Syros Pharmaceuticals, Inc. - Quarter Report: 2016 June (Form 10-Q)

 

 

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 June 30, 2016

 

OR

 

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

 

Commission file number: 001-37813

SYROS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

(617) 744-1340

(Registrant’s Telephone Number, Including Area Code)

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒     No  ☐

 

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

 

 

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

 

Number of shares of the registrant’s common stock, $0.001 par value, outstanding on August 12, 2016: 23,374,371

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

SYROS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

See accompanying notes to condensed consolidated financial statements.

SYROS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

SYROS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

1. Nature of Business

 

Syros Pharmaceuticals, Inc. (the "Company"), a Delaware corporation formed in November 2011, is a biopharmaceutical company seeking an understanding of the non-coding region of the genome to advance new medicines to control the expression of disease-driving genes. The Company has built a proprietary platform designed to analyze this unexploited region of DNA in human disease tissue to identify and drug novel targets linked to genomically defined patient populations.

 

The Company is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals; risks inherent in the development and commercialization of medicines to treat human disease; competition from other companies, many of which are larger and better capitalized; risks relating to obtaining and maintaining necessary intellectual property protection; and the need to obtain adequate additional financing to fund the development of its product candidates. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, eliminate or out-license certain of its research and development programs or future commercialization efforts.

 

On July 6, 2016, the Company completed an initial public offering (“IPO”), in which the Company issued and sold 4,600,000 shares of its common stock at a public offering price of $12.50 per share, including 600,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of $57.5 million. The Company received approximately $49.9 million in net proceeds after deducting $7.6 million of underwriting discounts and commissions and offering costs. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 15,988,800 shares of common stock at the applicable conversion ratio then in effect. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. In connection with the IPO, the Company amended and restated its Fourth Amended and Restated Certificate of Incorporation to change the authorized capital stock to 200,000,000 shares designated as common stock, and 10,000,000 shares designated as preferred stock, all with a par value of $0.001 per share. The financial statements as of June 30, 2016, including share and per share amounts, do not give effect to the IPO, as it closed subsequent to June 30, 2016.

 

The Company has incurred significant annual net operating losses in every year since its inception. It expects to continue to incur significant and increasing net operating losses for at least the next several years. The Company’s net losses were $13.4 million and $29.8 million for the years ended December 31, 2014 and 2015, respectively, and $12.0 million and $22.6 million for the three and six months ended June 30, 2016, respectively. As of June 30, 2016, the Company had an accumulated deficit of $76.1 million. The Company has not generated any revenues from product sales, has not completed the development of any product candidate and may never have a product candidate approved for commercialization. The Company has financed its operations to date primarily through private placements of its preferred stock. The Company has devoted substantially all of its financial resources and efforts to research and development and general and administrative expense to support such research and development. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on the Company’s stockholders' (deficit) equity and working capital. The Company believes that the proceeds from the IPO, together with existing cash and cash equivalents as of June 30, 2016, will enable it to fund its operating expenses and capital expenditure requirements at least through mid-2018, which the Company expects will allow it to achieve initial clinical data readouts for its two lead development programs.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. 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 Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in financial

statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations.  Accordingly, these financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2015 and notes thereto, included in the Company’s final prospectus for the IPO filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on June 30, 2016 (the “Prospectus”). 

 

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of June 30, 2016, the results of its operations for the three and six months ended June 30, 2016 and 2015 and cash flows for the six months ended June 30, 2016 and 2015. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016, or for any future period.

 

In connection with preparing for its IPO, the Company effected a one-for-3.75 reverse stock split of the Company’s common stock. The reverse stock split became effective on June 17, 2016. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The financial statements have also been retroactively adjusted to reflect adjustments to the conversion price for each series of convertible preferred stock effected in connection with the reverse stock split.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Syros Pharmaceuticals, Inc. and its wholly owned subsidiary, Syros Securities Corporation, which is a Massachusetts subsidiary formed by the Company in December 2014 to exclusively engage in buying, selling and holding securities on its own behalf. All intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, which include, but are not limited to, expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates and whether historical trends are expected to be representative of future trends. Management’s estimation process often may yield a range of potentially reasonable estimates and management must select an amount that falls within that range of reasonable estimates. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to revenue recognition, stock-based compensation expense, including estimating the fair value of the Company’s common stock, accrued expenses and income taxes. Actual results may differ from those estimates or assumptions.

