Quarterly Report (10-q)

Date : 04/30/2019 @ 9:46PM
Source : Edgar (US Regulatory)
Stock : Synthorx Inc (THOR)
Quote : 18.51  -0.31 (-1.65%) @ 3:09PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

or

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

For the transition period from           to           

Commission File Number: 001-38756

 

SYNTHORX, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-4709185

(State of incorporation)

(I.R.S. Employer Identification No.)

 

11099 N. Torrey Pines Road, Suite 190

La Jolla, California

92037

(Address of principal executive offices)

(Zip Code)

(858) 750-4789

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

THOR

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes       No  

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of April 22, 2019 was 32,142,214.

 

 

 

 


SYNTHORX, INC.

QUARTERLY REPORT on FORM 10-Q

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

Condensed Balance Sheets

 

1

 

 

Condensed Statements of Operations

 

2

 

 

Condensed Statements of Comprehensive Loss

 

3

 

 

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

4

 

 

Condensed Statements of Cash Flows

 

5

 

 

Notes to Condensed Financial Statements

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

20

Item 4.

 

Controls and Procedures

 

20

 

 

 

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

21

Item 1A.

 

Risk Factors

 

21

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

65

Item 3.

 

Defaults Upon Senior Securities

 

65

Item 4.

 

Mine Safety Disclosures

 

65

Item 5.

 

Other Information

 

65

Item 6.

 

Exhibits

 

66

 

 

 

SIGNATURES

 

67

 

 

 

 


PART I FINANCI AL INFORMATION

ITEM 1.

Financial Statements.

SYNTHORX, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,716

 

 

$

188,356

 

Investment securities, available-for-sale

 

 

137,621

 

 

 

 

Prepaid expenses and other current assets (including related party

   amounts of $0 and $28, respectively)

 

 

1,315

 

 

 

1,688

 

Total current assets

 

 

180,652

 

 

 

190,044

 

Operating lease right-of-use asset (including related party

   amounts of $2,060 and $0, respectively)

 

 

3,106

 

 

 

 

Property and equipment, net

 

 

1,428

 

 

 

1,382

 

Other assets

 

 

80

 

 

 

80

 

Total assets

 

$

185,266

 

 

$

191,506

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,963

 

 

$

2,228

 

Accrued liabilities (including related party amounts of $98 and $123,

   respectively)

 

 

4,802

 

 

 

4,814

 

Lease liability, current (including related party amounts of $145 and $0,

   respectively)

 

 

390

 

 

 

 

Total current liabilities

 

 

8,155

 

 

 

7,042

 

Lease liability, noncurrent (including related party amounts of $2,022 and $0,

   respectively)

 

 

2,931

 

 

 

 

Deferred rent (including related party amounts of $0 and $72,

   respectively)

 

 

 

 

 

104

 

Total liabilities

 

 

11,086

 

 

 

7,146

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; authorized shares 200,000,000

   at March 31, 2019 and December 31, 2018, respectively;

   issued shares — 32,142,214 and 32,103,953 at March 31, 2019 and

   December 31, 2018, respectively; outstanding shares— 31,442,454

   and 31,394,830 at March 31, 2019 and December 31, 2018, respectively

 

 

31

 

 

 

31

 

Additional paid-in capital

 

 

254,442

 

 

 

253,807

 

Accumulated deficit

 

 

(80,329

)

 

 

(69,478

)

Accumulated other comprehensive income

 

 

36

 

 

 

 

Total stockholders’ equity

 

 

174,180

 

 

 

184,360

 

Total liabilities and stockholders’ equity

 

$

185,266

 

 

$

191,506

 

 

The accompanying notes are an integral part of these financial statements.

1


SYNTHORX, INC .

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development (includes related party amounts of $241 and $251, respectively)

 

$

9,564

 

 

$

1,765

 

General and administrative (includes related party amounts of $82 and $65, respectively)

 

 

2,355

 

 

 

425

 

Total operating expenses

 

 

11,919

 

 

 

2,190

 

Loss from operations

 

 

(11,919

)

 

 

(2,190

)

Other income:

 

 

 

 

 

 

 

 

Interest income, net

 

 

1,068

 

 

 

 

Net loss

 

$

(10,851

)

 

$

(2,190

)

Net loss per common share, basic and diluted

 

$

(0.35

)

 

$

(2.32

)

Weighted average common shares outstanding, basic and diluted

 

 

31,430,071

 

 

 

942,605

 

 

The accompanying notes are an integral part of these financial statements.

2


SYNTHORX, INC .

CONDENSED S TATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(10,851

)

 

$

(2,190

)

Other comprehensive gain:

 

 

 

 

 

 

 

 

Unrealized gain on investment securities

 

 

36

 

 

 

 

Comprehensive loss

 

$

(10,815

)

 

$

(2,190

)

 

The accompanying notes are an integral part of these financial statements.

