Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
63
Item 8. Financial Stateme nts and Supplementary Data.
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors of aTyr Pharma, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of aTyr Pharma, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
San Diego, California
March 23, 2021
64
aTyr Pharma, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
16,952
$
9,210
Available-for-sale investments
14,737
21,934
Other receivables
2,039
100
Prepaid expenses
1,803
681
Total current assets
35,531
31,925
Property and equipment, net
899
1,270
Right-of-use assets
2,083
2,821
Other assets
213
172
Total assets
$
38,726
$
36,188
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
1,431
$
847
Accrued expenses
3,572
2,376
Contract liability
—
208
Current portion of operating lease liability
861
755
Term loans, net of issuance costs and discount (Note 6)
—
8,737
Total current liabilities
5,864
12,923
Long-term operating lease liability, net of current portion
1,378
2,239
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 5,000,000 undesignated authorized shares; Class X Convertible Preferred Stock issued and outstanding shares – 0 and 1,643,961 as of December 31, 2020 and December 31, 2019, respectively
—
2
Common stock, $0.001 par value per share; 21,425,000 and 10,714,286 authorized shares as of December 31, 2020 and December 31, 2019, respectively; issued and outstanding shares – 11,018,954 and 3,891,787 as of December 31, 2020 and December 31, 2019, respectively
11
4
Additional paid-in capital
370,210
343,524
Accumulated other comprehensive loss
(43
)
(40
)
Accumulated deficit
(338,528
)
(322,304
)
Total aTyr Pharma stockholders’ equity
31,650
21,186
Noncontrolling interest in Pangu BioPharma Limited
(166
)
(160
)
Total stockholders' equity
31,484
21,026
Total liabilities and stockholders’ equity
$
38,726
$
36,188
See accompanying notes.
65
aTyr Pharma, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Years Ended December 31,
2020
2019
2018
Revenues:
License and collaboration agreement revenues
$
10,455
$
422
$
—
Total revenues
10,455
422
—
Operating expenses:
Research and development
$
17,291
$
14,048
$
20,385
General and administrative
9,075
9,352
12,435
Total operating expenses
26,366
23,400
32,820
Loss from operations
(15,911
)
(22,978
)
(32,820
)
Total other expense, net
(319
)
(785
)
(1,695
)
Consolidated net loss
(16,230
)
(23,763
)
(34,515
)
Net loss attributable to noncontrolling interest in Pangu BioPharma Limited
6
160
—
Net loss attributable to aTyr Pharma, Inc.
(16,224
)
(23,603
)
(34,515
)
Net loss per share, basic and diluted
$
(1.77
)
$
(7.03
)
$
(16.11
)
Shares used in computing net loss per share, basic and diluted
9,160,269
3,355,600
2,141,961
See accompanying notes.
66
aTyr Pharma, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Years Ended December 31,
2020
2019
2018
Consolidated net loss
$
(16,230
)
$
(23,763
)
$
(34,515
)
Other comprehensive gain (loss):
Change in unrealized gain (loss) on available-for-sale investments, net of tax
(3
)
20
60
Comprehensive loss
(16,233
)
(23,743
)
(34,455
)
Comprehensive loss attributable to noncontrolling interest Pangu BioPharma Limited
6
160
—
Comprehensive loss attributable to aTyr Pharma, Inc. common stockholders
$
(16,227
)
$
(23,583
)
$
(34,455
)
See accompanying notes.
67
aTyr Pharma, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Convertible
Preferred Stock
Common Stock
Additional
Paid-In
Other
Comprehensive
Accumulated
Noncontrolling
Total
Stockholders’
Shares
Amount
Shares
Amount
Capital
Gain/(Loss)
Deficit
Interest
Equity
Balance as of December 31, 2017
2,285,952
2
2,129,968
2
328,547
(120
)
(264,186
)
—
64,245
Exercise of common stock options and release of restricted stock units
—
—
3,670
—
14
—
—
—
14
Issuance of common stock pursuant to employee stock purchase plan
—
—
3,028
—
36
—
—
—
36
Issuance of common stock from at the market offerings, net of offering costs
—
—
49,723
—
379
—
—
—
379
Stock-based compensation
—
—
—
—
3,431
—
—
—
3,431
Net unrealized gain on investments, net of tax
—
—
—
—
—
60
—
—
60
Net loss
—
—
—
—
—
—
(34,515
)
—
(34,515
)
Balance as of December 31, 2018
2,285,952
2
2,186,389
2
332,407
(60
)
(298,701
)
—
33,650
Conversion of preferred stock to common stock
(641,991
)
—
229,283
—
—
—
—
—
—
Issuance of common stock upon release of restricted stock units
—
—
7,487
—
—
—
—
—
—
Issuance of common stock pursuant to employee stock purchase plan
—
—
3,117
—
13
—
—
—
13
Issuance of common stock from at the market offerings, net of offering costs
—
—
805,357
1
4,404
—
—
—
4,405
Issuance of common stock from registered direct offering, net of offering costs
—
—
660,154
1
4,917
—
—
—
4,918
Stock-based compensation
—
—
—
—
1,783
—
—
—
1,783
Net unrealized gain on investments, net of tax
—
—
—
—
—
20
—
—
20
Net loss
—
—
—
—
—
—
$
(23,603
)
(160
)
(23,763
)
Balance as of December 31, 2019
1,643,961
$
2
3,891,787
$
4
$
343,524
$
(40
)
$
(322,304
)
$
(160
)
$
21,026
Conversion of preferred stock to common stock
(1,643,961
)
(2
)
587,444
1
1
—
—
—
—
Issuance of common stock from underwritten follow-on offering, net of offering costs
—
—
4,870,588
4
18,775
—
—
—
18,779
Issuance of common stock from at the market offerings, net of offering costs
—
—
1,657,075
2
6,435
—
—
—
6,437
Issuance of common stock upon release of restricted stock units
—
—
8,678
—
—
—
—
—
—
Issuance of common stock pursuant to employee stock purchase plan
—
—
3,382
—
10
—
—
—
10
Stock-based compensation
—
—
—
—
1,465
—
—
—
1,465
Net unrealized loss on investments, net of tax
—
—
—
—
—
(3
)
—
—
(3
)
Net loss
—
—
—
—
—
—
(16,224
)
(6
)
(16,230
)
Balance as of December 31, 2020
—
—
11,018,954
11
370,210
(43
)
(338,528
)
(166
)
31,484
See accompanying notes.
