and concentrate development efforts on the advancement of our therapeutic candidate, ATYR1923.  In connection with the Restructuring Plan, we reduced our workforce by approximately 30% to 42 full-time employees.  We completed the workforce reduction in June 2018. We recorded 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 according with our Executive Severance and Change in Control Policy.

Principles of Consolidation

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

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) and 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. 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 September 30, 2018, we had an accumulated deficit of $292.4 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 $56.0 million as of September 30, 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 inability 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.

 

7


 

Use of Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements and accompanying notes. The most significant estimates in our condensed consolidated financial statements relate to the 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.

Reclassifications

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

 

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. For the three months and nine months ended September 30, 2017, we have excluded 175 shares and 4,607 shares, respectively, subject to repurchase from the weighted average number of common shares outstanding. 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):

 

 

Three and Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Class X Convertible Preferred Stock (if-converted)

 

 

11,429,760

 

 

 

11,429,760

 

Warrants for common stock

 

 

6,682,708

 

 

 

6,642,332

 

Common stock options and restricted stock units

 

 

5,618,490

 

 

 

4,745,715

 

Employee stock purchase plan

 

 

27,196

 

 

 

38,862

 

 

 

 

23,758,154

 

 

 

22,856,669

 

 

Recent Accounting Pronouncements

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 condensed consolidated financial statements and related disclosures as we have 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 condensed consolidated balance sheet.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this update require an entity to apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.  ASU No. 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of

 

8


 

Topic 606. We are currently evaluating the impact of ASU No. 2018-07 and do not expect the adoption of this guidance will have a material impact on our condensed consolidated financial position or results of operations.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements to provide updates for technical corrections, clarifications, and other minor improvements that affect wide variety of Topics in the Codification including Amendments to Subtopic 718-40, Compensation–Stock Compensation–Income Taxes, which clarifies that an entity should recognize excess tax benefits (that is, the difference in tax benefits between the deduction for tax purposes and the compensation cost recognized for financial statement reporting) in the period in which the amount of the deduction is determined. This includes deductions that are taken on the entity’s tax return in a different period from when the event that gives rise to the tax deduction occurs and the uncertainty about whether (1) the entity will receive a tax deduction and (2) the amount of the tax deduction is resolved. ASU No. 2018-09 included other Topics which currently do not apply to us. The transition and effective date of ASU No. 2018-09 are based on the facts and circumstances of each amendment. Some of the amendments in ASU No. 2018-09 do not require transition guidance and are effective immediately and others have transition guidance with effective dates for annual periods beginning after December 15, 2018 for public business entities. We do not expect the adoption of this guidance will have a material impact on our condensed consolidated financial position or results of operations.

2. Fair Value Measurements

The carrying amounts of cash equivalents, prepaid expenses 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

 

 

 

Total

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

As of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

21,475

 

 

$

21,475

 

 

$

 

 

$

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

3,744

 

 

 

 

 

 

3,744

 

 

 

 

Commercial paper

 

 

5,787

 

 

 

 

 

 

5,787

 

 

 

 

Corporate debt securities

 

 

7,894

 

 

 

 

 

 

7,894

 

 

 

 

United States Treasury securities

 

 

6,989

 

 

 

6,989

 

 

 

 

 

 

 

Sub-total short-term investments

 

 

24,414

 

 

 

6,989

 

 

 

17,425

 

 

 

 

Total assets measured at fair value

 

$

45,889

 

 

$

28,464

 

 

$

17,425

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2018 and December 31, 2017 available-for-sale investments are detailed as follows (in thousands):

 

 

 

September 30, 2018

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Available-for-sale investments, short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

3,745

 

 

$

 

 

$

(1

)

 

$

3,744

 

Commercial paper

 

 

5,787

 

 

 

 

 

 

 

 

 

5,787

 

Corporate debt securities

 

 

7,896

 

 

 

 

 

 

(2

)

 

 

7,894

 

United States Treasury securities

 

 

6,993

 

 

 

 

 

 

(4

)

 

 

6,989

 

 

 

$

24,421

 

 

$

 

 

$

(7

)

 

$

24,414

 

 

 

 

