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Table of Contents

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 September 30, 2021

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: 001-37467

Astria Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

26-3687168

(State or Other Jurisdiction of
Incorporation or Organization)

(IRS Employer
Identification No.)

100 High Street
Floor 28

Boston, Massachusetts

02110

(Address of Principal Executive Offices)

(Zip Code)

(617) 349-1971

(Registrant’s Telephone Number, Including Area Code)

Catabasis Pharmaceuticals, Inc.

(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

ATXS

The Nasdaq Stock Market LLC

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, a 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 accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of November 1, 2021, there were 13,009,477 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

Table of Contents

TABLE OF CONTENTS

 

 

    

Page

PART I. FINANCIAL INFORMATION

3

Item 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020

4

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020

5

 

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020

6

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

18

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

 

 

 

PART II. OTHER INFORMATION

28

Item 1A.

Risk Factors

28

Item 6.

Exhibits

28

 

 

 

SIGNATURES

29

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

our expectations regarding the timing of our planned filing of an initial investigational new drug application, or IND, for our product candidate STAR-0215 (formerly known as QLS-215) and the timing, nature, goals and results of our planned Phase 1 and clinical trial of STAR-0215, including that the results from the Phase 1 trial could establish proof of concept for the differentiation of STAR-0215 as a potential treatment for hereditary angioedema, or HAE, and the timing of the Phase 1b/2 clinical trial of STAR-0215;
our expectations about the unmet medical need for HAE, the potential differentiating attributes of STAR-0215 as a potential treatment for HAE, along with the potential market impact of such differentiation, the potential of STAR-0215 to be the best-in-class and most patient-friendly chronic treatment option for HAE, and the profile, nature and anticipated growth of the global HAE market and HAE therapies;
our expectations that pre-clinical data of STAR-0215 may be replicated in clinical data;
our expectations that the acquisition of Quellis Biosciences, Inc., or “Quellis”, may be an opportunity to create significant stockholder value;
our expectations regarding our ability to expand our pipeline;
the potential benefits of any future acquisition, in-license, collaboration or pre-clinical development activities;
our commercialization, marketing and manufacturing plans, capabilities and strategy;
our intellectual property position and strategy;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our use of the proceeds from the private placement completed in February 2021;
developments relating to our competitors and our industry; and
the impact of government laws and regulations.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make as a result of various important factors, including risks and uncertainties related to our ability to recognize the anticipated benefits of the Quellis acquisition (as described below); the outcome of any legal proceedings that may be instituted against us or Quellis following the announcement of the acquisition and related transactions; changes in applicable laws or regulations; the possibility that we may be adversely affected by other economic, business, and/or competitive factors, including the COVID-19 pandemic; risks inherent in pharmaceutical research and development, such as adverse results in our drug discovery, preclinical and clinical development activities, the risk that the results of preclinical studies may not be replicated in clinical studies, our ability to enroll patients in our clinical trials, and the risk that any of our clinical trials may not commence, continue or be completed on time, or at all; feedback and guidance from and decisions made by the U.S. Food and Drug Administration and other regulatory authorities, investigational review boards at clinical trial sites and other review bodies with respect

1

Table of Contents

to STAR-0215 and any future product candidates; our ability to manufacture sufficient quantities of drug substance and drug product on a cost-effective and timely basis; our ability to obtain, maintain and enforce intellectual property rights for STAR-0215 and any other future product candidates; competition with respect to STAR-0215 or any other future product candidates or approved products; our ability to manage our cash usage and the possibility of unexpected cash expenditures; our ability to obtain necessary financing to conduct our planned activities and to manage unplanned cash requirements; and general economic and market conditions.

We have included important factors in the cautionary statements included in our most recent Annual Report on Form 10-K, particularly in the sections entitled “Summary of the Material Risks Associated with Our Business” and “Risk Factors”, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

2

Table of Contents

PART I- FINANCIAL INFORMATION

Item 1. Financial Statements

Astria Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

September 30, 

December 31, 

    

2021

    

2020

Assets

Current assets:

Cash and cash equivalents

$

131,777

$

24,930

Short-term investments

20,000

Prepaid expenses and other current assets

 

2,745

 

1,395

Total current assets

 

134,522

 

46,325

Right-of-use asset

557

966

Other assets

50

165

Total assets

$

135,129

$

47,456

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

574

$

1,544

Accrued expenses

 

3,585

 

4,197

Current portion of operating lease liabilities

541

649

Total current liabilities

 

4,700

 

6,390

Long-term portion of operating lease liabilities

 

 

397

Total liabilities

4,700

6,787

Stockholders’ equity:

Series X redeemable convertible preferred stock, $0.001 par value per share, 36,758 shares authorized; 31,455 shares issued and outstanding as of September 30, 2021 and no shares issued and outstanding as of December 31, 2020

96,398

Common stock, $0.001 par value per share, 150,000,000 shares authorized; 13,009,477 and 3,347,389 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

 

13

 

3

Additional paid-in capital

 

480,336

 

301,563

Accumulated deficit

(446,318)

(260,897)

Total stockholders’ equity

 

130,429

 

40,669

Total liabilities and stockholders’ equity

$

135,129

$

47,456

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

3

Table of Contents

Astria Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Operating expenses:

Research and development

$

3,788

$

7,806

$

9,859

$

19,845

General and administrative

 

4,110

 

3,057

 

10,992

 

8,612

Acquired in-process research and development

164,617

Total operating expenses

 

7,898

 

10,863

 

185,468

 

28,457

Loss from operations

 

(7,898)

 

(10,863)

 

(185,468)

 

(28,457)

Other income (expense):

Interest and investment income

35

4

89

231

Other expense, net

(8)