68
aTyr Pharma, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
2020
2019
2018
Cash flows from operating activities:
Consolidated net loss
$
(16,230
)
$
(23,763
)
$
(34,515
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
569
635
746
Stock-based compensation
1,465
1,783
3,431
Debt discount accretion and non-cash interest expense
346
707
966
Amortization (accretion) of premium (discount) of available-for-sale investment securities
110
(284
)
(261
)
Amortization of right-of-use assets
697
731
—
Loss (gain) on disposal of property and equipment
3
(28
)
18
Changes in operating assets and liabilities:
Other receivables
(1,939
)
58
(53
)
Prepaid expenses and other assets
(1,122
)
276
663
Accounts payable and accrued expenses
1,763
162
(2,058
)
Contract liability
(208
)
208
—
Operating lease liability
(755
)
(498
)
—
Net cash used in operating activities
(15,301
)
(20,013
)
(31,063
)
Cash flows from investing activities:
Purchases of property and equipment
(202
)
(79
)
(594
)
Purchases of available-for-sale investment securities
(21,066
)
(40,647
)
(40,299
)
Maturities of available-for-sale investment securities
28,150
45,600
78,065
Proceeds from sale of property and equipment
18
51
—
Net cash provided by investing activities
6,900
4,925
37,172
Cash flows from financing activities:
Proceeds from issuance of common stock through employee stock purchase plan
10
13
36
Proceeds from issuance of common stock through option exercises
—
—
14
Proceeds from issuance of common stock through at the market offerings, net of offering costs
6,437
4,405
379
Proceeds from issuance of common stock through registered direct offering, net of offering costs
—
4,918
—
Proceeds from issuance of common stock through underwritten follow-on offering, net of offering costs
18,779
—
—
Repayments on borrowings
(9,083
)
(8,000
)
(4,667
)
Net cash provided by (used in) financing activities
16,143
1,336
(4,238
)
Net change in cash and cash equivalents
7,742
(13,752
)
1,871
Cash and cash equivalents at beginning of period
9,210
22,962
21,091
Cash and cash equivalents at the end of period
$
16,952
$
9,210
$
22,962
Supplemental disclosure of cash flow information:
Interest paid
$
308
$
1,122
$
1,700
Purchase of fixed assets included in accounts payable
$
17
$
—
$
4
See accompanying notes.
69
aTyr Pharma, Inc.
Notes to Consolidated Financial Statements
1. Organization, Business and Basis of Presentation
Organization and Business
We were incorporated in the state of Delaware on September 8, 2005. We are focused on the discovery and development of innovative medicines based on novel immunological pathways.
Principles of Consolidation
Our 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.
Liquidity and Financial Condition
Other than the net income generated in the three months ended March 31, 2020, we have incurred losses and negative cash flows from operations since our inception. As of December 31, 2020, we had an accumulated deficit of $338.5 million and we expect to continue to incur net losses for the foreseeable future. As of December 31, 2020, our cash, cash equivalents and available-for-sale investments were $31.7 million. Subsequent to December 31, 2020, we received $2.0 million related to the Kyorin Agreement, approximately $9.9 million in gross proceeds from our at-the-market offering (ATM Offering Program) before deducting commissions and offering expenses and approximately $15.3 million in gross proceeds from our purchase agreement (Purchase Agreement) before deducting offering expenses payable by us. We believe that our current cash, cash equivalents and available-for-sale investments, will be sufficient to meet our anticipated cash requirements for a period of at least one year from the date of this Annual 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 equity offerings, grant funding, collaborations, strategic partnerships and/or licensing arrangements, and when we are closer to commercialization of our product candidates potentially through debt financings. However, we may be unable to raise additional capital or enter into such arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such 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 generally accepted accounting principles (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 for these items 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 trial and research and development expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ materially from these estimates and assumptions.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications were not material to the consolidated financial statements.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. We view our operations and manage our business in one operating segment.
70
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of readily available checking, money market accounts and money market funds. We consider all highly liquid investments that mature in three months or less when purchased to be cash equivalents.