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 September 30, 2018, all of our available-for-sale investments have a variety of effective maturity dates of less than one year. As of September 30, 2018, there are 11 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 September 30, 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. Accordingly, we started paying the Term Loans in June 2018. 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 September 30, 2018, the carrying value of our Term Loans consists of $17.3 million principal outstanding less the remaining debt issuance costs of $0.4 million. The debt issuance costs have been recorded as a debt discount that 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):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Debt balance

 

$

17,333

 

 

$

20,000

 

Less debt issuance costs and discount

 

 

(163

)

 

 

(345

)

Long-term debt, net of issuance costs and discount

 

 

17,170

 

 

 

19,655

 

Less current portion of long-term debt

 

 

(8,000

)

 

 

(5,333

)

Add accrual of final payment

 

 

895

 

 

 

397

 

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

 

$

10,065

 

 

$

14,719

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

8,000

 

 

$

5,333

 

Less current portion of debt issuance costs and discount

 

 

(258

)

 

 

(321

)

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

 

$

7,742

 

 

$

5,012

 

 

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

 

 

 

September 30, 2018

 

2018

 

$

2,000

 

2019

 

 

8,000

 

2020

 

 

7,333

 

 

 

$

17,333

 

 

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 originally expired in May 2019. In July 2018, we entered into a lease amendment to our facility lease. The amendment reduced the space we lease from 24,494 square feet to 20,508 square feet and extended the lease term to May 2023.  Rent expense for the three months ended September 30, 2018 and 2017 was $0.3 million and $0.3 million, respectively. Rent expense for the nine months ended September 30, 2018 and 2017 was $0.8 million and $0.7 million, respectively.

Future minimum payments under the non-cancelable operating lease as of September 30, 2018 are as follows (in thousands):

 

 

 

Operating

Lease

 

2018

 

$

240

 

2019

 

 

812

 

2020

 

 

1,002

 

2021

 

 

1,031

 

2022

 

 

1,062

 

Thereafter

 

 

403

 

 

 

$

4,550

 

 

Related Party Transactions

Research Agreements and Funding Obligations

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 September 30, 2018 and 2017, we recognized expense under the agreement in the amount of $0.5 million and $0.4 million, respectively. For the nine months ended September 30, 2018 and 2017, we recognized expense under the agreement in the amount of $1.5 million and $1.2 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. 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.  

 

12


 

Strategic Advisor Agreement

In November 2017, John D. Mendlein, Ph.D., a member of our Board of Directors since July 2010 and our Chief Executive Officer from September 2011 to November 2017, began serving as a strategic advisor to us pursuant to the terms of a strategic advisor agreement entered with Dr. Mendlein on November 1, 2017 (Strategic Advisor Agreement). Pursuant to the terms of the Strategic Advisor Agreement, we agreed to, among other things, pay Dr. Mendlein as a strategic advisor to us for a period of up to four years, at a monthly rate of $42,500 for the first year and $7,500 per month for the rest of the term. Either party may terminate the Strategic Advisor Agreement after the first year, provided that payments under the Strategic Advisor Agreement and continued vesting of outstanding employee stock options are guaranteed through the second year of the Strategic Advisor Agreement in the event the Board terminates the Strategic Advisor Agreement for convenience or Dr. Mendlein terminates for our material breach of the Strategic Advisor Agreement. For the three months and nine months ended September 30, 2018, we recognized expenses under the Strategic Advisor Agreement in the amounts of $0.1 million and $0.4 million, respectively.

4. Stockholders’ Equity

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

On August 27, 2017, we entered into a Securities Purchase Agreement (Securities Purchase Agreement) for a private placement (Private Placement) with a select group of institutional investors, including Viking Global Opportunities Illiquid Investments Sub-Master, LP (VGO Fund) and other accredited investors, certain of whom are affiliated with our directors and officers (collectively, the Purchasers). Pursuant to the Securities Purchase Agreement, (i) VGO Fund purchased 1,777,784 shares of our common stock, par value $0.001 per share (the Common Shares), at a price of $2.65 per share, 2,285,952 shares of our Class X Convertible Preferred Stock (the Preferred Shares or Preferred Stock, and together with the Common Shares, the Shares), par value $0.001 per share, at a price of $13.25 per share, and warrants to purchase up to that number of additional shares of Common Stock equal to thirty seven and one half percent (37.5%) of the number of Shares purchased by VGO Fund on an if-converted 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 shares of 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.

 

13


 

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 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.

