lyra-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2020

OR

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

For the transition period from ___________________ to ___________________

Commission File Number: 001-39273

 

Lyra Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-1700838

(State or other jurisdiction of

incorporation or organization)

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

480 Arsenal Way

Watertown, MA

02472

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 393-4600

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

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, $0.001 par value per share

 

LYRA

 

The Nasdaq Global 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  

As of May 22, 2020, the registrant had 12,924,563 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, the anticipated impact of the novel coronavirus, or COVID-19, pandemic on our business, business strategy, prospective products, product approvals, research and development costs, anticipated timing and likelihood of success of clinical trials, expected timing of the release of clinical trial data, the plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the sections in this Quarterly Report on Form 10-Q titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Condensed Consolidated Financial Statements (unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

3

 

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

27

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

81

Item 3.

Defaults Upon Senior Securities

81

Item 4.

Mine Safety Disclosures

81

Item 5.

Other Information

81

Item 6.

Exhibits

82

Signatures

83

 

 

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

LYRA THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,247

 

 

$

9,808

 

Prepaid expenses and other current assets

 

 

293

 

 

 

311

 

Total current assets

 

 

35,540

 

 

 

10,119

 

Property and equipment, net

 

 

284

 

 

 

237

 

Operating lease right-of-use asset

 

 

2,963

 

 

 

3,182

 

Restricted cash

 

 

329

 

 

 

329

 

Deferred offering costs

 

 

1,650

 

 

 

1,096

 

Total assets

 

$

40,766

 

 

$

14,963

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,358

 

 

$

1,069

 

Accrued expenses and other current liabilities

 

 

2,881

 

 

 

3,240

 

Operating lease liability

 

 

919

 

 

 

899

 

Total current liabilities

 

 

5,158

 

 

 

5,208

 

Operating lease liability, net of current portion

 

 

2,192

 

 

 

2,427

 

Total liabilities

 

 

7,350

 

 

 

7,635

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Series A-1 redeemable convertible preferred stock, $0.001 par value; 34,017,033 shares

   authorized, issued and outstanding at March 31, 2020 and December 31, 2019 (aggregate

   liquidation preference of $14,157 at March 31, 2020)

 

 

39,742

 

 

 

39,742

 

Series A-2 redeemable convertible preferred stock, $0.001 par value; 26,680,202 shares

   authorized, issued and outstanding at March 31, 2020 and December 31, 2019 (aggregate

   liquidation preference of $9,063 at March 31, 2020)

 

 

18,393

 

 

 

18,393

 

Series A-3 redeemable convertible preferred stock, $0.001 par value; 30,070,487 shares

   authorized, issued and outstanding at March 31, 2020 and December 31, 2019 (aggregate

   liquidation preference of $18,779 at March 31, 2020)

 

 

38,114

 

 

 

38,114

 

Series A-4 redeemable convertible preferred stock, $0.001 par value; 19,999,999 shares

   authorized, issued and outstanding at March 31, 2020 and December 31, 2019 (aggregate

   liquidation preference of $6,000 at March 31, 2020)

 

 

6,000

 

 

 

6,000

 

Series B redeemable convertible preferred stock, $0.001 par value; 98,351,953 and 100,018,619

   shares authorized at March 31, 2020 and December 31, 2019, respectively; 98,351,953 shares

   issued and outstanding at March 31, 2020 and December 31, 2019 (aggregate

   liquidation preference of $29,506 at March 31, 2020)

 

 

28,496

 

 

 

28,417

 

Series C redeemable convertible preferred stock, $0.001 par value; 90,180,614 shares

   authorized at March 31, 2020; 78,306,611 shares issued and outstanding at March 31, 2020

   (aggregate liquidation preference of $30,392 at March 31, 2020)

 

 

29,452

 

 

 

 

Total redeemable convertible preferred stock

 

 

160,197

 

 

 

130,666

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 400,000,000 and 275,000,000 shares authorized at

   March 31, 2020 and December 31, 2019, respectively; 230,860 shares issued and

   outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Additional paid-in capital

 

 

5,208

 

 

 

4,419

 

Accumulated deficit

 

 

(131,989

)

 

 

(127,757

)

Total stockholders’ deficit

 

 

(126,781

)

 

 

(123,338

)

Total liabilities, redeemable convertible preferred stock and stockholders’

  deficit

 

$

40,766

 

 

$

14,963

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


LYRA THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

2,964

 

 

$

2,764

 

General and administrative

 

 

1,284

 

 

 

860

 

Total operating expenses

 

 

4,248

 

 

 

3,624

 

Loss from operations

 

 

(4,248

)

 

 

(3,624

)

Other income:

 

 

 

 

 

 

 

 

Interest income

 

 

16

 

 

 

35

 

Total other income

 

 

16

 

 

 

35

 

Net loss

 

$

(4,232

)

 

$

(3,589

)

Comprehensive loss

 

$

(4,232

)

 

$

(3,589

)

Net loss per share attributable to common stockholders—basic and diluted

 

$

(18.70

)

 

$

(21.54

)

Weighted-average common shares outstanding—basic and diluted

 

 

230,860

 

 

 

170,156

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

 

LYRA THERAPEUTICS, INC.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

(unaudited)

(in thousands, except share amounts)

 

 

 

Redeemable

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Value

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at December 31, 2018

 

 

209,119,674

 

 

$

130,353

 

 

 

 

170,156

 

 

$

 

 

$

4,377

 

 

$

(111,451

)

 

$

(107,074

)

Accretion of convertible

   preferred stock to

   redemption value

 

 

 

 

 

77

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

 

 

 

(77

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

48

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,589

)

 

 

(3,589

)

Balance at March 31, 2019

 

 

209,119,674

 

 

$

130,430

 

 

 

 

170,156

 

 

$

 

 

$

4,348

 

 

$

(115,040

)