3


SYNTHORX, INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)

 

 

 

Three months ended March 31, 2019

 

 

 

Convertible Preferred

Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Other Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance at December 31, 2018

 

 

 

 

$

 

 

 

31,394,830

 

 

$

31

 

 

$

253,807

 

 

$

(69,478

)

 

$

 

 

$

184,360

 

Exercise of common stock

   options and vesting of

   early exercised common

   stock options

 

 

 

 

 

 

 

 

47,624

 

 

 

 

 

 

51

 

 

 

 

 

 

 

 

 

51

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

584

 

 

 

 

 

 

 

 

 

584

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

36

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,851

)

 

 

 

 

 

(10,851

)

Balance at March 31, 2019

 

 

 

 

$

 

 

 

31,442,454

 

 

$

31

 

 

$

254,442

 

 

$

(80,329

)

 

$

36

 

 

$

174,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

 

 

Convertible Preferred

Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Other Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Deficit

 

Balance at December 31, 2017

 

 

7,253,898

 

 

$

16,103

 

 

 

935,723

 

 

$

1

 

 

$

340

 

 

$

(12,869

)

 

$

 

 

$

(12,528

)

Exercise of common stock

   options and vesting of

   founder shares

 

 

 

 

 

 

 

 

15,346

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,190

)

 

 

 

 

 

(2,190

)

Balance at March 31, 2018

 

 

7,253,898

 

 

$

16,103

 

 

 

951,069

 

 

$

1

 

 

$

367

 

 

$

(15,059

)

 

$

 

 

$

(14,691

)

 

The accompanying notes are an integral part of these financial statements.

4


SYNTHORX, INC .

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(10,851

)

 

$

(2,190

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

584

 

 

 

26

 

(Amortization of premiums) and accretion of discounts on investment

   securities, net

 

 

(426

)

 

 

 

Depreciation

 

 

93

 

 

 

42

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

345

 

 

 

(249

)

Prepaid expenses and other current assets—related parties

 

 

28

 

 

 

(115

)

Accounts payable and accrued liabilities

 

 

775

 

 

 

590

 

Accounts payable and accrued liabilities—related parties

 

 

(25

)

 

 

(254

)

Deferred rent - related parties

 

 

 

 

 

37

 

Operating lease right-of-use assets and liabilities, net

 

 

75

 

 

 

 

Operating lease right-of-use assets and liabilities, net—related parties

 

 

36

 

 

 

 

Net cash used in operating activities

 

 

(9,366

)

 

 

(2,113

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of investment securities

 

 

(137,159

)

 

 

 

Purchases of property and equipment

 

 

(139

)

 

 

(46

)

Net cash used in investing activities

 

 

(137,298

)

 

 

(46

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

24

 

 

 

1

 

Net cash used in financing activities

 

 

24

 

 

 

1

 

Net decrease in cash and cash equivalents

 

 

(146,640

)

 

 

(2,158

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

188,356

 

 

 

3,661

 

End of period

 

$

41,716

 

 

$

1,503

 

 

The accompanying notes are an integral part of these financial statements.

5


SYNTHORX, INC .

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Business

Synthorx, Inc. (the “Company”) was incorporated in the state of Delaware in January 2014 and is based in San Diego, California. The Company is a biopharmaceutical company focused on prolonging and improving the lives of people with cancer and autoimmune disorders. The Company’s platform technology expands the genetic code by adding a new DNA base pair and is designed to create optimized biologics, which the Company refers to as Synthorins.

The Company has incurred significant operating losses since inception and expects to incur operating losses for the foreseeable future as it pursues the preclinical and clinical development of its programs and product candidates. As the Company continues to incur losses, its transition to profitability will depend on the successful development, approval and commercialization of its product candidates and on the achievement of sufficient revenues to support its cost structure. The Company may never achieve profitability, and unless and until it does, will need to continue to raise additional capital to fund its operations.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2019. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The preparation of the Company’s financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to accruals for research and development expenses and the valuation of equity awards. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates.

Reverse Stock Split

On November 26, 2018, the Company effected a 1-for-1.60224 reverse stock split of its common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities at the date of acquisition of three months or less to be cash equivalents. These investments may include money market funds, U.S. Government agencies, corporate debt securities and commercial paper.

 

 

6


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Marketable Securities

Investments with maturities at the date of acquisition of more than three months are considered marketable securities. The Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. The Company has classified its investment holdings as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. The Company’s investment policy sets minimum credit quality criteria and maximum maturity limits on its investments to provide for safety of principle, liquidity and a reasonable rate of return. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses are included in non-operating other income (expense) on the statement of operations and are derived using the specific identification method for determining the cost of the securities sold. During the periods presented, no realized gains or losses were recorded on the sale or maturity of the Company’s marketable securities and no impairments to reduce the value of an available-for-sale equity security were taken. See Note 5 for further discussion.

Research and Development Expenses

All research and development costs are expensed in the period incurred. Research and development expenses primarily consist of services provided by contract organizations for preclinical development, salaries and related expenses for personnel, including stock-based compensation expense, outside service providers, facilities costs, fees paid to consultants and other professional services, license fees, depreciation and supplies used in research and development. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the related goods or services are received.