Segment Information

        Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company and the chief operating decision maker view the Company's operations and manage its business in one operating segment. The Company operates only in the United States.

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments that have original maturities of three months or less when acquired to be cash equivalents. Cash equivalents, which consist of money market funds that invest in U.S. Treasury obligations, are stated at fair value. The Company maintains its bank accounts at one major financial institution.

 

Fair Value of Financial Instruments

 

ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguished between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumption about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

 

ASC 820 identified fair value as the exchange price, or 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 a basis for considering market participant assumptions in fair value measurements, ASC 820 established a three-tier fair value hierarchy that distinguishes between the following:

 

Level 1—Quoted market prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2—Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.

 

Level 3—Unobservable inputs developed using estimates or assumptions developed by the Company, which reflect those that a market participant would use.

 

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

The carrying amounts reflected in the balance sheets for cash and cash equivalents, prepaid expenses, other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature.

 

Other Long Term Assets

 

Other long term assets consist of deferred issuance costs relating to the IPO of common stock, which closed subsequent to June 30, 2016, and at December 31, 2015, include direct incremental legal and accounting fees relating to the Company's Series B preferred stock financing that closed in January 2016. Deferred issuance costs are capitalized as incurred until such financings are consummated. The deferred issuance costs will be offset against proceeds upon the closing of the IPO. Approximately $3.5 million and $1.9 million of deferred issuance costs were incurred and capitalized as of June 30, 2016 and December 31, 2015, respectively.

 

Revenue Recognition

 

To date, the Company’s only source of revenue has been the research agreement with a multinational pharmaceutical company.

 

The Company recognizes revenue in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, revenue is recognized when all of the following criteria are met:

 

 

 

 

 

Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

 

The Company analyzes arrangements with multiple deliverables based on the guidance in ASC Topic 605-25, Revenue Recognition—Multiple Element Arrangements (“ASC 605-25”). Pursuant to the guidance in ASC 605-25, the Company evaluates multiple element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires management to make judgements about the individual deliverables and whether such deliverables are separate from other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially within control of the Company. The Company’s research agreement contains a single unit of accounting.

 

The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605 are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, the Company would recognize revenue from the combined unit of accounting over the contractual or estimated performance period for the undelivered items, which is typically the term of its research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then the Company would recognize revenue under the arrangement on a straight-line basis over the period it expects to complete its performance obligations or upon completion when the final act is of such significance to the overall arrangement that performance has not substantively occurred until the completion of that act. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company would recognize revenue under the arrangement using the proportional performance method.

 

The Company recognizes service revenue under its research agreement based upon the completed performance method of revenue recognition as it is unable to reasonably estimate the period of performance of the services and the delivery of the final study report is significant to the arrangement.

 

Research and Development

 

Expenditures relating to research and development are expensed in the period incurred. Research and development expenses consist of both internal and external costs associated with the development of the Company’s gene control platform and gene control medicines. Research and development costs include salaries and benefits, materials and supplies, external research, preclinical and clinical development expenses, stock-based compensation expense and facilities costs. Facilities costs primarily include the allocation of rent, utilities and depreciation.

 

In certain circumstances, the Company is required to make nonrefundable advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the

nonrefundable advance payments are deferred and capitalized, even when there is no alternative future use for the research and development, until related goods or services are provided.

 

The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the work being performed, including the phase or completion of the event, invoices received and costs. Significant judgements and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

 

The Company may in-license the rights to develop and commercialize product candidates. For each in-license transaction the Company evaluates whether it has acquired processes or activities along with inputs that would be sufficient to constitute a “business” as defined under U.S. GAAP. A “business” as defined under U.S. GAAP consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set of activities to qualify as a business. When the Company determines that it has not acquired sufficient processes or activities to constitute a business, any up-front payments, as well as milestone payments, are immediately expensed as research and development in the period in which they are achieved.

 

Stock-Based Compensation Expense

The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and directors, including grants of restricted stock and stock options, to be recognized as expense in the consolidated statements of operations based on their grant date fair values. Grants of restricted stock and stock options to other service providers, referred to as non-employees, are required to be recognized as expense in the consolidated statements of operations based on their vesting date fair values. The Company estimates the fair value of options granted using the Black-Scholes option-pricing model. The Company until recently was a private company and lacks Company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The Company uses the value of its common stock to determine the fair value of restricted stock awards.