 

$

(110,692

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Value

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at December 31, 2019

 

 

209,119,674

 

 

$

130,666

 

 

 

 

230,860

 

 

$

 

 

$

4,419

 

 

$

(127,757

)

 

$

(123,338

)

Issuance of Series C

   redeemable convertible

   preferred stock, net of

   issuance costs of $201

 

 

78,306,611

 

 

 

29,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

   warrants in conjunction with sale

   of Series C redeemable

   convertible preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

740

 

 

 

 

 

 

740

 

Accretion of convertible

   preferred stock to

   redemption value

 

 

 

 

 

85

 

 

 

 

 

 

 

 

 

 

(85

)

 

 

 

 

 

(85

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134

 

 

 

 

 

 

134

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,232

)

 

 

(4,232

)

Balance at March 31, 2020

 

 

287,426,285

 

 

$

160,197

 

 

 

 

230,860

 

 

$

 

 

$

5,208

 

 

$

(131,989

)

 

$

(126,781

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


LYRA THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,232

)

 

$

(3,589

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

134

 

 

 

48

 

Depreciation expense

 

 

8

 

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

18

 

 

 

35

 

Operating lease right-of-use asset

 

 

219

 

 

 

226

 

Accounts payable

 

 

432

 

 

 

(46

)

Accrued expenses and other current liabilities

 

 

(381

)

 

 

527

 

Operating lease liability

 

 

(215

)

 

 

(214

)

Net cash used in operating activities

 

 

(4,017

)

 

 

(3,005

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8

)

 

 

(52

)

Net cash used in investing activities

 

 

(8

)

 

 

(52

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the sale of Series C redeemable convertible preferred stock

 

 

30,392

 

 

 

 

Payment of offering costs related to sale of Series C redeemable convertible preferred

   stock

 

 

(155

)

 

 

 

Payments for deferred offering costs

 

 

(773

)

 

 

 

Net cash provided by financing activities

 

 

29,464

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

25,439

 

 

 

(3,057

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

10,137

 

 

 

24,217

 

Cash and cash equivalents and restricted cash, end of period

 

$

35,576

 

 

$

21,160

 

Supplemental disclosure of non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable

 

$

49

 

 

$

 

Allocation of Series C redeemable convertible preferred stock to common stock warrant

 

$

740

 

 

$

 

Series C redeemable convertible preferred stock issuance costs included in accounts

   payable and accrued expense

 

$

51

 

 

$

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

85

 

 

$

77

 

Right-of-use asset obtained in exchange of operating lease obligation

 

$

 

 

$

4,045

 

Deferred offering costs included in accounts payable and accrued expense

 

$

702

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5

 


 

LYRA THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Basis of Presentation

Lyra Therapeutics, Inc. (the “Company”) is a clinical-stage therapeutics company focused on the development and commercialization of novel integrated drug and delivery solutions for the localized treatment of patients with ear, nose and throat (“ENT”) diseases. The Company’s proprietary technology platform, XTreo, is designed to precisely and consistently deliver medicines directly to the affected tissue for sustained periods with a single administration. The Company’s initial product candidates, LYR-210 and LYR-220, are bioresorbable polymeric matrices designed to be administered in a brief, non-invasive, in-office procedure and intended to deliver up to six months of continuous drug therapy to the sinonasal passages for the treatment of chronic rhinosinusitis (“CRS”). The Company was incorporated as a Delaware corporation on November 21, 2005 and is located in Watertown, Massachusetts. On July 16, 2018, the Company formerly changed its name from 480 Biomedical, Inc. to Lyra Therapeutics, Inc.

The Company is subject to risks common to companies in the therapeutics and pharmaceutical industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, reliance on third party manufacturers, ability to transition from pilot-scale manufacturing to large-scale production of products and the need to obtain adequate additional financing to fund the development of its product candidates.

Since inception, the Company has funded its operations with proceeds from sales of redeemable convertible preferred stock and funding from government contracts. The Company has incurred recurring net losses since inception and had net losses of approximately $4.2 million and $3.6 million for the three months ended March 31, 2020 and 2019, respectively. In addition, the Company has an accumulated deficit of approximately $132.0 million at March 31, 2020. The Company expects to continue to generate operating losses for the foreseeable future. At March 31, 2020, the Company had approximately $35.2 million of cash and cash equivalents.

On May 5, 2020, the Company completed its initial public offering (“IPO”), in which the Company issued and sold 4,025,000 shares of its common stock, including 525,000 shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $16.00 per share, for aggregate gross proceeds of $64.4 million. The Company received approximately $57.3 million in net proceeds after deducting underwriting discounts and estimated offering expenses payable by the Company.

The Company believes that its cash and cash equivalents as of March 31, 2020 along with the $57.3 million in net IPO proceeds will be sufficient to fund the Company’s operating plan for a period of at least one year from the issuance date of the condensed consolidated financial statements. The Company will need additional financing to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through equity or debt financings, collaboration agreements, licensing arrangements or government grants. The Company may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all.  The inability to obtain funding as and when needed would have a negative impact on the Company’s financial condition and ability to pursue its business strategies. If the Company is unable to obtain funding when needed, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.  The Company will need to generate significant revenue to achieve profitability, and it may never do so.

COVID-19 Pandemic and CARES Act

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s operations and those of third parties on which the Company relies, including by causing disruptions in the supply of the Company’s product candidates and the conduct of current and future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the Food and Drug Administration and other health authorities, which could result in delays of reviews and approvals, including with respect to the Company’s product candidates. In light of recent developments relating to the COVID-19

6


 

global pandemic, the Company discontinued enrollment at 67 patients in its ongoing Phase 2 LANTERN clinical trial and does not expect to enroll patients in the United States in Phase 2. Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce the Company’s ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, financing or clinical trial activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. Currently, the Company does not anticipate the need to obtain funding from such loans. Currently, the Company is unable to determine the impact that the CARES Act will have on its financial condition, results of operations, or liquidity.