Stock-Based Compensation

Stock options issued pursuant to the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) and 2014 Equity Incentive Plan (the “2014 Plan”) and option features associated with the rights to purchase shares pursuant to the Company’s 2018 Employee Stock Purchase Plan (the “ESPP”) are valued using the Black-Scholes option pricing model on the date of grant or subscription period. This option pricing model involves a number of estimates, including the expected term of an award or subscription period, the anticipated stock volatility and risk-free interest rates. Stock-based compensation expense is recognized using the straight-line method and is based on the value of the portion of stock awards that are ultimately expected to vest or the number of shares estimated to be issued pursuant to the ESPP.

The table below summarizes the total stock-based compensation expense included in the Company’s condensed statements of operations for stock options and shares subject to purchase under the ESPP for the periods presented (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

400

 

 

$

16

 

General and administrative

 

 

184

 

 

 

10

 

 

 

$

584

 

 

$

26

 

 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases , by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires leases to be recognized on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842 ; ASU No. 2018-10, Codification Improvements to Topic 842, Leases ; and ASU No. 2018-11, Targeted Improvements . The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

A modified retrospective transition approach is required for ASU 2016-02, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on January 1, 2019, and used the effective date as its date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. Further, the Company

7


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

elected the ‘package of practical expedients’ which does not require the Compan y to reassess its prior conclusions about lease identification, lease classification and initial direct costs under the new standard. On adoption, the Company recognized operating liabilities associated with leases of $3.3 million and corresponding ROU ass ets of $3.2 million, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases . See Note 8 for further discussion.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements. The amendments relate to disclosures regarding unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty and are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the timing and impact of the adoption of this guidance on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13,  Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments , which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted only as of annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the timing and impact of the adoption of this guidance on the Company’s consolidated financial statements.

3. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and dilutive common share equivalents outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of this calculation, convertible preferred stock, stock options, employee stock purchase rights, and unvested common stock subject to repurchase are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for the periods presented as their effect would be antidilutive. The Company incurred net losses for all periods presented and there were no reconciling items for potentially dilutive securities. More specifically, at March 31, 2019 and 2018, convertible preferred stock, stock options, employee stock purchase rights, and unvested common stock subject to repurchase totaling approximately 4,880,000 shares and 9,517,000 shares, respectively, were excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive.

4. Fair Value Measurements

The Company follows authoritative accounting guidance, which among other things, 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 non-recurring 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.

8


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

The carrying amounts of the Company’s prepaid expenses and other current assets, accounts payable and accrued liabilities are generally considered to be representative of their fair value because of the short nature of these instruments. The Company’s inve stments, which may include money market funds and available-for-sale investment securities consisting of U.S. Treasury notes, and high quality, marketable debt instruments of corporations and government sponsored enterprises, are measured at fair value in accordance with the fair value hierarchy .

Assets measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018, consisted of the following (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using:

 

 

 

Balance at

March 31,

2019

 

 

Quoted

Prices in

Active

Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Money market funds (1)

 

$

25,922

 

 

$

25,922

 

 

$

 

 

$

 

Commercial paper (2)

 

 

116,032

 

 

 

 

 

 

116,032

 

 

 

 

Corporate debt securities

 

 

37,282

 

 

 

 

 

 

37,282

 

 

 

 

Total

 

$

179,236

 

 

$

25,922

 

 

$

153,314

 

 

$

 

 

 

(1)

Included within cash and cash equivalents on the Company’s condensed balance sheet.

 

(2)

Commercial paper purchased within three months of maturity valued at $7.0 million is included within cash and cash equivalents on the Company’s condensed balance sheet.

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using:

 

 

 

Balance at

December 31,

2018

 

 

Quoted

Prices in

Active

Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Money market funds (1)

 

$

185,203

 

 

$

185,203

 

 

$

 

 

$

 

Total

 

$

185,203

 

 

$

185,203

 

 

$

 

 

$

 

 

 

(1)

Included within cash and cash equivalents on the Company’s condensed balance sheet.

The Company determines the fair value of commercial paper and corporate bonds with the aid of valuations provided by third parties using proprietary valuation models and analytical tools.  These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company validates the valuations received from its primary pricing vendors for its level 2 securities by examining the inputs used in that vendor’s pricing process and determines whether they are reasonable and observable. The Company also compares those valuations to recent reported trades for those securities. The Company did not adjust any of the valuations received from these independent third parties with respect to any of its level 2 securities at March 31, 2019 and n o transfers between levels occurred during the either of the reporting periods presented.

5. Investments in Marketable Securities

The Company’s investment policy defines allowable investment securities and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. In accordance with the Company’s investment policy, it has invested funds in marketable securities at March 31, 2019. The Company had no investments in marketable securities at December 31, 2018.  