 

The amount of stock-based compensation expense recognized during a period is based on the fair value of the portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. The Company evaluates its forfeiture rate at each reporting period. Ultimately, the actual expense recognized over the vesting period will be for only those options that vest.

 

The Company expenses the fair value of its stock-based awards to employees on a straight-line basis over the associated service period, which is generally the vesting period. For stock-based awards granted to non-employees, compensation expense is recognized over the period during which services are rendered by such non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of such awards.

 

For stock-based awards that contain performance-based milestones, the Company records stock-based compensation expense in accordance with the accelerated attribution model. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. For certain of the Company’s performance-based awards, notwithstanding any vesting in accordance with

the achievement of performance-based milestones, such awards vest in full on the sixth anniversary of the vesting commencement date.

 

Net Loss per Share

 

Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share applicable to common stockholders is calculated by adjusting the weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method and the if-converted method. For purposes of the dilutive net loss per share applicable to common stockholders calculation, convertible preferred stock, stock options, and unvested restricted stock are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share applicable to common stockholders, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.

 

The following common stock equivalents were excluded from the calculation of diluted net loss per share applicable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect.

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (“ASU 2014-09”). ASU 2014-09 amends ASC 605, Revenue Recognition, by outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 will be effective for the Company for interim and annual periods beginning after December 15, 2017. The Company is evaluating the impact that this ASU may have on its financial statements, if any.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (“ASU 2014-15”) which provides new guidance on management’s responsibility in evaluating whether or not there is substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued each reporting period. ASU 2014-15 is effective for annual periods ending after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the new guidance and determining the expected effect on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to put most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, which is the year ended December 31, 2019 for the Company. Entities are required to use a modified retrospective approach of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the new guidance and the expected effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early

adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

 

3. Fair Value Measurements

 

Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

 

 

 

 

 

4. Restricted Cash

 

At June 30, 2016 and December 31, 2015, the Company had $483,000 in restricted cash which serves as the security deposit on the lease of the Company’s current facility in Cambridge, Massachusetts (Note 7).

 

5. Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

 

 

6. Indebtedness

 

Equipment Financing

 

In March 2015, the Company entered into a lease agreement with a vendor for certain laboratory equipment. The Company financed $389,000 of the amount owed under the lease agreement and is required to make consecutive monthly payments of principal, plus accrued interest at 6.44%, over 36 months through March 2018. During the six months ended June 30, 2016, the Company made payments of $65,000, of which $10,000 related to interest. At June 30, 2016, $284,000 of principal was outstanding with respect to the equipment financing arrangement.

 

The Company also leases some of its office equipment under a capital lease agreement, for which $17,000 of principal was outstanding as of June 30, 2016,

 

7. Commitments and Contingencies

 

Operating Leases

 

In March 2015, the Company entered into an operating lease for approximately 21,488 rentable square feet of office and laboratory space in Cambridge, Massachusetts (the “2015 Lease”), with a lease term commencing in August 2015 and ending in October 2020, assuming occupancy in August 2015. The Company has an option to extend the lease for five additional years. The Company’s lease agreement has escalating rent payments and the Company records rent expense on a straight-line basis over the term of the lease, including any rent-free periods. The Company recorded rent expense of $320,000 for the year ended December 31, 2015 and $221,000 and $441,000 for the three and six months ended June 30, 2016, respectively, related to the 2015 Lease. The lease agreement required the Company to issue an original letter of credit in the amount of $483,000, which is included in restricted cash in the accompanying balance sheet at December 31, 2015 and June 30, 2016.

 

The 2015 Lease includes certain lease incentives in the form of tenant allowances. The Company has capitalized the improvements made with the tenant allowance into fixed assets and established a liability for the deferred lease incentive upon occupancy. The Company recorded these incentives as a component of deferred rent and will amortize these incentives as a reduction of rent expense over the lease term. The related fixed assets will be amortized over the lease term.

 

License Agreements

 

Whitehead Institute for Biomedical Research and Dana-Farber

        

 Effective April 1, 2013, the Company entered into a license agreement with the Whitehead Institute for Biomedical Research ("Whitehead") and the Dana-Farber Cancer Institute (“Dana-Farber”), pursuant to which the Company was granted a worldwide, sublicensable license under specified patents relating to modulators of Myc/Max Screen, relating to Chem-Seq owned or controlled by Whitehead and Dana-Farber.