Investment Securities
Investment securities primarily consist of investment grade corporate debt securities, asset-backed securities and commercial paper. We classify all investment securities as available-for-sale. Investment securities are carried at fair value, with the unrealized gains and losses, if any, reported as a component of other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses from the sale of investment securities, if any, are determined on a specific identification basis. A decline in the market value of any investment security below cost that is determined to be other than temporary will result in an impairment charge to earnings and a new cost basis for the security is established. No such impairment charges were recorded for any period presented. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method and are included in interest income. Interest income is recognized when earned. As of December 31, 2020, we held an aggregate total of $14.7 million of investment securities which consisted of corporate debt securities, asset-backed securities, and commercial paper all of which will mature in less than one year, and there was an unrealized gain of approximately $7,000 between the amortized cost and fair value of these investment securities. As of December 31, 2019, we held $21.9 million of corporate debt securities, asset-backed securities and commercial paper, all of which mature in less than one year, and there was an unrealized gain of approximately $10,000 between the amortized cost and fair value of these investment securities.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents and investment securities. We have established guidelines regarding diversification of investments and their maturities, which are designed to maintain principal and maximize liquidity. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We have not experienced any losses in such accounts and we believe that we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful life of the related assets (generally three to seven years). Leasehold improvements are stated at cost and amortized on a straight-line basis over the lesser of the remaining term of the related lease or the estimated useful life of the leasehold improvements. Repairs and maintenance costs are charged to expense as incurred .
Impairment of Long-Lived Assets
Long-lived assets consist primarily of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While our current and historical operating losses are indicators of impairment, we believe that future cash flows to be received support the carrying value of our long-lived assets and, accordingly, have not recognized any impairment losses since inception.
Accrued Expenses
Expenses related to clinical studies, preclinical development activities and product manufacturing are based on estimates of the services received and efforts expended pursuant to our contractual arrangements. There may be instances in which payments made to our service providers will temporarily exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as, for clinical studies, the successful enrollment of patients, site initiation and the completion of clinical milestones. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known at the time. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense balance accordingly. Historically, our estimated accrued liabilities have materially approximated actual expenses incurred.
Leases
We follow Accounting Standards Codification (ASC) Topic 842, Leases in recording our operating and financing leases. For our long-term operating leases, we recognized a right-of-use asset and a lease liability in our consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow
71
equivalent funds on a collateralized basis at the lease commencement date. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determine the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise. We also made accounting policy elections not to apply the recognition requirements under Topic 842 to any of our short-term leases and to account for each separate lease and associated non-lease components as a single lease component for all of our leases. Under Topic 842 we determine if an arrangement is a lease at inception. Our right-of-use assets consist of an operating lease for our facility headquarters. We have a noncancelable operating lease that included certain tenant improvement allowances and is subject to base lease payments, which escalate over the term of the lease, additional charges for common area maintenance and other costs.
We do not separate lease and non-lease components for our long-term leases.
Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses in our consolidated statements of operations.
Revenue Recognition
We evaluate our agreements under ASC Topic 606, Revenue from Contracts with Customers and ASC Topic 808, Collaborative Arrangements . We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services . In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreement, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. We use key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide research and development services. We recognize revenue at a point in time when we transfer control of a distinct performance obligation to our partner. For example, if a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs include: 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 advisors; costs to acquire, develop and manufacture preclinical study and clinical trial materials; costs incurred under clinical trial agreements with clinical research organizations and investigative sites; costs for laboratory supplies; payments related to licensed products and technologies; allocated facilities and information technology costs; and depreciation.
Patent Costs
Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.
Stock-Based Compensation
Stock-based compensation expense represents the grant date fair value of employee stock option grants recognized as expense over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate fair value of stock option grants using the Black-Scholes option pricing model. We estimate the fair value using assumptions, including the risk-free interest rate, the expected volatility of a peer group of similar companies, the expected term of the awards and the expected dividend yield. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. We follow ASC Topic 718, Compensation – Stock Compensation as guidance for accounting modification.
72
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income in the period that includes the enactment date.
We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If we determine that we would be able to realize the deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common stock and 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):
Years Ended December 31,
2020
2019
2018
Class X Preferred Stock (if-converted to common stock)
—
587,445
816,851
Common stock warrants
13,904
13,904
477,639
Common stock options and restricted stock units
584,211
363,553
371,823
Employee stock purchase plan
1,602
1,958
1,610
Total
599,717
966,860
1,667,923
The following table summarizes our net loss per share (in thousands, except per share data):
Years Ended December 31,
2020
2019
2018
Numerator:
Net loss attributable to aTyr Pharma, Inc.
$
(16,224
)
$
(23,603
)
$
(34,515
)
Denominator:
Shares used in computing net loss per share, basic and diluted
9,160,269
3,355,600
2,141,961
Net loss per share - basic and diluted
$
(1.77
)
$
(7.03
)
$
(16.11
)
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. We generally use the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
73
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. We expect the adoption of the amendments in ASU 2016-13 to not have an effect on its financial position and the results of its operations when such amendment is adopted.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes to identify, evaluate, and improve areas of GAAP for which costs and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments for Topic 740 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Topic 740 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. An entity that elects early adoption must adopt all the amendments in the same period. We expect the adoption of the amendments in ASU 2019-12 will not have an effect on its financial position and the results of its operations when such amendment is adopted.
3. 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. 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 asset-backed securities, commercial paper, and corporate debt securities. We have no financial liabilities measured at fair value on a recurring basis. None of our non-financial assets and liabilities is recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.