As further discussed in Note 12, upon the completion of the IPO of its common stock in May 2020, all outstanding redeemable convertible preferred stock of the Company converted into shares of common stock and all outstanding warrants to purchase common stock were automatically cashless exercised.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standard Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2020 and the results of its operations and its cash flows for the three months ended March 31, 2020 and 2019. The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period. These condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2019, and the notes thereto, which are included in the Company’s final prospectus for its IPO dated April 30, 2020 and filed pursuant to Rule 424(b)(4) under the Securities Act on May 1, 2020.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2019, included in the Company’s final prospectus for its IPO dated April 30, 2020 and filed pursuant to Rule 424(b)(4) under the Securities Act on May 1, 2020. Since the date of those financial statements, there have been no changes to its significant accounting policies except as noted below.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of expenses during the reporting period. On an ongoing basis, the Company’s management evaluates its estimates, which include but are not limited to management’s judgments of accrued expenses, fair value of common stock, valuation of share-based awards, warrants to purchase common stock and deferred income taxes. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.

7


 

The Company utilizes significant estimates and assumptions in determining the fair value of its common stock. The Company has utilized various valuation methodologies to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

Restricted Cash

The Company had restricted cash of approximately $0.3 million as of March 31, 2020 and December 31, 2019, which was held in certificates of deposit at the Company’s financial institution to secure the Company’s letter of credit for its facility lease.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains all its cash and cash equivalents at a single accredited financial institution, in amounts that exceed federally insured limits.

The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts, or other foreign exchange hedging arrangements.

Net Loss per Share

The Company has reported losses since inception and has computed basic net loss per share attributable to common stockholders by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company has computed diluted net loss per common share after giving consideration to all potentially dilutive common shares, including options to purchase common stock, warrants to purchase common stock and redeemable convertible preferred stock, outstanding during the period determined using the treasury-stock and if-converted methods, except where the effect of including such securities would be antidilutive. Because the Company has reported net losses since inception, these potential common shares have been anti-dilutive and basic and diluted loss per share have been the same.

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share data):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,232

)

 

$

(3,589

)

Accretion of redeemable convertible preferred stock

 

 

(85

)

 

 

(77

)

Net loss attributable to common stockholders

 

$

(4,317

)

 

$

(3,666

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares—basic and diluted

 

 

230,860

 

 

 

170,156

 

Net loss per share attributable to common stockholders

   —basic and diluted

 

$

(18.70

)

 

$

(21.54

)

 

8


 

The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares retroactively adjusted):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Series A-1 redeemable convertible preferred stock

 

 

986,466

 

 

 

986,466

 

Series A-2 redeemable convertible preferred stock

 

 

773,712

 

 

 

773,712

 

Series A-3 redeemable convertible preferred stock

 

 

872,031

 

 

 

872,031

 

Series A-4 redeemable convertible preferred stock

 

 

579,993

 

 

 

579,993

 

Series B redeemable convertible preferred stock

 

 

2,852,177

 

 

 

2,852,177

 

Series C redeemable convertible preferred stock

 

 

2,270,869

 

 

 

 

Warrants to purchase common stock

 

 

681,256

 

 

 

 

Stock options

 

 

901,678

 

 

 

736,477

 

Total

 

 

9,918,182

 

 

 

6,800,856

 

 

Recently Adopted Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”), which modifies the disclosure requirements on fair value measurements. The Company adopted ASU No. 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU No. 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. The Company adopted ASU No. 2018-15 on January 1, 2020 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which makes a number of changes meant to add or clarify guidance on accounting for income taxes. The new guidance will become effective for the Company on January 1, 2022. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2019-12 will have on its consolidated financial statements.

3. Fair Value Measurements

The Company did not have financial assets and liabilities measured at fair value at March 31, 2020 and December 31, 2019.

There have been no changes to the valuation methods used during the three months ended March 31, 2020 and 2019. There were no transfers within the fair value hierarchy during the three months ended March 31, 2020 and 2019.

The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities.

In connection with the Company’s sale of Series C redeemable convertible preferred stock (“Series C Preferred Stock”) the Company issued to investors warrants for the purchase of common stock (“Warrants”). The proceeds from the issuance of the Series C Preferred Stock were allocated between the Series C Preferred Stock and Warrants based on their relative fair values at the time of issuance.

9


 

4. Property and Equipment

Property and equipment consist of the following at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Property and equipment:

 

 

 

 

 

 

 

 

Laboratory equipment

 

$

1,715

 

 

$

1,715

 

Computer software and equipment

 

 

604

 

 

 

595

 

Office furniture and fixtures

 

 

301

 

 

 

301

 

Leasehold improvements

 

 

317

 

 

 

317

 

Construction in progress

 

 

184

 

 

 

138

 

 

 

$

3,121

 

 

$

3,066

 

Accumulated depreciation

 

 

(2,837

)

 

 

(2,829

)

Property and equipment, net

 

$

284

 

 

$

237

 

 

The Company recognized approximately $8,000 of depreciation expense for the three months ended March 31, 2020 and 2019.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Payroll and employee related expenses

 

$

1,019

 

 

$

885

 

Third-party research and development expenses

 

 

1,119

 

 

 

1,344

 

Professional and consulting fees

 

 

590

 

 

 

901

 

Other

 

 

153

 

 

 

110

 

Total accrued expenses and other current liabilities

 

$

2,881

 

 

$

3,240

 

 

6. Redeemable Convertible Preferred Stock

On January 10, 2020, the Company filed an amended and restated certificate of incorporation which authorizes its Board of Directors to issue up to 299,300,288 shares of preferred stock, par value $0.001 per share.