9


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

The cost, gross unrealized holding gains, gross unrealized ho lding losses and fair value of available-for-sale investments by types and classes of security at March 31, 2019 consisted of the following (in thousands):

 

 

 

 

 

March 31, 2019

 

 

 

Maturity

(in years)

 

Amortized

Cost Basis

 

 

Other-than-

temporary

Impairments

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Fair

Value

 

Commercial paper

 

1 year or less

 

$

109,011

 

 

$

 

 

$

30

 

 

$

(2

)

 

$

109,039

 

Corporate debt securities

 

1 year or less

 

 

28,574

 

 

 

 

 

 

10

 

 

 

(2

)

 

 

28,582

 

Total available-for-sale securities

 

 

 

$

137,585

 

 

$

 

 

$

40

 

 

$

(4

)

 

$

137,621

 

 

At March 31, 2019, there were nine securities in unrealized loss positions. These securities have not been in a continuous unrealized loss position for more than 12 months. Further, the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis which may be at maturity. As such, the Company has classified these losses as temporary in nature. The Company reviews its investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. 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 and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

6. Balance Sheet Details

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Prepaid insurance

 

$

836

 

 

$

1,171

 

Interest receivable

 

 

243

 

 

 

265

 

Prepaid clinical trial costs

 

 

99

 

 

 

 

Prepaid manufacturing and process development costs

 

 

21

 

 

 

175

 

Other prepaids and current assets (including related party amounts of $0 and

   $28, respectively)

 

 

116

 

 

 

77

 

 

 

$

1,315

 

 

$

1,688

 

 

Property and equipment for the consisted of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Laboratory equipment

 

$

1,691

 

 

$

1,635

 

Leasehold improvements

 

 

118

 

 

 

72

 

Software/Hardware

 

 

55

 

 

 

 

Furniture and fixtures

 

 

55

 

 

 

36

 

Construction in progress

 

 

4

 

 

 

41

 

 

 

$

1,923

 

 

$

1,784

 

Less accumulated depreciation and amortization

 

 

(495

)

 

 

(402

)

 

 

$

1,428

 

 

$

1,382

 

 

10


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Accrued liabilities consist ed of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Accrued research and development (including related party amounts of $0 and

   $59, respectively)

 

$

2,414

 

 

$

1,579

 

Stock repurchase liability

 

 

1,117

 

 

 

1,143

 

Accrued compensation

 

 

723

 

 

 

895

 

Other accrued liabilities (including related party amounts of $98 and $64,

   respectively)

 

 

548

 

 

 

1,197

 

 

 

$

4,802

 

 

$

4,814

 

 

 

7. Related Party Transactions

In February 2015, as amended in October 2017, the Company entered into a Support Services Agreement with COI Pharmaceuticals, Inc. (“COI”) that outlines the terms of services provided by COI to the Company, as well as the fees charged for such services. Jay Lichter, Ph.D., a member of the Company’s board of directors, and Tighe Reardon, the Company’s Acting Chief Financial Officer, are each an executive officer and director of COI, a shared service company that provides certain back-office and administrative and research and development support services, including facilities support, to the portfolio companies of Avalon Ventures, a stockholder of the Company. The Company pays COI quarterly prepayments for estimated costs to be incurred under the agreement in such quarter. Either party may terminate the support services agreement by giving 30 days’ prior notice. The support services agreement automatically renews in October of each year unless terminated by either party by giving 30 days’ prior notice.

Expense recognized by the Company under the support services agreement with COI and costs incurred pursuant to a sublease with COI, as further described in Note 8, for the periods presented were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

152

 

 

$

158

 

General and administrative

 

 

79

 

 

 

62

 

 

 

$

231

 

 

$

220

 

 

At March 31, 2019 and December 31, 2018, the Company had accounts payable and accrued expenses due to COI of $0.1 million and $0.1 million, respectively. As of December 31, 2018 the Company had prepaid expenses to COI of less than $0.1 million. No amounts were due from COI and the Company had no prepaid expenses to COI at March 31, 2019.

Research Funding and Option Agreement

In July 2014, the Company entered into a Research Funding and Option Agreement (the “Research Agreement”) for certain technologies from The Scripps Research Institute (“TSRI”), and in August 2018, amended the Research Agreement. Pursuant to the agreement (as amended), the Company provides funding to TSRI to conduct certain research activities under a research program. The agreement continues in effect until the earlier of (a) July 2019, and (b) the completion of the research program, unless extended or terminated by mutual agreement and subject to customary termination provisions related to failure to make payments, breach or insolvency. Under the research funding and option agreement, TSRI granted the Company an option to enter into a license agreement for certain patent rights and technology related to the research program. As described below, the license agreement was entered into in July 2014, and any intellectual property to which the Company exercises the foregoing option will be included in such license agreement. The Company is obligated to provide research funding to TSRI in the amount of $0.2 million both during 2018 and 2019, of which $0.1 million was paid in 2018 and $0.1 million had been paid in 2019 as of March 31, 2019.

License Agreement

In July 2014, the Company entered into a License Agreement (the “TSRI License”) with TSRI. Under the TSRI License (as amended), TSRI granted the Company an exclusive, worldwide, royalty-bearing, sublicensable, license to certain TSRI patent rights, know-how and biological materials (the “Licensed Technology”), to make, use, sell, offer for sale, and import products covered by the claims of the licensed patent rights or developed by the Company through the use of the Licensed Technology (the “Licensed Products”) and to otherwise exploit the Licensed Technology. The Licensed Technology forms the basis for the Company’s

11


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

proprietary Expanded Genetic Alphabet platform technology. The license granted to the Company by TSRI under the Licensed Technology is su bject to certain U.S. Government rights and certain other limited rights retained by TSRI.