Assets measured at fair value on a recurring basis are as follows (in thousands):
Fair Value Measurements Using
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
As of December 31, 2020
Assets:
Current:
Cash equivalents
$
13,708
$
13,708
$
—
$
—
Available-for-sale investments:
Asset-backed securities
2,219
—
2,219
—
Commercial paper
5,494
—
5,494
—
Corporate debt securities
7,024
—
7,024
—
Total available-for-sale investments
14,737
—
14,737
—
Total assets measured at fair value
$
28,445
$
13,708
$
14,737
$
—
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 December 31, 2019
Assets:
Current:
Cash equivalents
$
8,248
$
8,248
$
—
$
—
Available-for-sale investments:
Asset-backed securities
6,304
—
6,304
—
Commercial paper
7,568
—
7,568
—
Corporate debt securities
8,062
—
8,062
—
Total available-for-sale investments
21,934
—
21,934
—
Total assets measured at fair value
$
30,182
$
8,248
$
21,934
$
—
As of December 31, 2020 and 2019, available-for-sale investments are detailed as follows (in thousands):
December 31, 2020
Gross
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Market Value
Available-for-sale investments:
Asset-backed securities
$
2,218
$
1
$
—
$
2,219
Commercial paper
5,491
3
—
5,494
Corporate debt securities
7,021
3
—
7,024
$
14,730
$
7
$
—
$
14,737
December 31, 2019
Gross
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Market Value
Available-for-sale investments:
Asset-backed securities
$
6,299
$
5
$
—
$
6,304
Commercial paper
7,568
—
—
7,568
Corporate debt securities
8,057
5
—
8,062
$
21,924
$
10
$
—
$
21,934
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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.
As of December 31, 2020, except of one investment security, all available-for-sale investments were in a gross unrealized gain position. The unrealized loss for one investment security was immaterial.
4. License, Collaboration and Other Agreements
Kyorin Pharmaceutical Co., Ltd.
In January 2020, we entered into a collaboration and license agreement with Kyorin Pharmaceutical Co., Ltd. (Kyorin) for the development and commercialization of ATYR1923 for ILD in Japan. Under the agreement (the Kyorin Agreement), Kyorin received an exclusive right to develop and commercialize ATYR1923 in Japan for all forms of interstitial lung diseases (ILD). Under the terms of the Kyorin Agreement, Kyorin is obligated to fund all research, development, regulatory, marketing and commercialization activities in Japan. In September 2020, Kyorin began dosing patients in a Phase 1 clinical trial of ATYR1923 (known as KRP-R120 in Japan) and completed the last subject visit in December 2020. The Phase 1 clinical trial, which was conducted and funded by Kyorin, is a placebo-controlled study to evaluate the safety, pharmacokinetics and immunogenicity of ATYR1923. Results from this study are intended to enable Kyorin to initiate clinical trials in ILD in Japan. We received an $8.0 million upfront payment in January 2020 and a $2.0 milestone payment in January 2021 upon completion of enrollment in the Phase 1 clinical trial, and we are eligible to receive up to an additional $165.0 million in the aggregate upon achievement of certain development, regulatory and sales milestones, as well as tiered royalties ranging from the mid-single digits to mid-teens on net sales in Japan. As of December 31, 2021, the $2.0 million milestone payment is recorded as Other receivables in the Consolidated Balance Sheets.
Following the first anniversary of the effective date of the Kyorin Agreement, Kyorin has the right to terminate the agreement for any reason upon 90 days advance written notice. Either party may terminate the Kyorin Agreement in the event that the other party breaches the agreement and fails to cure the breach, becomes insolvent or challenges certain of the intellectual property rights licensed under the agreement .
We assessed our license and collaboration with Kyorin in accordance with Topic 606 and concluded that Kyorin is a customer. We identified the following performance obligations under the Kyorin Agreement: 1) the license of ATYR1923 for ILD in Japan; and 2) free clinical trial material for Kyorin’s Phase 1 clinical trial. The $8.0 million upfront payment received from Kyorin is non-refundable and non-creditable and is considered fixed consideration. We determined that the relative stand-alone selling price was $7.9 million when the license was delivered to Kyorin in January 2020. We determined that the relative standalone selling price was $0.1 million for the free clinical trial material delivered to Kyorin in June 2020, using the “expected cost plus a margin” approach. In December 2020, Kyorin completed the last subject visit in its Phase 1 trial of ATYR1923. This achievement triggered a $2.0 million milestone payment, which we received in January 2021. For the year ended December 31, 2020, we recognized $10.0 million as license and collaboration agreement revenue for the upfront payment and milestone achievement.
Both the milestones and royalty payments under the Kyorin Agreement are variable consideration. Since milestone payments are binary in nature, we will use the “most-likely” method to evaluate whether the milestones should be included as revenue. We will apply constraint to these amounts until the milestone is probable of being achieved. The royalties are dependent on future sales by Kyorin which are at the full discretion of Kyorin. Accordingly, we will apply a constraint to these amounts until the future sale sales have occurred.
CSL Behring
In March 2019, we entered into a research collaboration and option agreement with CSL Behring (CSL) for the development of product candidates derived from up to four tRNA synthetases from our preclinical pipeline (CSL Agreement). Under the terms of the CSL Agreement, CSL will fund all research and development activities related to the development of the applicable product candidates for the duration of the collaboration. CSL reimburses us for all research and development activities. The research and development activities will be performed in six phases by both parties. The first phase totaling $0.6 million was funded in May 2019 and future phases will be funded on a quarterly basis.
In June 2020, the CSL Agreement was amended to extend the work on the first phase of the research program through September 30, 2020 and provided $0.2 million of additional funding for research and development activities. In February 2021, the CSL Agreement was terminated.