In January 2020, the Company issued 78,306,611 shares of Series C Preferred Stock for $0.38811 per share, in exchange for gross cash proceeds of approximately $30.4 million.

As further discussed in Note 12, upon the completion of the IPO of its common stock in May 2020, all outstanding redeemable convertible preferred stock of the Company converted into shares of common stock.

The rights, preferences, and privileges of the Series A-1, A-2, A-3, A-4 and B redeemable convertible preferred stock (“Series A-1 Preferred Stock,” “Series A-2 Preferred Stock,” “Series A-3 Preferred Stock,” “Series A-4 Preferred Stock” and “Series B Preferred Stock,” respectively) and Series C Preferred Stock (collectively, the “Preferred Stock”) are the following:

Dividends

The holders of Preferred Stock are entitled to receive dividends in any fiscal year, when, as, and if declared by the Board of Directors provided that such dividend payable on the Series C Preferred Stock and Series B Preferred Stock shall not be lesser than the amount of any dividend to be paid on any other class or series of capital stock. The Company shall not declare or pay any cash dividends on shares of common stock until each of the holders of the Preferred Stock then outstanding shall have first received, or there shall have been declared and set aside for payment, a cash dividend on each outstanding share of Preferred Stock. No cash dividends have been declared since the Company’s inception.

10


 

Voting

The holders of Preferred Stock are entitled to vote on all matters with the common stockholders as if they were one class of stock. The holders of Preferred Stock are entitled to the number of votes equal to the number of shares of common stock into which such holders’ share of the Preferred Stock is then convertible.

Conversion

Each share of Preferred Stock is convertible, at the option of the holder, at any time, into one share of common stock, adjusted for certain dilutive events and per the conversion rates as defined below under “Liquidation.” In addition, all shares of Preferred Stock will automatically convert into shares of common stock upon the earlier of (i) the closing of a firm underwritten public offering which results in at least $40.0 million of net proceeds to the Company or (ii) upon the written notice from the holders of a majority of the then-outstanding shares of Preferred Stock, voting together as a separate class on an as-converted basis at the then effective conversion rate. The Preferred Stock will convert at 1:1 ratio into shares of common stock.

Liquidation

In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Company, including a change of control, as defined in its amended and restated certificate of incorporation, the holders of the Preferred Stock will be entitled to be paid a preference payment, prior to any payment to holders of common stock or any other capital stock ranking junior on liquidation to the Preferred Stock. In the case of Series A-1 Preferred Stock, (a) for the previously outstanding Series A preferred stock this preference payment is equal to the greater of (i) $0.4058 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (ii) the amount per share which the holders of the previously outstanding Series A preferred stock would be entitled to if the shares of the previously outstanding Series A had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company; (b) for the previously outstanding Series B preferred stock this preference payment is equal to the greater of (i) $0.4503 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (ii) the amount per share which the holders of the previously outstanding Series B preferred stock would be entitled to if the shares of the previously outstanding Series B had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company; and (c) for the previously outstanding Series C preferred stock this preference payment is equal to the greater of (i) $0.4002 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (ii) the amount per share which the holders of the previously outstanding Series C preferred stock would be entitled to if the shares of the previously outstanding Series C had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company. In the case of Series A-2 Preferred Stock, this preference payment is equal to the greater of (a) $0.3397 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (b) the amount per share which the holders of Series A-2 Preferred Stock would be entitled to if the shares of Series A-2 Preferred Stock had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company. In the case of Series A-3 Preferred Stock, this preference payment is equal to the greater of (a) $0.6245 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (b) the amount per share which the holders of Series A-3 Preferred Stock would be entitled to if the shares of Series A-3 Preferred Stock had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company. In the case of Series A-4 Preferred Stock, this preference payment is equal to the greater of (a) $0.30 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (b) the amount per share which the holders of Series A-4 Preferred Stock would be entitled to if the shares of Series A-4 Preferred Stock had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company. In the case of Series B Preferred Stock, this preference payment is equal to the greater of (a) $0.30 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (b) the amount per share which the holders of Series B Preferred Stock would be entitled to if the shares of Series B Preferred Stock had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company. In the case of Series C Preferred Stock, this preference payment is equal to the greater of (a) $0.38811 per share, subject to certain adjustments, as defined, plus any dividends declared but unpaid on such shares, or (b) the amount per share which the holders of Series C Preferred Stock would be entitled to if the shares of Series C Preferred Stock had been converted into shares of common stock immediately prior to such voluntary or involuntary liquidation, dissolution, or winding-up of the Company.

After the payment of all required preferential amounts to the holders of Preferred Stock, upon the dissolution, liquidation, or winding-up of the Company, any remaining assets and funds of the Company available for distribution shall be distributed among the holders of the then outstanding common stock, pro rata, according to the number of shares of common stock held by such holders.

11


 

Redemption

Series A-1, A-2 A-3, A-4, B and C Preferred Stock are required to be redeemed by the Company at a price of $0.4162, $0.3397, $0.6245, $0.30, $0.30 and $0.38811 per share, respectively, subject to certain adjustments, as defined in its amended and restated certificate of incorporation, plus all declared but unpaid dividends in three annual installments commencing 60 days after receipt by the Company, at any time on or after January 10, 2025 (the fifth anniversary of the Series C Preferred Stock original issue date), of written notice requesting redemption of all shares of Preferred Stock from the holders of a majority of the then outstanding shares of Preferred Stock (which must include at least 50% of the then outstanding shares of Series B Preferred Stock and 50% of the then outstanding shares of Series C Preferred Stock).

7. Common Stock

On January 10, 2020, the Company filed an amended and restated certificate of incorporation which authorizes its Board of Directors to issue up to 400,000,000 shares of common stock, par value $0.001 per share.

The holders of common stock are entitled to one vote for each share held. Common stockholders are not entitled to receive dividends, unless declared by the Board of Directors.