In consideration for the license, the Company issued TSRI 30,663 shares of the Company’s common stock. In July 2015, the Company issued an additional 8,711 shares of its common stock to TSRI. Beginning in July 2017, and annually thereafter, the Company is required to pay TSRI an immaterial annual minimum royalty. The Company is also obligated to pay running royalties in the low single digit percentages on its or its sublicensees’ net sales of the Licensed Products on a country-by-country and product-by-product basis. Certain of these payment obligations may be increased during the pendency of any challenge of the licensed patent rights by the Company, its affiliates, or sublicensees. In the event that the Company is required to obtain a license under patent rights held by a third party to prevent infringement of the Licensed Products, the Company may offset its royalty obligations to TSRI by up to a maximum mid-double digit percentage of any royalties the Company pays to such third party. However, in no event, can the Company reduce the royalties payable to TSRI by more than a mid-double digit percentage in any calendar quarter. The Company’s royalty obligations as to each product terminate on a country-by-country basis upon the expiration of the last-to-expire of the licensed patent claims that cover the Licensed Products. In addition, the Company is also required to pay TSRI (i) an amount in the low-double digit percent range of sublicensing revenues, (ii) an amount in the high-single digit percent range of non-sublicensing transaction revenues, such as amounts received for grants of licenses to third parties and grants of other distribution or marketing rights, payable in shares of the Company’s capital stock and (iii) milestone payments of up to $2.4 million for each Licensed Product. The Company is responsible for reimbursing TSRI for its patent costs incurred in connection with prosecuting and maintaining the TSRI License patent rights. The parties may terminate the TSRI License at any time by mutual agreement. In addition, the Company may terminate the TSRI License by giving 90 days’ notice to TSRI and TSRI may terminate the TSRI License immediately in the event of certain breaches of the agreement by the Company or upon the Company’s failure to undertake certain activities in furtherance of commercial development goals. Unless terminated earlier by either or both parties, the term of the TSRI License will continue until the final expiration of all royalty obligations under the agreement.

Academic Development Program Awards

The Company has incurred research and development expense in connection with academic development program awards to TSRI to fund direct research. A member of the Company’s board of directors is a faculty member at TSRI and such payments fund a portion of his research activities conducted at TSRI.

Expense recognized by the Company related to the above agreements with TSRI for the periods presented was as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

89

 

 

$

93

 

General and administrative

 

 

3

 

 

 

3

 

 

 

$

92

 

 

$

96

 

 

As of December 31, 2018, the Company had accounts payable and accrued expenses due to TSRI of $0.1 million. The Company had no accounts payable and accrued expenses due to TSRI at March 31, 2019. Further, as of March 31, 2019 and December 31, 2018, the Company had no prepaid expenses to TSRI.

8. Commitments and Contingencies

Operating Lease

In August 2017, the Company entered into a sublease with COI, a related party, for its corporate office and laboratory space in La Jolla, California (the “2017 Sublease”). In November 2018, the Company amended the 2017 Sublease to provide the Company with a one-time right to terminate as of March 1, 2024, subject to certain conditions and fees. The 2017 Sublease, as amended, which expires in February 2027, contains rent escalations and the Company is required to pay for common area maintenance and other costs during the term of the lease. In connection with the 2017 Sublease, the Company recognized an operating lease right-of-use asset of $2.1 million as of March 31, 2019 and an aggregate lease liability of $2.2 million in its balance sheet. The remaining lease term is 7 years and 11 months, and the estimated incremental borrowing rate used by the Company to recognize the lease liability was 8.5%. The right to early terminate the lease was not recognized as part of the Company’s lease liability and right-of-use lease asset.

12


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

In addition, in September 2018, the Company entered into a noncancelable operating lease for additional corporate office and laboratory space (the “Lease”). The Lease commenced in November 2018 and will expire in February 2023 , however, t he Company has the option to extend the Lease for a 12-month period. The Lease provided for abatement of rent during the first four months of the lease, contains rent escalat ions and the Company is required to pay for common area maintenance and other costs during the term of the lease . In connection with the Lease, the Company recognized an operating lease right-of-use asset of $1. 0 million as of March 31, 2019 and an aggrega te lease liability of $1.2 million in its balance sheet. The remaining lease term is 4 years, and the estimated incremental borrowing rate used by the Company to recognize the lease liability was 7%. The option to extend the lease was not recognized as par t of the Company’s lease liability and right-of-use lease asset.

Future minimum lease payments under the 2017 Sublease and the Lease as of March 31, 2019 are as follows (in thousands):

 

2019

$

501

 

2020

 

655

 

2021

 

675

 

2022

 

727

 

2023

 

483

 

Thereafter

 

1,327

 

Total future minimum lease payments

 

4,368

 

Less interest

 

(1,047

)

Total lease liability

$

3,321

 

Weighted average lease term

6.7 years

 

Weighted average discount rate

 

8.0

%

 

Operating lease costs were $0.3 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.

Contingencies

From time to time, the Company becomes subject to claims or suits arising in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. The Company had no such contingent liabilities as of March 31, 2019 or December 31, 2018, respectively.

9. Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Authorized Shares

In connection with the completion of the Company’s initial public offering (“IPO”) in December 2018, the Company amended its Certificate of Incorporation to authorize 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share, respectively.