 

Whitehead Institute for Biomedical Research

 

        Effective April 4, 2013, the Company entered into an additional license agreement with Whitehead, pursuant to which the Company was granted a worldwide license under specified patents relating to super-enhancers owned or controlled by Whitehead.

 

 In connection with the Whitehead agreements, the Company issued 171,674 shares of its common stock to Whitehead in April 2013. Payments are due under the Whitehead agreements when the Company achieves certain milestones. The future potential milestone payments due under the Whitehead agreements have not been accrued as of June 30, 2016 and December 31, 2015, respectively, as no milestones have been achieved and the agreement can be cancelled at the Company's option. Therefore, the Company had no obligation to pay any of these amounts.  The Company paid the Whitehead Institute Genome Technology Core $0.4 million for the year ended December 31, 2015 and $0.6 million and $0.2 million for the six months ended June 30, 2016 and 2015, respectively.

 

TMRC Co. Ltd.

 

        In April 2016, the Company amended and restated its license agreement with TMRC Co. Ltd. (“TMRC”). Under the amended and restated license agreement, in addition to royalties owed on patents rights, the Company is obligated to pay the remainder of the upfront license fee of $1.0 million and will pay low single-digit royalties on net sales with respect to know-how licensed by TMRC during a predefined royalty term. The Company paid the remaining license fee of $500,000 in May 2016.

 

        The Company also entered into a supply management agreement with TMRC and agreed to pay TMRC a fee for each kilogram of SY-1425 active pharmaceutical ingredient produced.

 

 

8. Convertible Preferred Stock

 

On August 8, 2012, the Company issued 2,500,000 shares of Series A-1 Convertible Preferred Stock ("Series A-1") at a purchase price of $0.50 per share. The issuance resulted in cash proceeds of $1,208,000, net of issuance costs of $42,000. The Series A-1 had a liquidation preference amount of $1,542,000 at June 30, 2016.

 

On various dates in 2013, the Company issued 12,100,000 shares of Series A-2 Convertible Preferred Stock ("Series A-2") at a purchase price of $1.00 per share. The shares were issued for cash proceeds of $10,021,000, net of issuance costs of $42,000, and the exchange of outstanding Convertible Notes, including accrued interest, of approximately $2,036,000. The Series A-2 had a liquidation preference amount of $14,432,000 at June 30, 2016.

 

On various dates in 2014, the Company issued 15,750,000 shares of Series A-3 Convertible Preferred Stock ("Series A-3") at a purchase price of $1.00 per share. The issuances resulted in cash proceeds of $15,749,000, net of issuance costs of $1,000. The Series A-3 had a liquidation preference amount of $17,878,000 at June 30, 2016.

 

The Series A-1, Series A-2 and Series A-3 preferred stock are collectively referred to as "Series A" or "Series A Preferred Stock."

 

In October 2014, the Company issued 16,893,931 shares of Series B Convertible Preferred Stock ("Series B") at a purchase price of $3.1461 per share. The issuance resulted in cash proceeds of $52,998,000, net of issuance costs of $152,000.

 

In January 2016, the Company issued 12,714,150 shares of Series B at a purchase price of $3.1461 per share. The issuance resulted in cash proceeds of $39,794,000, net of issuance costs of $206,000. The Series B had a liquidation preference of $99,726,000 at June 30, 2016.

 

The rights, preferences, and privileges of the Series A-1, Series A-2, Series A-3 and Series B (collectively the "Preferred Stock") are included in the Prospectus. There were no changes to the rights, preferences, and privileges of the Preferred Stock during the six months ended June 30, 2016.

 

9. Stock-Based Payments

 

2016 Stock Incentive Plan

 

The 2016 Stock Incentive Plan (the “2016 Plan”) was adopted by the board of directors on December 15, 2015 and approved by the stockholders on June 17, 2016 and became effective upon the closing of the IPO, or July 6, 2016. The 2016 Plan replaced the 2012 Equity Incentive Plan (the "2012 Plan"). Any options or awards outstanding under the 2012 Plan remained outstanding and effective. Under the 2016 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The Company initially reserved 3,218,742 shares of common stock for the issuance of awards under the 2016 Plan, which will be cumulatively increased on January 1 of each calendar year by the least of 6,000,000 shares of common stock, 4.0% of the outstanding shares or such lesser amount as specified by the compensation committee of the board of directors. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. At June 30, 2016, 3,218,742 shares remained available for future issuance under the 2016 Plan. Under the 2016 Plan, stock options may not be granted at less than fair value on the date of grant.