We assessed our research collaboration with CSL in accordance with Topic 606 and concluded that CSL is a customer. We identified the following performance obligations under the CSL Agreement: 1) research services; and 2) participation in the Joint
75
Steering Committee. We concluded that the performance obligations are interrelated and do not have a standalone basis. CSL has the right to terminate the research collaboration upon 45 days notice, which is considered to be the legally enforceable contract term. Therefore, during the first phase of research services, we have a 45 day performance obligation and all research services beyond the initial 45 days performance obligation are considered a material right. In addition, each phase of research services represents a separate customer option since CSL must provide written notice of its intent to advance to the next phase.
Under the CSL Agreement, CSL is obligated to pay us for the costs incurred by us under the research programs. The payment of $0.6 million for the first phase of the research program received in May 2019 as well as the $0.2 million related to the amendment in June 2020 were considered fixed consideration and we will recognize revenue on the payment for the research service performance obligation as the services are performed. We are utilizing a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligation to our counterparty. In applying the cost-based input methods of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs and internal full-time equivalent effort. A cost-based input method of revenue recognition requires us to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods. As of December 31, 2020, all activities under the CSL Agreement were complete and the contract liability had been recognized.
For the years ended December 31, 2020 and 2019, we recognized $0.5 million and $0.4 million, respectively, as license and collaboration agreement revenues under the CSL Agreement.
Hong Kong University of Science and Technology
In March 2020, our subsidiary, Pangu BioPharma, together with the Hong Kong University of Science and Technology (HKUST) was awarded a grant of approximately $750,000 to build a high-throughput platform for the development of bi-specific antibodies. The two-year project is being funded by the Hong Kong Government’s Innovation and Technology Commission (ITC) under the Partnership Research Program (PRP). The PRP aims to support research and development projects undertaken by companies in collaboration with local universities and public research institutions. The grant will fund approximately 50% of the total estimated project cost, with aTyr contributing the remaining 50%. The research grant agreement between Pangu BioPharma, HKUST and the Government of the Hong Kong Special Administration Region was effective April 1, 2020.
All the contributions provided by the ITC are paid to HKUST and we record expenses under this grant award when incurred. Expenses for the year ended December 31, 2020 were $0.2 million.
5. Balance Sheet Details
Prepaid expenses consist of the following (in thousands):
December 31,
2020
2019
Prepaid clinical and research expense
$
583
$
22
Prepaid manufacturing expenses
$
513
$
172
Other prepaid expenses
707
487
$
1,803
$
681
Property and equipment consist of the following (in thousands):
December 31,
2020
2019
Computer and office equipment
$
552
$
543
Scientific and laboratory equipment
5,270
5,241
Tenant improvements
1,701
1,700
7,523
7,484
Less accumulated depreciation and amortization
(6,624
)
(6,214
)
$
899
$
1,270
As of December 31, 2020, 2019 and 2018, depreciation expense was $0.6 million, $0.6 million and $0.7 million, respectively.
76
Accrued expenses consist of the following (in thousands):
December 31,
2020
2019
Accrued salaries, wages and benefits
$
1,809
$
1,275
Other accrued expenses (1)
1,763
1,101
$
3,572
$
2,376
(1)
Other accrued expenses include expenses for clinical research organizations and contract manufacturing organizations.
6. 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.
In November 2020, the Term Loans were fully repaid, including the final payment equal to 8.75% of the funded amounts.
In connection with the first tranche, we issued warrants to each of SVB and Solar to purchase an aggregate of 3,415 shares of our common stock with an exercise price of $43.93 per share. In connection with the second tranche, we issued warrants to each of SVB and Solar to purchase an aggregate of 1,489 shares of our common stock with an exercise price of $50.37 per share. In connection with the third tranche, we issued warrants to each of SVB and Solar to purchase an aggregate of 1,443 shares of our common stock with an exercise price of $51.98 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 were accreted to interest expense over the life of Term Loans.
Facility Lease
We have a non-cancelable facility lease that is subject to base lease payments, which escalate over the term of the lease, additional charges for common area maintenance and other costs. In July 2018, we entered into a lease amendment that reduced the space we lease from 24,494 square feet to 20,508 square feet and extended the lease term to May 2023. With the lease amendment, we do not have an option to extend the lease.
Operating lease expense for each of the years ended December 31, 2020, 2019 and 2018 was $1.0 million. A s of December 31, 2020 and 2019, the weighted average remaining lease term was 2.4 years and 3.4 years, respectively, and the weighted average discount rate for each years was 9.6%.
Future minimum payments under the non-cancelable facility lease and reconciliation to the operating lease liability as of December 31, 2020 were as follows (in thousands):
Operating Lease
2021
$
1,031
2022
1,062
2023
404
Less: Amount representing interest
(258
)
Present value of lease payments
2,239
Less: Current portion of operating lease liability
(861
)
Long-term operating lease liability, net of current portion
$
1,378
7. Stockholders’ Equity
At the Market Offering Program
In June 2016, we entered into a sales agreement with Cowen and Company, LLC (Cowen) for at the market offerings (ATM Offering Program), under which we were able to offer and sell shares of our common stock having an aggregate offering price of up to $35.0 million from time to time. In May 2019, we terminated the ATM Offering Program with Cowen. During the year ended
77
December 31, 2019 and prior to termination in May 2019, we sold an aggregate of 193,670 shares of common stock at an average price of $ 7.35 per common share for net proceeds of $ 1.4 million under the ATM Offering Program with Cowen
In May 2019, we entered into a sales agreement with H.C. Wainwright & Co., LLC (Wainwright) to create an ATM Offering Program under which we may offer and sell shares of our common stock having an aggregate offering price of up to $10.0 million. In November 2020, we amended our sales agreement with Wainwright to increase the amount of the ATM Offering Program up to $20.0 million. Wainwright is entitled to a commission at a fixed commission rate equal to 3% of the gross proceeds. During the year ended December 31, 2020, we sold an aggregate of 1,657,075 shares of common stock at an average price of $4.07 per share for gross proceeds of $6.8 million under the ATM Offering Program. During the year ended December 31, 2019, we sold an aggregate of 611,687 shares of common stock at an average price of $5.43 per common share for gross proceeds of $3.3 million under the ATM Offering Program with Wainwright.