Public Offering and Related Transaction

In December 2018, the Company completed its IPO selling 13,699,636 shares its common stock at $11.00 per share. Proceeds from the Company’s IPO, net of underwriting discounts and commissions and other offering costs, were $137.5 million. In connection with the IPO, all 26,737,354 shares of convertible preferred stock outstanding at the time of the IPO converted into 16,687,477 shares of the Company’s common stock.

Convertible Preferred Stock

Prior to its conversion to common stock, the Company’s convertible preferred stock was classified as temporary equity on the Company’s balance sheets in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities whose redemption is based upon certain change in control events outside of the Company’s control, including liquidation, sale or transfer of control of the Company. The Company had determined not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty of whether or when such events would occur.

13


SYNTHORX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS Continued

(Unaudited)

 

During the year ended December 31, 2018 , the Company issued convertible preferred stock as follows:

 

in April 2018, the Company issued 8,118,108 shares of Series C convertible preferred stock, raising proceeds, net of offering costs, of $26.3 million; and

 

in November 2018, the Company issued 11,365,348 shares of Series C convertible preferred stock, raising proceeds, net of offering costs, of $37.1 million.

Equity Incentive Plans

In November 2018, the Company’s board of directors and stockholders approved the 2018 Plan that became effective upon the date of the underwriting agreement related to the IPO. Upon adoption of the 2018 Plan, the Company restricted future grants from its 2014 Plan. A total of 3,428,492 new shares of common stock were initially reserved for issuance under the 2018 Plan. The number of shares reserved under the 2018 Plan also include 87,111 shares of common stock that remained available for issuance under the 2014 Plan at the time the 2018 Plan became effective, and will be increased by the number of shares under the 2014 Plan that are repurchased, forfeited, expired or cancelled on or after the effective date of the 2018 Plan. In addition, the number of shares of common stock available for issuance under the 2018 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2019 through January 1, 2028, in an amount equal to 4% of the total number of shares of the Company’s common stock on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Company’s board of directors. On January 1, 2019, 1,284,158 shares were automatically added to the 2018 Plan pursuant to the provision.

Early Exercise of Stock Options

Certain stock options granted under the Company’s 2014 Plan provide option holders the right to elect to exercise unvested options in exchange for restricted common stock. A summary of the early exercised shares is as follows:

 

 

 

Shares

 

Balance as of December 31, 2018

 

 

709,123

 

Shares vested

 

 

(9,363

)

Balance as of March 31, 2019

 

 

699,760

 

 

The shares are subject to repurchase by the Company at the original exercise price in the event the optionee’s service is terminated either voluntarily or involuntarily prior to vesting. As of March 31, 2019 and December 31, 2018, the Company recorded accrued liabilities of $1.1 million and $1.1 million, respectively, associated with the repurchase rights for early exercised stock options.

2018 Employee Stock Purchase Plan

In November 2018, the Company’s board of directors and stockholders approved and adopted the ESPP that became effective immediately prior to the date of the underwriting agreement related to the IPO. The ESPP permits eligible employees who elect to participate in an offering under the ESPP to have up to 15% of their eligible earnings withheld, subject to certain limitations, to purchase shares of common stock pursuant to the ESPP. The price of common stock purchased under the ESPP is equal to 85 percent of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant date of purchase. A total of 645,000 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will automatically increase on January 1 of each calendar year, starting on January 1, 2019 through January 1, 2028, in an amount equal to the lesser of (i) 1% of the total number of shares of the Company’s common stock on the last day of the calendar month before the date of each automatic increase and (ii) 750,000 shares; provided that before the date of any such increase, the Company’s board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). On January 1, 2019, 321,039 shares were automatically added to the ESPP pursuant to the provision.

As of March 31, 2019, no shares were issued under the ESPP.

 

14


 

ITEM 2.

M anagement’s Discussion and Analysis of Financial Condition and Results of Operations .

You should read the following discussion and analysis together with our unaudited financial statements and notes thereto included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2018 included in the Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or the SEC, on March 12, 2019. I n addition to historical information, this Quarterly Report contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption “Risk Factors” in the Annual Report, and the caption “Risk Factors” in this Quarterly Report, as updated by our subsequent filings under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Furthermore, past operating results are not necessarily indicative of results that may occur in future periods.

Overview

We are a biopharmaceutical company focused on prolonging and improving the lives of people with cancer and autoimmune disorders. Our proprietary, first-of-its kind platform technology expands the genetic code by adding a new DNA base pair and is designed to create optimized biologics, which we refer to as Synthorins. A Synthorin is a protein optimized through incorporation of novel amino acids encoded by our new DNA base pair that enables site-specific modifications, which enhance the pharmacological properties of these therapeutics. Our lead product candidate, THOR-707, is a variant of IL-2 designed to kill tumor cells by increasing CD8+ T and NK cells without causing vascular leak syndrome observed with approved recombinant IL-2 (aldesleukin). Based on our preclinical studies, we believe our platform technology can generate a pipeline of additional therapeutics that are more effective, better tolerated or have enhanced ease of use when compared to drugs that have been engineered by other means. We have worldwide rights to our Expanded Genetic Alphabet platform technology and our Synthorins.