 

Terms of stock option agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2016 Plan. Stock option awards granted by the Company generally vest over four years, with 25% vesting on the one year anniversary of the vesting commencement date and 75% vesting ratably, on a monthly basis, over the remaining three years. Such awards are exercisable from the date of grant for a period of ten years. The Company may grant performance-based stock option awards for which vesting accelerates upon the achievement of

performance-based milestones. For certain of such awards, notwithstanding any vesting in accordance with the achievement of performance-based milestones, such awards may vest in full on the sixth anniversary of the vesting commencement date.

 

Stock Options

 

Performance-Based Stock Options

 

The Company has granted stock options to management for which the vesting of such stock options accelerates upon the achievement of performance-based criteria. Milestone events are specific to the Company’s corporate goals, including but not limited to certain preclinical and clinical development milestones and the Company’s ability to execute on its corporate development and financing strategies. Stock-based compensation expense associated with these performance-based stock options is recognized based on the accelerated attribution model. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. Notwithstanding any vesting in accordance with the achievement of performance-based milestones, such awards vest in full on the sixth anniversary of the vesting commencement date. For the year ended December 31, 2015, the Company recorded additional stock-based compensation expense of $26,000 related to the achievement of certain performance-based milestones. No milestones were achieved during the three months and six months ended June 30, 2016. As of June 30, 2016, there was $1,019,000 of unrecognized stock-based compensation expense related to the performance-based stock options.

 

A summary of the status of stock options as of December 31, 2015 and June 30, 2016 and changes during the six months ended June 30, 2016 is presented below:

 

 

The intrinsic value of options exercised during the six months ended June 30, 2016 was $2,280,000.

 

Restricted Common Stock

 

From time to time, upon approval by the Company’s board of directors, certain employees and advisors have been granted restricted shares of common stock with time- and performance-based vesting criteria. These shares of restricted stock are subject to repurchase rights. Accordingly, the Company has recorded the proceeds from the issuance of restricted stock as a liability in the condensed consolidated balance sheets included as a component of accrued expenses or other long term liabilities based on the scheduled vesting dates. The restricted stock liability is reclassified into stockholders’ equity (deficit) as the restricted stock vests over time or upon the achievement of performance.

 

A summary of the status of unvested restricted common stock as of December 31, 2015, June 30, 2016 and changes during the six months ended June 30, 2016 is presented below:

 

 

Stock-based Compensation Expense

 

The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:

 

 

The weighted‑average grant date fair value per share of options granted in the six months ended June 30, 2016 and 2015 was $6.91 and $4.17, respectively.

 

The following table summarizes the stock-based compensation expense for stock options and restricted common stock granted to employees and non-employees recorded in the Company’s statements of operations:

 

 

As of June 30, 2016, there was $8.1 million of total unrecognized compensation cost related to non-vested stock options and unvested restricted common stock, which is expected to be recognized over a weighted-average period of 2.9 years. 

 

10. Related Party Transactions

 

During the six months ended June 30, 2016 and 2015, the Company paid one of its investors $733,000 and $1,450,000, respectively, for external research and preclinical development services. During the six months ended June 30, 2015, the Company paid $244,000 to one of its investors for rent related to the Company’s operating lease that expired in August 2015. No payments were made to this investor for the six months ended June 30, 2016.

 

11. Subsequent Events

 

On July 6, 2016, the Company completed the IPO, in which the Company issued and sold 4,600,000 shares of its common stock at a public offering price of $12.50 per share, including 600,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of $57.5 million. The Company received approximately $49.9 million in net proceeds after deducting $7.6 million of underwriting discounts and commissions and other offering costs. Upon the closing of the IPO, all of the outstanding

shares of convertible preferred stock automatically converted into 15,988,800 shares of common stock at the applicable conversion ratio then in effect. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. In connection with the IPO, the Company amended and restated its Fourth Amended and Restated Certificate of Incorporation to change the authorized capital stock to 200,000,000 shares designated as common stock and 10,000,000 shares designated as preferred stock, all with a par value of $0.001 per share. The financial statements as of June 30, 2016, including share and per share amounts, do not give effect to the IPO, as it closed subsequent to June 30, 2016.