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:

 

 

September 30, 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

 

 

5,618,490

 

Shares available under the 2015 Plan

 

 

1,153,420

 

Shares available under the 2015 ESPP

 

 

856,805

 

 

 

 

25,741,183

 

 

The following table summarizes our stock option activity under all equity incentive plans for the nine months ended September 30, 2018:

 

 

 

Number of

Outstanding

Options

 

 

Weighted

Average

Exercise Price

 

Outstanding as of December 31, 2017

 

 

4,617,059

 

 

$

5.52

 

Granted

 

 

2,029,061

 

 

$

2.40

 

Exercised

 

 

(12,141

)

 

$

1.10

 

Canceled/forfeited/expired

 

 

(1,252,089

)

 

$

4.92

 

Outstanding as of September 30, 2018

 

 

5,381,890

 

 

$

4.49

 

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Expected term (in years)

 

6.02 – 6.08

 

 

 

6.06

 

 

5.50 – 6.08

 

 

5.50 – 6.08

 

Risk-free interest rate

 

 

2.9%

 

 

 

2.1%

 

 

2.3% – 3.0%

 

 

1.9% – 2.1%

 

Expected volatility

 

88.4% – 88.9%

 

 

 

105.9%

 

 

88.4% – 98.4%

 

 

104.0% – 124.4%

 

Expected dividend yield

 

 

0.0%

 

 

 

0.0%

 

 

 

0.0%

 

 

 

0.0%

 

 

14


 

 

The following table summarizes our restricted stock unit activity under all equity incentive plans for the nine months ended September 30, 2018:

 

 

Number of Outstanding

Restricted Stock Units

 

 

Weighted Average

Grant Date

Fair Value

 

Balance as of December 31, 2017

 

 

49,300

 

 

$

4.28

 

Granted

 

 

270,300

 

 

$

0.85

 

Released

 

 

(39,301

)

 

$

4.53

 

Forfeited

 

 

(43,699

)

 

$

1.41

 

Balance as of September 30, 2018

 

 

236,600

 

 

$

0.85

 

Stock-based Compensation

The allocation of stock-based compensation for all stock options and awards, including the adjustments to stock-based compensation expense associated with our May 2018 Restructuring Plan (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

204

 

 

$

368

 

 

$

1,064

 

 

$

1,235

 

General and administrative

 

 

486

 

 

 

821

 

 

 

1,765

 

 

 

2,414

 

 

 

$

690

 

 

$

1,189

 

 

$

2,829

 

 

$

3,649

 

 

In connection with the Restructuring Plan, stock-based compensation expense for the nine months ended September 30, 2018 included approximately $0.3 million and $0.1 million, respectively, in research and development expenses and in general and administrative expenses, due to the acceleration of time-based vesting provisions of outstanding equity awards in accordance with our Executive Severance and Change in Control Policy.

 

 

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 condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the condensed 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 are a biotherapeutics company engaged in the discovery and development of innovative medicines based on novel immunological pathways. We have concentrated our research and development efforts on a newly discovered area of biology, the extracellular functionality of tRNA synthetases. Built on more than a decade of foundational science on this novel biology and its effect on immune responses, we have built a global intellectual property estate directed to a potential pipeline of protein compositions derived from 20 tRNA synthetase genes. We are focused on the therapeutic translation of the Resokine pathway, comprised of extracellular proteins derived from the histidyl tRNA synthetase (HARS) gene family, one of the tRNA synthetase genes. Our clinical-stage product candidate, ATYR1923, is based on the Resokine pathway, binds to the neuropilin-2 receptor and is designed to down-regulate immune engagement in interstitial lung diseases (ILD) and other immune-mediated diseases.

Our scientists successfully engineered ATYR1923, a fusion protein comprised of the immune-modulatory domain of HARS fused to the FC region of a human antibody. We are developing ATYR1923 as a potential therapeutic for patients with ILD, a group of immune-mediated disorders which cause progressive fibrosis of the lung tissue. We announced data from a first-in-human Phase 1 clinical trial of ATYR1923 in June 2018. This randomized, double-blind, placebo-controlled study investigated the safety, tolerability, immunogenicity, and pharmacokinetics (PK) of intravenous ATYR1923 in 36 healthy volunteers. The results indicate that the drug was generally well-tolerated at all dose levels tested, with no significant adverse events and the observed PK profile supports the potential for a once-monthly dosing regimen.