We are initially using our Expanded Genetic Alphabet platform technology to develop cytokine Synthorins that target validated mechanisms of action with large market opportunities, in which existing therapies have significant drawbacks. We have designed cytokine Synthorin programs, including IL-2, IL-10 and IL-15, for the treatment of cancer, and another IL-2 Synthorin program for the treatment of autoimmune disorders. We plan to develop THOR-707 to treat multiple tumor types. We plan to file an IND with the FDA stating a general solid tumor indication in the second quarter of 2019 and, thereafter, initiate a Phase 1/2 clinical trial of THOR-707 in multiple solid tumor types as both a single agent and in combination with an immune checkpoint inhibitor. We plan to specify particular indications for THOR-707 after our initial clinical trials. In our studies of THOR-707 we plan to target indications historically sensitive to IL-2 and PD-1 inhibitors, such as melanoma, renal cell carcinoma, non-small cell lung cancer and urothelial cancer. Our second development program is focused on the development of an IL-2 Synthorin for autoimmune indications, initially in chronic graft versus host disease, or GVHD, atopic dermatitis and Crohn’s disease. We have several lead IL-2 AI Synthorin molecules that have demonstrated activity ex vivo on human immune cells and we are advancing these molecules into in vivo studies. We intend to nominate a lead IL-2 AI Synthorin product candidate in 2019 and start IND-enabling studies thereafter. We then plan to file an IND in 2020 and begin clinical development thereafter. We expect to begin in vitro and in vivo studies of our Synthorin IL-10 in the first half of 2019 and begin IND-enabling studies thereafter. We have also identified multiple IL-15 Synthorins and expect to identify a development candidate in the first half of 2019.

To date, we have incurred significant net losses since our inception and as of March 31, 2019 had an accumulated deficit of $80.3 million. Our net losses have resulted primarily from costs incurred in connection with raising capital, research and development activities and general and administrative expenses. We also incurred a $36.0 million non-cash charge in 2018 from the increase in the fair value of a convertible preferred stock purchase right granted in April 2018 and settled in November 2018. We do not have any products approved for sale and have not generated any revenue from product sales or otherwise.

We expect to incur operating losses for the foreseeable future as we pursue the preclinical and clinical development of our programs. Furthermore, we anticipate these losses will increase substantially as we continue our research and development of, and eventually seek regulatory approvals for, our lead product candidate, THOR-707, and any other future product candidates, and as we expand our clinical, regulatory, quality and manufacturing capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution, if we obtain marketing approval for any of our product candidates, and incur additional costs associated with operating as a public company. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through public or private equity offerings, debt financings, collaborations and licensing arrangements or other capital sources.

15


 

In December 2018, we completed our initial public offering in which we sold 13,699,636 million shares of our common stock at $11.00 per share and received net proceeds, after underwriting discount and offering costs, of $137.5 million . Further, i n April and November 2018, we issued a total of 19,483,456 shares of Series C convertible preferred stock at a price of $3.2699 per share, resulting in aggregate proceeds , net of offering costs, of $63.4 million. Upon the closing of our initial public offering, all 26,737,354 outstanding shares of our convertible preferred stock automatically converted into 16,687,477shares of common stock.

Financial Operations Overview

Research and Development Expenses

To date, our research and development expenses have related primarily to development of our Expanded Genetic Alphabet platform technology and discovery efforts, preclinical studies and other preclinical activities related to our portfolio of Synthorins, including our lead product candidate THOR-707. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Research and development expenses include:

 

external research and development expenses incurred under agreements with contract research organizations and consultants to conduct our preclinical, toxicology and other preclinical studies;

 

costs related to manufacturing THOR-707 for preclinical and clinical studies, including fees paid to third-party manufacturers and raw material suppliers;

 

laboratory supplies;

 

salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals involved in research and development efforts;

 

license fees and research funding to TSRI; and

 

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance, equipment and other supplies.

Our direct research and development expenses consist principally of external costs, such as fees paid to contract research organizations, or CROs, and consultants in connection with our preclinical and toxicology studies, and costs related to manufacturing materials for preclinical studies. Prior to our identification of potential product candidates in our IL-2 IO program in late 2017, we did not track external costs by program. Subsequent to the identification of potential product candidates, a significant majority of our direct research and development costs are related to these IL-2 IO Synthorins and, more specifically, THOR-707. We deploy our personnel and facility related resources across all of our research and development activities.

We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of THOR-707 and the discovery and development of new product candidates. We cannot determine with certainty the timing of initiation, the duration or the completion costs of future clinical trials and preclinical studies of product candidates due to the inherently unpredictable nature of preclinical and clinical development. 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 and development programs to pursue and how much funding to direct to each product candidate or program 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.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, insurance costs and facility-related costs. We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities and, if any product candidates receive marketing approval, commercialization activities. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

16


 

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments used in our accounting practices and reflect the effects of revisions in the period in which they are deemed necessary. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. For a description of our critical accounting policies, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have not been any material changes to our critical accounting policies since December 31, 2018.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

9,564

 

 

$

1,765

 

 

$

7,799

 

General and administrative

 

 

2,355

 

 

 

425

 

 

 

1,930

 

Total operating expenses

 