Underwritten Follow-On Public Offering
In February 2020, we completed an underwritten follow-on public offering of 4,235,294 shares of our common stock at a price to the public of $4.25 per share. In March 2020, the underwriters fully exercised their option to purchase additional shares resulting in the issuance of an additional 635,294 shares of common stock. The total gross proceeds from the underwritten follow-on public offering, including the underwriters’ option to purchase additional shares, was approximately $20.7 million, before deducting underwriting discounts, commissions and offering expenses payable by us.
Purchase Agreement
In September 2020 , we entered into a common stock purchase agreement (Purchase Agreement) with Aspire Capital Fund, LLC (Aspire Capital), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of our common stock at our request from time to time during the 30 month term of the Purchase Agreement. Concurrently with entering into the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended, for the resale of the shares of our common stock that have been and may be issued to Aspire Capital under the Purchase Agreement. As of December 31, 2020, we had not sold any shares of common stock to Aspire Capital under this Purchase Agreement.
2014 Stock Plan
We adopted a stock option plan in 2007 (the 2007 Plan), which was subsequently amended, restated and renamed in July 2014 (the 2014 Plan) to provide for the incentive stock options, nonstatutory stock options, stock and rights to purchase restricted stock to eligible recipients. Recipients of incentive stock options are eligible to purchase shares of our common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options under the 2014 Plan is ten years. Options granted generally vest over four years. Shares underlying any awards under the 2014 Plan that are forfeited, canceled, reacquired by us prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan.
2015 Stock Plan
In April 2015, our board of directors adopted, and our stockholders approved, the 2015 Stock Plan (the 2015 Plan). The 2015 Plan became effective on May 6, 2015 and we ceased granting any new awards under our 2014 Plan. Awards granted under the 2014 Plan prior to our IPO that are forfeited, canceled, reacquired by us prior to vesting satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan. A total of 112,469 shares of our common stock were initially reserved for issuance under the 2015 Plan. In addition, the number of shares reserved and available for issuance under the 2015 Plan automatically increased each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by the lesser of (i) 131,428 shares, (ii) 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or (iii) an amount determined by our board of directors. Pursuant to this provision, through January 1, 2019, an aggregate of 307,949 additional shares were reserved for issuance under the 2015 Plan. At our 2020 Annual Meeting of Stockholders, our stockholders approved an amendment to increase the number of shares of common stock reserved under the 2015 Plan by 350,000 shares. Total shares available for issuance under the 2015 Plan as of December 31, 2020 were 381,663. Shares underlying any awards under the 2015 Plan that are forfeited, canceled, reacquired by us prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan.
The maximum term of options granted under 2015 Plan is ten years. For an initial grant to an employee, 25% of the options generally vest on the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years. For subsequent grants to an employee, the options generally vest monthly over a four-year term.
78
Inducement Grants
Options under inducement grants vest over a period of four years, with 25% vesting on the one year anniversary of the grant date and the remaining 75% vesting on a monthly basis over three years thereafter, subject to continuous employment. These options were inducement grants issued outside of the 2015 Plan in accordance with Nasdaq Listing Rule 5635(c)(4). In addition, from time to time, we may make inducement grants of stock options to new employees. During the year ended December 31, 2020, we did not make inducement grants of stock options.
Employee Stock Purchase Plan
In April 2015, our board of directors adopted, and our stockholders approved, our 2015 Employee Stock Purchase Plan (the 2015 ESPP). The 2015 ESPP became effective on May 6, 2015. A total of 16,258 shares of our common stock were initially reserved for issuance under the 2015 ESPP. In addition, the number of shares reserved and available for purchase under the 2015 ESPP automatically increased each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by 1% of the outstanding number of shares of our common stock on the immediately preceding December 31 or such lesser number of shares as determined by the administrator of the 2015 ESPP. Pursuant to this provision, through January 1, 2019, an aggregate of 76,988 additional shares were reserved for issuance under the 2015 ESPP. As of December 31, 2020, total shares reserved for issuance under the 2015 ESPP were 75,315.
Stock-based Compensation
Stock Options
Stock option activity is summarized as follows:
Number of
Outstanding
Stock Options
Weighted
Average
Exercise Price
Weighted
Remaining Contractual Term
Aggregate
Intrinsic Value
Outstanding as of December 31, 2019
351,078
$
51.34
Granted
412,432
$
4.18
Canceled/forfeited/expired
(186,976
)
$
33.73
Outstanding as of December 31, 2020
576,534
$
23.33
7.89
$
15,087
Options vested and expected to vest as of December 31, 2020
576,534
$
23.33
7.89
$
15,087
Options exercisable as of December 31, 2020
268,039
$
41.06
6.70
$
1,233
The assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:
Years Ended December 31,
2020
2019
2018
Expected term (in years)
5.50– 6.08
5.51– 6.07
5.50 – 6.08
Risk-free interest rate
0.3% – 1.5
%
1.4% – 2.6
%
2.3% – 3.0
%
Expected volatility
102.2% – 109.7
%
97.2% – 105.4
%
87.9% – 98.4
%
Expected dividend yield
0.0
%
0.0
%
0.0
%
The assumptions used in the Black-Scholes option pricing model to determine the fair value of the ESPP offering were as follows:
Years Ended December 31,
2020
2019
2018
Expected term (in years)
0.50
0.50
0.50
Risk-free interest rate
0.1% – 1.6
%
1.6% – 2.5
%
1.4% – 2.1
%
Expected volatility
89.7% – 143.2
%
99.7% – 141.7
%
71.5% – 99.7
%
Expected dividend yield
0.0
%
0.0
%
0.0
%
Expected term . The expected term represents the period of time that options are expected to be outstanding. Because we do not have sufficient history of exercise behavior, we determine the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.