The Company has reserved for future issuances the following shares of common stock as of March 31, 2020:

 

 

 

As of

March 31, 2020

 

Series A-1 Preferred Stock

 

 

986,466

 

Series A-2 Preferred Stock

 

 

773,712

 

Series A-3 Preferred Stock

 

 

872,031

 

Series A-4 Preferred Stock

 

 

579,993

 

Series B Preferred Stock

 

 

2,852,177

 

Series C Preferred Stock

 

 

2,270,869

 

Warrants to purchase common stock

 

 

681,256

 

Stock options

 

 

1,176,697

 

Total

 

 

10,193,201

 

 

Warrants

In conjunction with the issuance of the Series C Preferred Stock, the Company issued Warrants to purchase 681,256 shares of common stock at an exercise price of $8.63 per share. The Warrants expire on the earlier of (i) ten years from the Warrant issuance date, (ii) immediately prior to the closing of the IPO, (iii) immediately prior to the closing of a Liquidation Transaction (as defined in the Warrant), or (iv) unless terminated earlier as provided in the Warrant. If the expiration of the Warrant is occasioned by either the closing of the IPO or a Liquidation Transaction and to the extent that the fair market value of one share of common stock underlying the Warrant would be greater than the exercise price in effect on such date immediately prior to such IPO or Liquidation Transaction, then all currently outstanding Warrants shall automatically be deemed to be net exercised effective immediately prior to and contingent upon the closing of the IPO or Liquidation Transaction. In the event of an IPO or Liquidation Transaction where the fair market value of one share of common stock underlying the Warrant would be less than the exercise price in effect immediately prior to such IPO or Liquidation Transaction, then the Warrants will expire immediately prior to the closing of such IPO or Liquidation Transaction.

The Company classified the Warrants as equity in the condensed consolidated balance sheets in accordance with the guidance in ASC 815, Derivatives and Hedging. The Company allocated the net proceeds from the issuance of the Series C Preferred Stock based on the relative fair values of the Series C Preferred Stock and Warrants, which resulted in approximately $0.7 million of the net proceeds being allocated to the Warrants.

As further discussed in Note 12, upon the completion of the IPO of its common stock in May 2020, all outstanding Warrants were automatically cashless exercised.

12


 

8. Stock-Based Compensation Expense

The Company adopted the 2016 Equity Incentive Plan (“2016 Plan”) in February 2016. Upon adoption of the 2016 Plan, no further grants were made under the 2005 Equity Incentive Plan (“2005 Plan”, together with the 2016 Plan, the “Plans”). The 2016 Plan initially provided for the grant of awards for 130,499 shares of common stock. In June 2017, the Company amended the 2016 Plan to provide for the grant of awards for a total of 411,797 shares of common stock. In June 2018, the Company amended the 2016 Plan to provide for the grant of awards for a total of 1,020,792 shares of common stock.

All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock, restricted stock units, and other share-based awards under the terms of the 2016 Plan. As of March 31, 2020, 275,019 shares of common stock were available for future grant under the 2016 Plan.

All stock option grants are non-statutory stock options except option grants to employees and officers intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended. Stock options may not be granted at less than the fair market value of the Company’s common stock on the date of grant. Vesting periods of awards are determined by the Board of Directors. Vesting periods of awards granted to date range from vesting upon grant to vesting over a four-year period. Vesting conditions are generally based on service provisions, whereby the awards vest over time. Additionally, the Company has granted certain awards which vest upon the achievement of certain financing and revenue milestones. Stock options granted under the Plans expire no more than 10 years from the date of grant.

Stock-based compensation expense included in the Company’s condensed consolidated statements of operations and comprehensive loss is as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

40

 

 

$

3

 

General and administrative

 

 

94

 

 

 

45

 

Total

 

$

134

 

 

$

48

 

 

The Company did not record any stock-based compensation associated with milestone-based awards in the three months ended March 31, 2020 and 2019.

The fair value of each stock option granted to employees, directors and non-employees was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions:

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Risk-free interest rate

 

 

1.5

%

 

 

2.5

%

Expected dividend yield

 

 

%

 

 

%

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Expected volatility

 

 

78.0

%

 

 

76.3

%

 

13


 

A summary of the stock option activity under the Plans for the three months ended March 31, 2020 is as follows:

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life

(in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding December 31, 2019

 

 

792,439

 

 

$

6.59

 

 

 

7.3

 

 

$

3,363

 

Granted

 

 

109,239

 

 

 

8.63

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2020

 

 

901,678

 

 

$

6.84

 

 

 

7.4

 

 

$

3,366

 

Exercisable at March 31, 2020

 

 

438,822

 

 

$

9.41

 

 

 

5.7

 

 

$

1,409

 

Vested and expected to vest at March 31, 2020

 

 

901,678

 

 

$

6.84

 

 

 

7.4

 

 

$

3,366

 

 

The weighted-average fair value of options granted to employees, directors and consultants during the three months ended March 31, 2020 and 2019 was $5.84 and $1.87, respectively.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. No options were exercised during the three months ended March 31, 2020 and 2019.

As of March 31, 2020, total unrecognized stock-based compensation expense relating to unvested stock options was approximately $1.5 million. This amount is expected to be recognized over a weighted-average period of 3.2 years. Additionally, as of March 31, 2020, there was approximately $36,000 of unrecognized stock-based compensation related to a stock option award related to the achievement of a revenue-based milestone. As the Company believes the achievement of the revenue-based milestone is currently not probable, it has not recorded any stock-based compensation related to this award. The Company will continue to assess the probability of achieving the revenue-based milestone at each reporting period.

2020 Incentive Award Plan

In April 2020, the Company’s Board of Directors adopted the Company’s 2020 Incentive Award Plan (“2020 Plan”), and, subsequent to the IPO, all equity-based awards will be granted under the 2020 Plan. The 2020 Plan provides for grant of qualified and nonqualified stock options, stock appreciation rights, restricted stock, dividend equivalents, restricted stock units, performance awards and other share and cash-based awards to the Company’s employees, officers, directors and consultants.