 

11,919

 

 

 

2,190

 

 

 

9,729

 

Loss from operations

 

 

(11,919

)

 

 

(2,190

)

 

 

(9,729

)

Interest Income

 

 

1,068

 

 

 

 

 

 

1,068

 

Net loss

 

$

(10,851

)

 

$

(2,190

)

 

$

(8,661

)

 

Research and Development Expenses. Research and development expenses were $9.6 million and $1.8 million for the three months ended March 31, 2019 and 2018, respectively. The increase of $7.8 million was due primarily to an increase of $4.5 million in external expense related to our THOR-707 program and $1.5 million of increased personnel and related expenses, including $0.4 of additional non-cash stock-based compensation expense, as we have increased our research and development headcount to support our development programs. We also incurred additional external costs on our other development programs during the three months ended March 31, 2019 as compared to same period in 2018, including our IL-2 AI program.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2019 were $2.4 million, an increase of $1.9 million from the $0.4 million incurred for the same period in 2018. The increase in expenses in 2019 was due primarily to $0.9 million of increased personnel and related expenses, including $0.2 million of additional non-cash stock-based compensation expense, as we have increased our general and administrative headcount to support our expanding operations. Furthermore, we incurred additional costs during the three months ended March 31, 2019 that were not incurred in during the same period in 2018 as we now operate as a public company, including additional insurance, legal and accounting fees.

Interest Income. The $1.1 million of interest income recognized for the three months ended March 31, 2019 was primarily due to an increase in our excess cash reserves, primarily from our initial public offering in December 2018, and the execution of our investment policy in the fourth quarter of 2018 whereby we began investing our excess cash reserves in investment securities and interest-bearing money-market accounts. Prior to the fourth quarter of 2018, our excess cash reserves were in a non-interest-bearing account and hence there was no similar income for the three months ended March 31, 2018 .

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Liquidity and Capital Resources

We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. Since inception, we have financed our operations primarily through the sale of our equity securities and we will need to raise substantial additional capital in the future. For example, in 2018, we raised proceeds, net of offering costs, of $137.5 million from our initial public offering in December 2018, and $63.4 million from the sale of our Series C convertible preferred stock in April and November 2018.

As of March 31, 2019 we had $41.7 million of cash and cash equivalents, a decrease of $146.6 million from the $188.4 million of cash and cash equivalents at December 31, 2018. The decrease in our cash and cash equivalents balance during the three months ended March 31, 2019 was primarily due to the execution of our investment policy during the period whereby we began investing a significant portion of our cash and cash equivalents in available-for-sale investment securities. Further detail of the change in our cash and cash equivalents for the three months ended March 31, 2019 and 2018 is summarized below.

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2019

 

 

2018

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

Operating activities

 

$

(9,366

)

 

$

(2,113

)

Investing activities

 

 

(137,298

)

 

 

(46

)

Financing activities

 

 

24

 

 

 

1

 

Net decrease in cash and cash equivalents

 

$

(146,640

)

 

$

(2,158

)

 

Operating Activities

Net cash used in operating activities was $9.4 million for the three months ended March 31, 2019, as compared to $2.1 million for same period in 2018. The $7.3 million increase in net cash used in operating activities was primarily due to an increase of $8.7 million in our net loss for the 2019 period as compared to the 2018 period . This increase in our net loss was mostly due to the advancement of our research and development programs, including THOR-707, and increased personnel costs to support these activities and our operations as a public company. The impact from our increased net loss during the 2019 period as compared to 2018, was partially offset by increases in our accounts payable and accrued liability balances during 2019, due to the increased expenses associated with our development efforts and supporting activities.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2019 was primarily due to the execution of our investment policy whereby we began investing our excess cash reserves, including the $137.5 million of net proceeds from our initial public offering in December 2018, in investment securities in accordance with our investment policy. In addition, we purchased property and equipment in each period, primarily consisting of laboratory equipment.

Financing Activities and Funding Requirements

Net cash provided by financing activities was from the exercise of stock options in each period.

We believe that our existing cash and cash equivalent balance will be sufficient to meet our anticipated cash requirements through at least the next 12 months. However, 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. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

Our future capital requirements will depend on many factors, including:

 

the initiation, progress, timing, costs and results of drug discovery, preclinical studies and clinical trials of THOR-707 and any other future product candidates;

 

the number and characteristics of product candidates that we pursue;

 

the outcome, timing and costs of seeking regulatory approvals;

18


 

 

the cost of manufacturing THOR-707 and future product candidates for clinical tri als in preparation for marketing approval and in preparation for commercialization;

 

the costs of any third-party products used in our combination clinical trials that are not covered by such third party or other sources;

 

the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;

 

the receipt of marketing approval and revenue received from any potential commercial sales of THOR-707 or other product candidates;

 

the cost of commercialization activities for THOR-707 and future product candidates we develop if we receive marketing approval, including marketing, sales and distribution costs;

 

the emergence of competing therapies and other adverse market developments;

 

the ability to establish and maintain strategic licensing or other arrangements and the financial terms of such agreements;

 

the amount and timing of any payments we may be required to make pursuant to the TSRI Agreement, or other future license agreements;

 

the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;

 

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