79
Risk-free interest rate. We base the risk-free interest rate assumption on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.
Expected volatility. The expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.
Expected dividend yield. We base the expected dividend yield assumption on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.
Restricted Stock Units
Occasionally, we grant restricted stock units to employees. The fair value of restricted stock is determined by the closing price of the Company's common stock reported on the Nasdaq Global Select Market on the date of grant. Restricted stock unit activity is summarized as follows:
Number of Outstanding
Restricted Stock Units
Weighted Average
Grant Date
Fair Value
Balance as of December 31, 2019
12,475
$
9.90
Granted
5,000
$
4.29
Released
(8,678
)
$
10.47
Forfeited
(1,120
)
$
11.90
Balance as of December 31, 2020
7,677
$
5.32
The allocation of stock-based compensation for all options, including performance options with market condition and restricted stock units is as follows (in thousands):
Years Ended December 31,
2020
2019
2018
Research and development
$
254
$
354
$
1,216
General and administrative
1,211
1,429
2,215
Total stock-based compensation expense
$
1,465
$
1,783
$
3,431
The weighted–average grant date fair value per share of stock options granted by us, during the years ended December 31, 2020, 2019 and 2018 was $3.39, $5.67 and $25.76, respectively. The total grant date fair value of restricted stock units granted by us during the years ended December 31, 2020, 2019 and 2018 was $21,000, $39,000 and $0.2 million, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2018 was $6,000. We did not have any options exercised during the years ended December 31, 2020 and 2019. The aggregate intrinsic value of restricted stock units released during the years ended December 31, 2020, 2019 and 2018 was $34,000, $31,000 and $19,000, respectively. As of December 31, 2020, total unrecognized share-based compensation expense related to unvested stock options and restricted stock units was approximately $1.8 million and $17,000, respectively. These unrecognized costs for options and restricted stock units are expected to be recognized ratably over a weighted-average period of approximately 2.8 years and 1.7 years, respectively.
Warrants
Warrants outstanding for the purchase of common stock as of December 31, 2020 were as follows:
Number
Exercise Price
Expiration
Outstanding
Per Share
Date
144
$
104.65
March 2021
1,066
$
281.50
July 2023
6,830
$
43.93
November 2023
2,978
$
50.37
June 2024
2,886
$
51.98
December 2024
13,904
80
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance was as follows:
December 31, 2020
Common stock warrants
13,904
Common stock options and restricted stock units
584,211
Shares available under the 2015 equity incentive plan
381,663
Shares available under the employee stock purchase plan
75,315
1,055,093
8. Income Tax
Pretax losses were generated by both domestic and foreign operations as follows (in thousands):
Years Ended December 31,
2020
2019
2018
United States
$
(15,950
)
$
(23,315
)
$
(34,021
)
Foreign
(280
)
(448
)
(494
)
$
(16,230
)
$
(23,763
)
$
(34,515
)
For the years ended December 31, 2020, 2019, and 2018, we did not record a provision for income taxes due to a full valuation allowance against our deferred taxes. A reconciliation of the expected statutory federal income tax provision to the actual income tax provision is summarized as follows (in thousands):
Years Ended December 31,
2020
2019
2018
Expected income taxes benefit at federal statutory rate
$
(3,408
)
$
(4,990
)
$
(7,248
)
State income taxes, net of federal benefit
(12
)
(19
)
(14
)
Permanent items and other
169
49
(80
)
Stock compensation
804
701
850
Research credits
(835
)
(817
)
(1,222
)
Unrecognized tax benefits
334
327
489
Foreign rate differential
13
20
22
Change in tax rate
(7
)
(49
)
(11
)
Change in valuation allowance
2,942
4,778
7,214
Income tax (benefit) expense
$
—
$
—
$
—
Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial and tax reporting purposes. The deferred tax assets consisted primarily of the income tax benefits from net operating loss (NOL) carryforwards, research and development credits and capitalized research and development expenses, along with other accruals and reserves. Valuation allowances of $74.6 million and $71.7 million as of December 31, 2020 and 2019, respectively, have been recorded to offset deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold under ASC 740, Accounting for Income Taxes .