In parallel with the Phase 1 clinical trial, we expanded 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 as an immuno-modulator. For example, we have presented the positive results of ATYR1923 in a mouse bleomycin lung injury model and a rat bleomycin lung injury model at the 2017 and 2018 American Thoracic Society Annual Meetings, respectively. In addition, we presented positive findings of ATYR1923 in a scleradermatous chronic graft versus host disease model at the Scleroderma Foundation’s 2018 National Patient Conference. These data, as well as the Phase 1 clinical trial results and consultation with key opinion leaders helped us in our selection of pulmonary sarcoidosis as the indication for our clinical trial for our ATYR1923 program.

Pulmonary sarcoidosis is an inflammatory disease characterized by the formation of granulomas, clumps of inflammatory cells in one or more organs of the body. Sarcoidosis affects people of all ages, but typically presents before the age of 50 years, with the incidence peaking at 20 to 39 years. The disorder usually begins in the lungs, skin or lymph nodes, but can affect almost any organ.  Sarcoidosis in the lungs is called pulmonary sarcoidosis and 90% or more of patients with sarcoidosis have lung involvement. Pulmonary sarcoidosis is a major form of ILD. Estimates of prevalence vary; however, we believe that approximately 150,000 to 200,000 Americans live with pulmonary sarcoidosis. The prognosis for patients with pulmonary sarcoidosis ranges from benign and self-limiting to chronic, debilitating disease with mortality. At this time, we plan to initiate a multi-ascending dose, placebo-controlled Phase 1b/2a study in patients with pulmonary sarcoidosis in the fourth quarter of 2018. The study has been designed to evaluate safety, tolerability and immunogenicity of multiple doses of ATYR1923. In addition, we intend to evaluate established clinical endpoints and potential biomarkers to assess preliminary activity of ATYR1923.

 

 

16


 

Financial Operations Overview

Organization and Business; Principles of Consolidation

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 September 2005. The condensed consolidated financial statements include our accounts and our 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma Limited as of September 30, 2018. All intercompany transactions and balances are eliminated in consolidation.

In May 2018, we implemented a corporate restructuring and program prioritization plan (Restructuring Plan) to streamline our operations and concentrate development efforts on the advancement of our therapeutic candidate, ATYR1923.  In connection with the Restructuring Plan, we reduced our workforce by approximately 30% to 42 full-time employees.  We completed the workforce reduction in June 2018. We recorded 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.

Research and Development Expenses

To date, our research and development expenses have related primarily to the development of and clinical trial for our product candidates and to research efforts targeting the potential therapeutic application of other tRNA synthetase-based immuno-modulators (including funding of our research collaboration 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 advisory panels and boards;

 

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.

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.

 

17


 

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 Expense

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

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 condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these condensed 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 condensed 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 condensed 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 September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Increase /

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

Research and development expenses

 

$

4,202

 

 

$

7,133

 

 

$

(2,931

)

General and administrative expenses

 

 

2,475

 

 

 

3,694

 

 

 

(1,219

)

Other expense, net

 

 

(437

)

 

 

(363

)

 

 

74

 

 

Research and development expenses. Research and development expenses were $4.2 million and $7.1 million for the three months ended September 30, 2018 and 2017, respectively. The decrease of $2.9 million was primarily due to a $1.4 million decrease in personnel associated costs because of lower headcount, which was mainly a result of the Restructuring Plan, a $0.7 million decrease in product manufacturing costs, a $0.6 million decrease due to the completion of ATYR1923 Phase 1 activities, and a $0.2 million decrease in overall general research and development expenses.

General and administrative expenses. General and administrative expenses were $2.5 million and $3.7 million for the three months ended September 30, 2018 and 2017, respectively. The decrease of $1.2 million was primarily due to a $0.7 million decrease in personnel associated costs because of lower headcount, which was mainly a result of the Restructuring Plan, a $0.4 million decrease related to consulting and professional fees, and a $0.1 million decrease related to overall general and administrative expenses.

Other expense, net. Other expense remained relatively consistent at $0.4 million for the three months ended September 30, 2018 and 2017.  Other expense consists primarily of interest expense related to our Term Loans, as defined and described below, net of our interest income earned on cash and cash equivalents and available-for-sale investments.