 

In July 2016, upon closing of the IPO, the Company recognized approximately $1.2 million of stock-based compensation expense associated with the vesting of 53,334 shares of restricted common stock and the vesting of performance-based option awards to purchase up to 59,387 shares of common stock.

 

The 2016 Employee Stock Purchase Plan (the “2016 ESPP”) was adopted by the board of directors on December 15, 2015 and approved by the stockholders on June 17, 2016 and became effective on July 6, 2016. The 2016 ESPP will be administered by the Company’s board of directors or by a committee appointed by the Company’s board of directors. The 2016 ESPP initially will provide participating employees with the opportunity to purchase up to an aggregate of 586,666 shares of the Company’s common stock. The number of shares of the Company’s common stock reserved for issuance under the 2016 ESPP will automatically increase on the first day of each fiscal year, commencing on January 1, 2017 and ending on December 31, 2025, in an amount equal to the least of (i) 1,173,333 shares of the Company’s common stock, (ii) 1.0% of the total number of shares of the Company’s common stock outstanding on the first day of the applicable year, and (iii) an amount determined by the Company’s board of directors.

 

 

 

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 financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our final prospectus for our initial public offering filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or the SEC on June 30, 2016, or the Prospectus.

 

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. 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, 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 the 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 biopharmaceutical company pioneering an understanding of the non-coding region of the genome controlling the activation and repression of genes. Our goal is to advance a new wave of medicines to control the expression of disease-driving genes. We have built a proprietary gene control platform designed to systematically and efficiently analyze this unexploited region of DNA in human disease tissue to identify and drug novel targets linked to genomically defined patient populations. Because gene expression is fundamental to the function of all cells, we believe that our gene control platform has broad potential to create medicines that achieve profound and durable benefit across therapeutic areas and a range of diseases. By focusing on genomically defined subsets of patients, we believe we can conduct efficient clinical trials with a higher likelihood of success. We are currently focused on developing treatments for cancer and immune-mediated diseases and are building a pipeline of gene control medicines. We opened enrollment for a Phase 2 clinical trial for our lead product candidate, SY-1425 (tamibarotene), in the third quarter of 2016. This trial will enroll genomically defined subsets of patients with relapsed or refractory acute myelogenous leukemia, or AML, and relapsed high-risk myelodysplastic syndrome, or MDS. We plan to initiate a Phase 1/2 clinical trial for our development candidate SY-1365, initially for the treatment of acute leukemia, in the first half of 2017. Both of these programs may have potential in additional indications. Using our platform, we are also generating a pipeline of novel preclinical drug candidates for genomically defined subsets of currently underserved patients. Our goal is to build a fully integrated biopharmaceutical company based on our leadership position in gene control.

 

Since our inception in November 2011, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing our technology platform and conducting preclinical research for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have financed our operations to date primarily through private placements of preferred stock. From inception through June 30, 2016, we raised an aggregate of $122.2 million of gross proceeds from sales of our preferred stock and the issuance of convertible notes that subsequently converted to preferred stock to fund operations. On July 6, 2016, we completed the sale of 4,600,000 shares of our common stock (inclusive of 600,000 shares of common stock sold by us pursuant to the full exercise of an option to purchase additional shares granted to the underwriters in connection with the offering) in our initial public offering, or IPO, at a price to the public of $12.50 per share, resulting in gross proceeds of $57.5 million. We received approximately $49.9 million in net proceeds, after deducting underwriting discounts and commissions and offering costs of approximately $7.6 million. The shares began trading on the NASDAQ Global Select Market on June 30, 2016. Upon the closing of the IPO on July 6, 2016, all

outstanding shares of convertible preferred stock converted into 15,988,800 shares of common stock. As of July 31, 2016, there were no shares of convertible preferred stock outstanding. Additionally, pursuant to our charter, 200,000,000 shares of common stock and 10,000,000 shares of preferred stock are authorized for issuance.

 

Since inception, we have incurred significant operating losses. Our net losses were $22.6 million and $10.7 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, we had an accumulated deficit of $76.1 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

 

 

 

 

 

 

 

 

 

 

 

Because of the numerous risks and uncertainties associated with product development, we are unable to 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 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.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future.