The initial number of shares of the Company’s common stock that may be issued under the 2020 Plan is 2,100,000 shares and the maximum number of shares that may be issued under the 2020 Plan is 8,800,000 shares, plus the number of shares of the Company’s common stock underlying outstanding awards under the 2005 and 2016 Plans as of the effective date of the 2020 Plan that become available again for grant under the 2005 and 2016 Plans in accordance with their terms. The number of shares available under the 2020 Plan will automatically increase on January 1st of each year from 2021 to 2030 by the lesser of (i) 4% of the number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (ii) a smaller number of shares determined by the Company’s Board of Directors on or prior to such date for such year.

14


 

2020 Employee Stock Purchase Plan

In April 2020, the Company’s Board of Directors adopted the Company’s 2020 Employee Stock Purchase Plan (“2020 ESPP”). The 2020 ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and is not subject to the provisions of the Employee Retirement Income Security Act of 1974.  The Company initially reserved 150,000 shares of common stock for issuance under the 2020 ESPP.  In addition, the number of shares available for issuance under the 2020 ESPP will be annually increased on January 1st of each year from 2021 to 2030 by the lesser of (i) 0.5% of the number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the Company’s Board of Directors, provided that no more than 987,500 shares of common stock may be issued under the 2020 ESPP. The 2020 ESPP permits eligible participants to purchase common stock through payroll deductions of up to a specified percentage of their eligible compensation. On the first trading day of each offering period, each participant will automatically be granted an option to purchase shares of the Company’s common stock. The option will expire at the end of the applicable offering period, and will be exercised at that time to the extent of the payroll deductions accumulated during the offering period. The purchase price of the shares, in the absence of a contrary designation, will be 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the purchase date.

9. Related Parties

The Company had consulting agreements that expired in January 2020 with two of its founders who are also directors of the Company. Total consulting expense related to these consulting agreements was $0 and $12,500 for the three months ended March 31, 2020 and 2019, respectively.

In 2011, the Company entered into a Contribution Agreement, Transition Services Agreement (as amended), Collaboration Agreement, Technology License Agreement and Trademark Coexistence Agreement with Arsenal Medical, Inc. (“Arsenal”), a company which shares certain common owners with the Company. During the three months ended March 31, 2019, the Company invoiced Arsenal for an aggregate of approximately $0.2 million, primarily for its share of rent and other overhead costs.  The Transition Services Agreement expired in June 2019. All amounts receivable from Arsenal were collected as of December 31, 2019.

10. Income Taxes

During the three months ended March 31, 2020 and 2019, the Company recorded a full valuation allowance on federal and state deferred tax assets since management does not forecast the Company to be in a taxable position in the near future.

11. Leases

In August 2007, the Company entered into an operating lease, as amended, for approximately 22,343 square feet of office and laboratory space in Watertown, Massachusetts. In November 2017, the Company amended its lease (“2017 Amendment”) and extended the lease term through April 2023. Initial base rent under the 2017 Amendment was approximately $1.0 million per year. The 2017 Amendment includes annual rent escalations over the term of the operating lease. The Company maintains a letter of credit of approximately $0.3 million securing its obligations under the operating lease which is secured by approximately $0.3 million of certificate of deposits, which are included as restricted cash in the consolidated balance sheets. Rent expense is recognized on a straight-line basis over the terms of occupancy.

The components of lease cost recorded in the Company’s condensed consolidated financial statements were as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Lease Cost:

 

 

 

 

 

 

 

 

Operating lease cost

 

$

263

 

 

$

263

 

Variable lease cost

 

 

193

 

 

 

179

 

Sublease income

 

 

 

 

 

(183

)

Total lease cost, net

 

$

456

 

 

$

259

 

 

15


 

Variable lease payments include the Company’s allocated share of costs incurred and expenditures made by the landlord in the operation and management of the building.  The Company’s sublease income during the three months ended March 31, 2019 related to subleases for a portion of the Company’s office and lab space.

 

The weighted-average remaining lease term and discount rate related to the Company’s operating lease were as follows:

 

 

 

As of March 31, 2020

 

Weighted-average remaining lease term (in years)

 

 

3.1

 

Weighted-average discount rate

 

 

5.5

%

 

Maturity of the Company’s operating lease liability in accordance with ASC 842 as of March 31, 2020 are as follows (in thousands):

 

Year ending December 31,

 

 

 

 

Remainder of 2020

 

$

799

 

2021

 

 

1,091

 

2022

 

 

1,124

 

2023

 

 

379

 

Total maturities

 

 

3,393

 

Less: Amount representing interest

 

 

(282

)

Present value of operating lease liability

 

 

3,111

 

Less: Current portion of operating lease liability

 

 

(919

)

Total operating lease liability, net of current portion

 

$

2,192

 

 

12. Subsequent Events

a. Reverse stock split

The Company’s Board of Directors approved a one-for-34.483 reverse stock split of its issued and outstanding common stock and stock options and a proportional adjustment to the existing conversion ratios for the Company’s redeemable convertible preferred stock pursuant to an amendment to the Company’s amended and restated certificate of incorporation effective as of April 27, 2020. Accordingly, all common stock shares, per share amounts, and additional paid in capital amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the reverse stock split. In addition, pursuant to the same amendment, the number of authorized shares of common stock was reduced to 200,000,000 shares.