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Significant components of our deferred tax assets are summarized as follows (in thousands):
December 31,
2020
2019
Deferred tax assets:
Net operating loss carryforwards
$
41,203
$
38,180
Capitalized research and development expenses
17,007
16,900
Research credits and other state credits
12,954
12,452
Intangible assets
1,655
1,841
Reserve and accruals
544
481
Share-based compensation expense
1,253
1,829
Lease liability
472
631
Valuation allowance
(74,646
)
(71,702
)
Total deferred tax assets
$
442
$
612
Deferred tax liabilities:
Right of use lease assets
(442
)
(612
)
Total deferred tax liabilities
(442
)
(612
)
Net deferred tax assets
$
—
$
—
As of December 31, 2020, we had federal NOL carryforwards of approximately $177.8 million, with $65.3 million of NOLs generated after December 31, 2017 carrying forward indefinitely and $112.5 million of NOLs that will begin to expire in 2025. NOLs generated after January 1, 2018 are subject to an 80% of taxable income limitation when utilized after December 31, 2020 in accordance with the Tax Cuts and Jobs Act of 2017 as modified by the Coronavirus Aid, Relief and Economic Security Act (CARES Act). We had state net operating loss carryforwards of approximately $164.1 million, and foreign net operating loss carryforwards of $8.3 million. The state net operating losses will begin to expire in 2021. The foreign net operating losses carry over indefinitely.
As of December 31, 2020, we had federal and state research and development credit carryforwards of approximately $5.5 million and $4.5 million, respectively, which begin to expire in 2026 for federal purposes and carry over indefinitely for state purposes. We had $12.5 million of federal Orphan Drug Credits as of December 31, 2020, which will begin to expire in 2035.
Utilization of the domestic NOL and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. Since the Company’s formation, we raised capital through the issuance of capital stock on several occasions which on its own or combined with the purchasing stockholders’ subsequent disposition of those shares, has resulted in such an ownership change, and could result in an ownership change in the future.
Upon the occurrence of an ownership change under Section 382 as outlined above, utilization of the NOL and research and development credit carryforwards become subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term, tax-exempt rate, which could be subject to additional adjustments. Any limitation may result in expiration of a portion of our NOL or research and development credit carryforwards before utilization. Due to the existence of the valuation allowance, any impact to the NOL and research and development tax credit carryforwards from Section 382 analysis will be offset by a corresponding adjustment to valuation allowance, resulting in no tax provision impact.
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
Our practice is to recognize interest and penalties related to income tax matters in income tax expense. We had no accrual for interest and penalties on our balance sheet and had not recognized interest or penalties in the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018.
Due to the existence of the valuation allowance, future changes in unrecognized tax benefits will not impact our effective tax rate.
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Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, derecognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.
The activity related to our unrecognized tax benefits is summarized as follows (in thousands):
December 31,
2020
2019
2018
Balance as of beginning of year
$
21,302
$
19,643
$
16,558
Increase related to prior year tax positions
3
—
2
Increase related to current year tax positions
402
1,659
3,083
Balance as of end of year
$
21,707
$
21,302
$
19,643
We do not anticipate that the amount of unrecognized tax benefits as of December 31, 2020 will change within the next twelve months.
We are subject to taxation in the United States, Hong Kong and state jurisdictions. Our tax years from inception are subject to examination by the United States, Hong Kong and California authorities due to carry forward of unutilized NOLs and research and development credits.
On March 27, 2020, the CARES Act was enacted and signed into law in response to COVID-19. The CARES Act, among other things, included several significant provisions that impacted corporate taxpayers’ accounting for income taxes. Prior to the enactment of the CARES Act, the 2017 Tax Cuts and Jobs Act generally eliminated the ability to carryback net operating losses (NOLs), and permitted the NOLs arising in tax years beginning after December 31, 2017 to be carried forward indefinitely, limited to 80% of the taxpayer’s income. The CARES Act amended the NOL rules, suspending the 80% limitation on the utilization of NOLs generated after December 31, 2017 and before January 1, 2021. Additionally, the CARES Act allows corporate NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five taxable years preceding the taxable year of the loss. Also, the CARES Act allows companies to defer making certain payroll tax payments until future years. With the enactment of the CARES Act, we do not expect a material impact on our consolidated financial positions or results of operations.
On December 27, 2020, the United States enacted the Consolidated Appropriations Act of 2021 (CAA). The CAA includes provisions extending certain CARES Act provisions and adds coronavirus relief, tax and health extenders. We will continue to evaluate the impact of the CAA and its impact on our consolidated financial positions or results of operations in 2021 and future years.
In June 29, 2020, the state of California passed Assembly Bill 85 (AB 85) which suspends the California net operating loss deduction during tax years 2020 through 2022. AB 85 also applies limitation to the amount of tax that can be offset by business credits to $5.0 million for tax years 2020 through 2022. These suspensions were considered in preparation of our 2020 consolidated financial positions or results of operations.
9. Employee Benefits
401(k) Plan
We maintain a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. In April 2015, our Board of Directors approved a policy, beginning on June 1, 2015, to match employee contributions equal to 50% of the participant’s contribution of up to a maximum of 6% of the participant’s annual salary. We made discretionary contributions totaling $0.2 million during each of the years ended December 31, 2020, 2019 and 2018.
10. Subsequent Events
From January 1, 2021 through March 22, 2021 we sold an aggregate of 1,988,254 shares of common stock at a weighted average price of $4.99 per share through our ATM Offering Program for gross proceeds of $9.9 million.
From January 1, 2021 through March 22, 2021 we sold an aggregate of 3,000,000 shares of common stock at a weighted average price of $5.09 per share through our Purchase Agreement with Aspire Capital for gross proceeds of $15.3 million.
On March 23, 2021, we entered into Capital on Demand TM Sales Agreement with JonesTrading Institutional Services LLC (JonesTrading) create an ATM Offering Program under which we may offer and sell shares of our common stock having an aggregate
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offering price of up to $ 25 .0 million. Jones Trading is entitled to a commission at a fixed commission rate equal to up to 3 % of the gross proceeds .
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None