 

18


 

Comparison of the Nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

Increase /

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

Research and development expenses

 

$

16,836

 

 

$

24,757

 

 

$

(7,921

)

General and administrative expenses

 

 

10,021

 

 

 

11,188

 

 

 

(1,167

)

Other expense, net

 

 

(1,336

)

 

 

(788

)

 

 

548

 

Research and development expenses. Research and development expenses were $16.8 million and $24.8 million for the nine months ended September 30, 2018 and 2017, respectively. The decrease of $7.9 million was primarily due to a $3.1 million decrease related to the completion of clinical studies related to ATYR1923 and ATYR1940, a $3.0 million decrease in product manufacturing costs, a $1.3 million decrease in personnel associated costs due to lower headcount, which was mainly a result of the Restructuring Plan and a $0.5 million decrease in overall general research and development expenses.

General and administrative expenses. General and administrative expenses were $10.0 million and $11.2 million for the nine months ended September 30, 2018 and 2017, respectively. The decrease of $1.2 million was primarily due to a $0.7 million decrease related to non-cash stock compensation expense, and a $0.5 million decrease related to our consulting and professional fees.

Other expense, net. Other expense was $1.3 million and $0.8 million for the nine months ended September 30, 2018 and 2017, respectively. Other expense consists primarily of interest expense related to our Term Loans, as defined and described below, net of our interest income earned on cash and cash equivalents and available-for-sale investments. The increase 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 September 30, 2018, we had an accumulated deficit of $292.4 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 $56.0 million as of September 30, 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 September 30, 2018, we have funded our operations primarily through the sales of equity securities and convertible debt and through venture debt and term loans.

Debt Financing

In November 2016, we entered into a loan and security agreement, and subsequently entered into amendments thereto (collectively, the Loan Agreement), for a term loan 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.

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. Accordingly, we started paying the principal balance of the Term Loans in June 2018. 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.

 

19


 

Cash Flows

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

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(26,224

)

 

$

(32,058

)

Investing activities

 

 

39,305

 

 

 

(24,107

)

Financing activities

 

 

(2,625

)

 

 

47,542

 

Net increase (decrease) in cash

 

$

10,456

 

 

$

(8,623

)

 

Operating activities. Net cash used in operating activities was $26.2 million and $32.1 million for the nine months ended September 30, 2018 and 2017, respectively. Net cash used in operating activities for the nine months ended September 30, 2018 was primarily related to our net loss of $28.2 million, adjusted for non-cash stock-based compensation expense of $2.8 million and net cash outflows from the changes in our operating assets and liabilities of $2.0 million. Net cash used in operating activities for the nine months ended September 30, 2017 was primarily related to our net loss of $36.7 million, adjusted for non-cash stock-based compensation expense of $3.6 million and net cash inflows from the changes in our operating assets and liabilities of $0.1 million.

Investing activities. Net cash provided by investing activities for the nine months ended September 30, 2018 was primarily due to net maturities of investment securities of $39.9 million. Net cash used by investing activities for the nine months ended September 30, 2017 was primarily due to net purchases of investment securities of $23.0 million. 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 used in financing activities for the nine months ended September 30, 2018 was $2.6 million and consisted primarily of principal payments on the Term Loans of which, pursuant to the Loan Agreement, we started paying in June 2018.  Net cash provided by financing activities for the nine months ended September 30, 2017 was $47.5 million and consisted primarily of proceeds of $42.5 million from a private placement of our equity securities, net of offering costs, and $4.9 million from the second tranche from the Term Loans, net of issuance cost.

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 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. 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;

 

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.

 

 

20


 

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. In May 2018, we provided TSRI with written notice of termination of our research funding and option agreement effective as of November 10, 2018.  In July 2018, we entered into an amendment to our facility lease that reduced the space we lease by 3,986 square feet from 24,494 square feet to 20,508 square feet, and extended the lease term from May 2019 to May 2023.

The following table summarizes our contractual obligations as of September 30, 2018:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than 1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More than 5 Years

 

 

 

 

 

 

 

(in thousands)

 

Term Loans, principal payments only

 

$

17,333

 

 

$

8,000

 

 

$

9,333

 

 

$

 

 

$

 

Operating lease

 

 

4,550

 

 

 

805