b. Initial public offering

In May 2020, the Company completed its IPO in which the Company issued and sold 4,025,000 shares of its common stock, including 525,000 shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $16.00 per share, for aggregate gross proceeds of $64.4 million. The Company received approximately $57.3 million in net proceeds after deducting underwriting discounts and estimated offering expenses payable by the Company. In connection with this financing, all outstanding shares of Preferred Stock converted into 8,335,248 shares of the Company’s common stock, all outstanding Warrants were automatically cashless exercised resulting in the issuance of 313,794 shares of the Company’s stock and the issuance to one of our directors, in lieu of compensation payable by the Company under a consulting agreement, of 19,661 fully vested shares of the Company’s common stock.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified under Part II, Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage therapeutics company focused on the development and commercialization of novel integrated drug and delivery solutions for the localized treatment of patients with ear, nose and throat diseases. Our proprietary technology platform, XTreo, is designed to precisely and consistently deliver medicines directly to the affected tissue for sustained periods with a single administration. Our initial product candidates, LYR-210 and LYR-220, are bioresorbable polymeric matrices designed to be administered in a brief, non-invasive, in-office procedure and intended to deliver up to six months of continuous drug therapy to the sinonasal passages for the treatment of chronic rhinosinusitis, or CRS. The therapeutic embedded within LYR-210 and LYR-220 is mometasone furoate, which is the active ingredient in various U.S. Food and Drug Administration, or FDA, approved drugs and has a well-established efficacy and safety profile. CRS is an inflammatory disease of the paranasal sinuses which leads to debilitating symptoms and significant morbidities and affects approximately 14 million people in the United States. We are advancing LYR-210 as a potential preferred alternative to surgery in an ongoing Phase 2 LANTERN clinical trial for CRS patients who have failed medical management. In our Phase 1 clinical trial, LYR-210 met its primary safety endpoint, and we observed that patients generally experienced significant and rapid, clinically meaningful and durable improvement in SNOT-22 scores, an established patient symptom severity scale, through week 25, which was the end of the trial. We are also developing LYR-220 for use in CRS patients who have an enlarged nasal cavity due to sinus surgery but continue to require treatment to manage CRS symptoms. Beyond CRS, we believe our XTreo platform has potential applications in other disease areas, which we are actively exploring to further broaden its therapeutic potential.

We were incorporated as a Delaware corporation on November 21, 2005, and our headquarters is located in Watertown, Massachusetts. On July 16, 2018, we formally changed our name to Lyra Therapeutics, Inc. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, building our intellectual property portfolio and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations primarily through private placements of redeemable convertible preferred stock and funding from government contracts, and through the sale of our common stock in our initial public offering, or IPO, which closed in May 2020. From inception through March 31, 2020, we have raised an aggregate of $179.3 million to fund our operations, of which $162.1 million were gross proceeds from sales of our redeemable convertible preferred stock, $0.3 million were gross proceeds from the issuance of common stock and $16.8 million were gross proceeds from government contracts. In May 2020, we completed our IPO in which we issued and sold 4,025,000 shares of our common stock at a public offering price of $16.00 per share, for aggregate gross proceeds of $64.4 million. We received approximately $57.3 million in net proceeds after deducting underwriting discounts and estimated offering expenses payable by us.

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We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. Our net losses were $4.2 million and $3.6 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, we had an accumulated deficit of $132.0 million. We anticipate that our expenses will increase significantly as we:

 

conduct additional clinical trials of our most advanced product candidate, LYR-210, including the Phase 2 LANTERN trial which commenced in May 2019 and one or more planned pivotal Phase 3 clinical trials of LYR-210;

 

advance the development of LYR-220;

 

continue to discover and develop additional product candidates;

 

establish manufacturing and supply chain capacity sufficient to provide commercial quantities of any product candidates for which we may obtain marketing approval;

 

seek regulatory and marketing approvals for product candidates that successfully complete clinical trials, if any;

 

establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval in geographies in which we plan to commercialize our products ourselves;

 

maintain, expand and protect our intellectual property portfolio;

 

hire additional staff, including clinical, scientific, technical, regulatory, operational, financial commercial and support personnel, to execute our business plan; and

 

add clinical, scientific, operational, financial and management information systems and personnel to support our product development and potential future commercialization efforts, and to enable us to operate as a public company.

We do not expect to generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate. Additionally, we currently use contract research organizations, or CROs, to carry out our clinical development activities. We do not yet have a sales organization. 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. Furthermore, we will incur additional costs associated with operating as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to fund our operations through public or private equity or debt financings or other sources, including strategic collaborations and licensing arrangements. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed.

Because of the numerous risks and uncertainties associated with therapeutics product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

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COVID-19 Pandemic and CARES Act

On January 30, 2020, the World Health Organization, or WHO, announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China, the COVID-19 outbreak, and the risks to the international community as the virus spreads globally beyond its point of origin. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The COVID-19 pandemic is affecting the United States and global economies and may affect our operations and those of third parties on which we rely, including by causing disruptions in the supply of our product candidates and the conduct of current and future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the FDA and other health authorities, which could result in delays of reviews and approvals, including with respect to our product candidates. Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, financing or clinical trial activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. Currently, we do not anticipate the need to obtain funding from such loans. We continue to examine the impact that the CARES Act may have on our business. Currently, we are unable to determine the impact that the CARES Act will have on our financial condition, results of operations, or liquidity.

As of March 31, 2020, we had cash and cash equivalents totaling $35.2 million. We believe that our existing cash and cash equivalents, together with the net proceeds from our IPO, will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2023. We have based these estimates on assumptions that may prove to be imprecise or incorrect, and we may use our available capital resources sooner than we currently expect. See “—Liquidity and Capital Resources.” Because of the numerous risks and uncertainties associated with the development of our product candidates and any future product candidates, our platform and technology and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates.

If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval and successful commercialization efforts, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

Operating Expenses

Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.