 

Expenses

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for our research activities, including development of our gene control platform and gene control product candidates, which initially focus on cancer indications, and which include:

 

 

 

 

 

 

Research and development costs are expensed as incurred. Nonrefundable advance payments made to vendors for goods or services that will be received in the future for use in research and development activities are deferred and capitalized, even when there is no alternative future use for the research and development, until related goods or services are provided.

 

The following summarizes our most advanced current research and development programs:

 

 

 

We typically use our employee, consultant and infrastructure resources across our research and development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or certain external consultant costs to specific product candidates or development programs.

 

The following table summarizes our external research and development expenses, by program for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

We expect our research and development expenses will increase for the foreseeable future as we seek to advance our programs. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our product candidates. This is due to the numerous risks and uncertainties associated with developing such product candidates, including the uncertainty of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of our product candidates.

 

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. Other significant costs include corporate facility costs not otherwise included in research and development expenses, legal fees related to patent and corporate matters and fees for accounting and consulting services.

 

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates and remediate our material weakness in our internal control over financial reporting. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company.

 

Other Income (Expense), Net

 

Other income (expense), net consists of interest income on our cash and cash equivalents and interest expense related to our equipment financing arrangement.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of the change in estimates.

 

We believe that our most critical accounting policies are those relating to revenue recognition, accrued research and development expenses and stock-based compensation, and there have been no significant changes to our accounting policies discussed in our Prospectus. 

 

Results of Operations

 

Comparison of Three Months Ended June 30, 2016 and 2015

 

The following table summarizes our results of operations for the three months ended June 30, 2016 and 2015, together with the changes in those items in dollars (in thousands):

 

 

Revenue

 

In November 2014, we entered into a research agreement with a multinational pharmaceutical company. Revenue was $0.3 million for the three months ended June 30, 2015 and related to the completion of a research project under our agreement. We did not earn any revenue under this agreement for the three months ended June 30, 2016. The amount of revenue to be recognized under this agreement in future periods may fluctuate.

 

Research and Development Expense

 

Research and development expense increased by $4.1 million from $5.4 million for the three months ended June 30, 2015 to $9.5 million for the three months ended June 30, 2016. The following table summarizes our research and

development expenses for the three months ended June 30, 2016 and 2015, together with the changes to those items in dollars (in thousands):

 

 

The increase in research and development expense was primarily attributable to research and development activities associated with advancing our lead preclinical programs and enhancing our internal capabilities and included the following:

 

 

 

 

 

 

General and Administrative Expense

 

General and administrative expense increased by $1.5 million from $1.0 million for the three months ended June 30, 2015 to $2.5 million for the three months ended June 30, 2016. The increase in general and administrative expense was primarily attributable to the following:

 

 

 

Other Income (Expense), Net

 

 Other income (expense), net consists of interest income on our cash and cash equivalents and interest expense related to our equipment financing arrangement.

 

Comparison of Six Months Ended June 30, 2016 and 2015

 

The following table summarizes our results of operations for the six months ended June 30, 2016 and 2015, together with the changes in those items in dollars (in thousands):

 

 

Revenue

 

Revenue was $0.3 million for the six months ended June 30, 2015 related to the completion of a research project under our research agreement with a multinational pharmaceutical company. We did not earn any revenue for the six months ended June 30, 2016. The amount of revenue to be recognized under this agreement in future periods may fluctuate.

 

Research and Development Expense

 

Research and development expense increased by $8.6 million from $9.2 million for the six months ended June 30, 2015 to $17.8 million for the six months ended June 30, 2016. The following table summarizes our research and development expenses for the six months ended June 30, 2016 and 2015, together with the changes to those items in dollars (in thousands):

 

 

The increase in research and development expense was primarily attributable to research and development activities associated with advancing our lead preclinical programs and enhancing our internal capabilities and included the following:

 

 

 

 

 

 

General and Administrative Expense

 

General and administrative expense increased by $3.1 million from $1.8 million for the six months ended June 30, 2015 to $4.9 million for the six months ended June 30, 2016. The increase in general and administrative expense was primarily attributable to the following:

 

 

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

We funded our operations from inception through June 30, 2016 primarily through gross proceeds of $122.2 million from sales of our preferred stock and the issuance of convertible notes that subsequently converted into preferred stock.

 

As of June 30 2016, we had cash and cash equivalents of $50.1 million.