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Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including the development of and pursuit of regulatory approval of our most advanced product candidate, LYR-210, for the treatment of CRS, which include:

 

employee-related expenses, including salaries, benefits and stock-based compensation expense for personnel engaged in research and development functions;

 

expenses incurred in connection with the preclinical and clinical development of our product candidates, including under agreements with CROs, investigative sites and consultants;

 

costs of manufacturing our product candidates for use in our preclinical studies and clinical trials as well as manufacturers that provide components of our product candidates for use in our preclinical and potential future clinical trials;

 

consulting and professional fees related to research and development activities;

 

costs related to compliance with clinical regulatory requirements; and

 

facility costs and other allocated expenses, which include expenses for rent and maintenance of our facility, utilities, depreciation and other supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as clinical site activations, patient enrollment, or information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and may be reflected in our consolidated financial statements as prepaid or accrued research and development expenses.

Our research and development expenses consist primarily of costs such as employee compensation, consulting fees and CRO expenses in connection with our preclinical and clinical development activities. We typically use our employee and infrastructure resources across our development programs and we do not allocate personnel costs and other internal costs to specific product candidates or development programs with the exception of the costs to manufacture our product candidates.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase for the foreseeable future as we initiate additional clinical trials, including one or more clinical trials for LYR-210 and LYR-220, scale our manufacturing processes and continue to discover and develop additional product candidates.

The successful development of LYR-210, LYR-220 and other potential future product candidates is highly uncertain. Accordingly, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the development of these product candidates. We are also unable to predict when, if ever, we will generate revenue and material net cash inflows from the commercialization and sale of any of our product candidates for which we may obtain marketing approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of preclinical studies, clinical trials and development of our product candidates will depend on a variety of factors, including:

 

successful completion of clinical trials with safety, tolerability and efficacy profiles for LYR-210, LYR-220 and any potential future product candidates that are satisfactory to the FDA or any comparable foreign regulatory authority;

 

approval of an IND for LYR-220 and any potential future product candidate to commence planned or future clinical trials in the United States or foreign countries;

 

significant and changing government regulation and regulatory guidance;

 

timing and receipt of marketing approvals from applicable regulatory authorities;

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establishing arrangements with contract manufacturing organizations, or CMOs, for third-party clinical and commercial manufacturing to obtain sufficient supply of our product candidates;

 

obtaining and maintaining patent and other intellectual property protection and regulatory exclusivity for our product candidates;

 

commercializing the product candidates, if and when approved, whether alone or in collaboration with others;

 

competition with other therapies; and

 

business interruptions resulting from the COVID-19 global pandemic.

A change in the outcome of any of these variables with respect to the development, manufacture or commercialization enabling activities of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we may be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting, auditing, tax services and insurance costs.

We expect that our general and administrative expenses will increase in the future to support continued research and development activities and potential commercialization of our product candidates. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. Additionally, we will incur increased expenses associated with being a public company, including costs of additional personnel, accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, and investor and public relations costs.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our final prospectus for our IPO dated April 30, 2020 and filed with the SEC on May 1, 2020 pursuant to Rule 424(b) under the Securities Act and the notes to the unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.  During the three months ended March 31, 2020, there were no material changes to our critical accounting policies from those discussed in our final prospectus.

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Recently Adopted Accounting Pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Dollar

 

 

 

2020

 

 

2019

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

2,964

 

 

$

2,764

 

 

$

200

 

General and administrative

 

 

1,284

 

 

 

860

 

 

 

424

 

Total operating expenses

 

 

4,248

 

 

 

3,624

 

 

 

624

 

Loss from operations

 

 

(4,248

)

 

 

(3,624

)

 

 

(624

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

16

 

 

 

35

 

 

 

(19

)

Total other income

 

 

16

 

 

 

35

 

 

 

(19

)

Net loss

 

$

(4,232

)

 

$

(3,589

)

 

$

(643

)

Research and Development Expenses

Research and development expenses increased by $0.2 million to $3.0 million for the three months ended March 31, 2020 from $2.8 million for three months ended March 31, 2019.

The increase in research and development expenses for the three months ended March 31, 2020 was primarily attributable to following:

 

An increase in employee compensation and benefits of $0.6 million resulting from an increase in headcount across the research and development function, particularly in chemistry, manufacturing and controls, or CMC as we continued to advance our LANTERN trial and we began preparation for transfer of our manufacturing process.

 

An increase of $0.3 million in lab support resulting from increased research and development headcount and their related activities, as well as the expense allocated to research and development related to our leased facility.

 

Partially offsetting the increases were decreases in clinical development external costs of $0.3 million, CMC costs of $0.2 million and consulting and professional costs of $0.2 million. These decreases were driven by decreased spending on LYR-210 as the COVID-19 pandemic adversely impacted enrollment in our Phase 2 LANTERN clinical trial, the completion of the majority of the manufacturing of the product needed for that clinical trial and a reduction in our use of consultants, particularly regulatory and quality assurance consultants.

General and Administrative Expenses

General and administrative expenses increased by $0.4 million to $1.3 million for the three months ended March 31, 2020 from $0.9 million for the three months ended March 31, 2019.

The increase in general and administrative expenses for the three months ended March 31, 2020 was primarily attributable to an increase in employee compensation and benefits of $0.4 million resulting from an increase in headcount.

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Interest Income

Interest income decreased by $19,000 to $16,000 for the three months ended March 31, 2020 from $35,000 for the three months ended March 31, 2019. The decrease was attributable to lower average interest rates for the three months ended March 31, 2020 due to changes in market conditions.

Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations from inception through March 31, 2020 primarily with gross proceeds of $162.1 million from sales of our redeemable convertible preferred stock and $16.8 million from government contracts. On May 5, 2020, we completed our IPO by issuing 4,025,000 shares of common stock, at an offering price of $16.00 per share, for net proceeds of $57.3 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The following table provides information regarding our total cash and cash equivalents at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

As of

 

 

As of

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Cash and cash equivalents

 

$

35,247

 

 

$

9,808