 

Cash Flows

 

The following table provides information regarding our cash flows for the six months ended June 30, 2016 and 2015 (in thousands):

 

 

Net Cash Used in Operating Activities

 

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

 

Net cash used in operating activities was $21.8 million during the six months ended June 30, 2016 compared to $9.4 million during the six months ended June 30, 2015. The increase in cash used in operating activities was primarily due to an increase in our net loss of $11.9 million for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $1.8 million during the six months ended June 30, 2016 compared to $0.2 million during the six months ended June 30, 2015. The increase in cash used in investing activities was due to increased purchases of property and equipment associated with our operating lease.

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash provided by financing activities was $37.8 million during the six months ended June 30, 2016, and there was $0.3 million provided by financing activities during the six months ended June 30, 2015. The increase in cash provided by financing activities was primarily due to the issuance of $39.8 million of Series B preferred stock in January 2016. 

 

Funding Requirements

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate clinical trials of SY-1425, advance the development of SY-1365, initiate new research and preclinical development efforts and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

 

On July 6, 2016, we completed our IPO, in which we issued and sold 4,600,000 shares of common stock at a public offering price of $12.50 per share, including 600,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of $57.5 million. We received approximately $49.9 million in net proceeds after deducting underwriting discounts and commissions and offering costs of $7.6 million. We believe that the proceeds from the IPO, together with our existing cash and cash equivalents as of June 30, 2016, will enable us to fund our operating expenses and capital expenditure requirements at least through mid-2018. Our future capital requirements will depend on many factors, including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

 

If we raise funds through additional 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 to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Contractual Obligations and Commitments

 

Under the amended and restated TMRC license agreement, we paid the balance of the remaining upfront license fee of $0.5 million in May 2016. Upon the successful dosing of the first patient in our Phase 2 clinical trial of SY-1425, we are obligated to make a $1.0 million milestone payment.

 

During the three months ended June 30, 2016, there were no other material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Prospectus.

 

Off-Balance Sheet Arrangements

 

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable Securities and Exchange Commission rules.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in the form of a money market fund and marketable securities and are invested in U.S. Treasury obligations.

 

We are also exposed to market risk related to changes in foreign currency exchange rates. We contract with vendors that are located in Asia and Europe and certain invoices are denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with these arrangements. We do not currently hedge our foreign currency exchange rate risk. As of June 30, 2016, we had minimal or no liabilities denominated in foreign currencies.

 

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the six months ended June 30, 2016 and 2015, respectively.

 

Item 4.  Controls and Procedures

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

 

Our management, with the participation of our Chief Executive Officer and Chief Operating Officer, who serves as our Principal Financial and Principal Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Operating Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are not currently party to any legal proceedings.

 

Item 1A. Risk Factors.

 

We operate in a dynamic and rapidly changing business environment that involves multiple risks and substantial uncertainty. The following discussion addresses risks and uncertainties that could cause, or contribute to causing, actual results to differ from expectations in material ways. In evaluating our business, investors should pay particular attention to the risks and uncertainties described below and in other sections of this Quarterly Report on Form 10-Q and in our subsequent filings with the SEC. These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. The trading price of our common stock could also decline due to any of these risks, and you could lose all or part of your investment.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have incurred significant losses since inception, expect to incur significant and increasing losses for at least the next several years, and may never achieve or maintain profitability.

 

We have incurred significant annual net operating losses in every year since our inception. We expect to continue to incur significant and increasing net operating losses for at least the next several years. Our net losses were $13.4 million and $29.8 million for the years ended December 31, 2014 and 2015, respectively, and $12.0 million and $22.6 million for the three and six months ended June 30, 2016, respectively. As of June 30, 2016, we had an accumulated deficit of $76.1 million. We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We have financed our operations to date primarily through private placements of our preferred stock and our initial public offering. We have devoted substantially all of our financial resources and efforts to research and development and general and administrative expense to support such research and development. Our net losses may fluctuate significantly from

quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders' (deficit) equity and working capital.

 

We anticipate that our expenses will increase substantially if and as we:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. Successful commercialization will require achievement of key milestones, including initiating and successfully completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations and cause a decline in the value of our common stock.

 

We have a limited operating history, no products approved for sale and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

 

We commenced operations in 2011. Our operations to date have been limited to financing and staffing our company, developing our gene control platform and conducting preclinical research. We have not yet demonstrated an ability to successfully conduct clinical trials, obtain marketing approvals, manufacture a commercial-scale product or