(3)

(42)

(96)

Total other income, net

 

27

 

1

 

47

 

135

Net loss

(7,871)

(10,862)

(185,421)

(28,322)

Dividend on convertible preferred stock related to beneficial conversion feature and issuance costs

(24,437)

Net loss attributable to common shareholders

$

(7,871)

$

(10,862)

$

(209,858)

$

(28,322)

Net loss per share - basic and diluted

$

(0.61)

$

(3.36)

$

(27.81)

$

(9.56)

Weighted-average common shares outstanding used in net loss per share - basic and diluted

 

12,830,782

 

3,237,477

 

7,546,969

 

2,961,623

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

4

Table of Contents

Astria Therapeutics, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Net loss

$

(7,871)

$

(10,862)

$

(185,421)

$

(28,322)

Other comprehensive loss:

Loss on short-term investments

 

 

(1)

 

 

Total other comprehensive loss:

 

 

(1)

 

 

Comprehensive loss

$

(7,871)

$

(10,863)

$

(185,421)

$

(28,322)

The accompanying notes are an integral part of these condensed consolidated financial statements

5

Table of Contents

Astria Therapeutics, Inc.

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

(In thousands, except shares)

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Series X redeemable convertible preferred stock, shares

Balance, beginning of period

Issuance of preferred stock in a private offering of public equity, net of issuance costs

35,573

Issuance of preferred stock upon acquisition of Quellis

50,504

Reclassification of preferred stock to permanent equity

(86,077)

Balance, end of period

Series X redeemable convertible preferred stock, value

Balance, beginning of period

$

$

$

$

Issuance of preferred stock in a private offering of public equity, net of issuance costs

84,696

Issuance of preferred stock upon acquisition of Quellis

156,185

Reclassification of preferred stock to permanent equity

(240,881)

Balance, end of period

$

$

$

$

Series X redeemable convertible preferred stock, shares

Balance, beginning of period

32,545

Reclassification of preferred stock to permanent equity

86,077

Conversion of preferred stock into common stock

(1,090)

(54,622)

Balance, end of period

31,455

31,455

Series X redeemable convertible preferred stock, value

Balance, beginning of period

$

99,770

$

$

$

Reclassification of preferred stock to permanent equity

240,881

Conversion of preferred stock into common stock

(3,372)

(168,920)

Dividend on convertible preferred stock related to beneficial conversion feature and issuance costs

24,437

Balance, end of period

$

96,398

$

$

96,398

$

Common stock, shares

Balance, beginning of period

12,824,796

3,137,264

3,347,386

2,072,266

Issuance of common stock upon acquisition of Quellis

555,444

Issuance of common stock upon the conversion of preferred stock

181,698

9,103,664

Issuance of common stock for at-the-market offerings

208,956

392,288

Issuance of common stock and warrants in public offerings

881,666

Issuance of common stock upon exercise of options

2,992

2,992

Fractional shares eliminated pursuant to reverse stock split

(9)

(9)

Balance, end of period

13,009,477

3,346,220

13,009,477

3,346,220

Common stock, par value

Balance, beginning of period

$

13

$

3

$

4

$

2

Issuance of common stock upon the conversion of preferred stock

9

Issuance of common stock in underwritten public offerings

 

 

 

 

1

Balance, end of period

$

13

$

3

$

13

$

3

Additional paid-in capital

 

 

 

 

Balance, beginning of period

$

475,563

$

291,912

$

301,562

$

259,315

Issuance of preferred stock in a private offering of public equity, net of issuance costs

19,565

Issuance of common stock upon acquisition of Quellis

8,098

Issuance of common stock for at-the-market offerings

8,939

16,268

Issuance of common stock in an underwritten public offering, net of issuance costs

24,558

Issuance of common stock upon the conversion of preferred stock

3,372

168,912

Issuance of common stock upon exercise of options

6

6

Dividend on convertible preferred stock related to beneficial conversion feature and issuance costs

(24,437)

Expense related to warrants inherited in acquisiton of Quellis

385

772

Reclassification of warrant liability to additional paid-in capital

3,468

Stock-based compensation expense

 

1,010

 

375

 

2,390

 

1,085

Balance, end of period

$

480,336

$

301,226

$

480,336

$

301,226

Accumulated deficit

 

 

 

 

Balance, beginning of period

$

(438,447)

$

(241,057)

$

(260,897)

$

(223,597)

Net loss

 

(7,871)

 

(10,862)

 

(185,421)

 

(28,322)

Balance, end of period

$

(446,318)

$

(251,919)

$

(446,318)

$

(251,919)

Accumulated other comprehensive loss

 

 

 

 

Balance, beginning of period

$

$

1

$

$

Realized loss on short-term investments

 

 

(1)

 

 

Balance, end of period

$

$

$

$

Total stockholders' equity

$

130,429

$

49,310

$

130,429

$

49,310

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

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Astria Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

Operating activities

Net loss

$

(185,421)

$

(28,322)

Reconciliation of net loss to net cash used in operating activities:

Non-cash portion of acquired in-process research and development

164,612

Stock-based compensation expense

2,390

1,085

Net gain on warrants inherited in acquisition of Quellis

(315)

Other non-cash items

15

42

Changes in assets and liabilities:

Prepaid expenses and other assets

 

(1,092)

 

121

Right-of-use asset- operating

(96)

125

Accounts payable

 

(2,947)

 

211

Accrued expenses

 

(1,011)

 

2,314

Net cash used in operating activities

 

(23,865)

 

(24,424)

Investing activities

Purchases of short-term investments

(42,777)

Sales and maturities of short-term investments

20,000

69,110

Cash acquired in acquisition of Quellis

6,466

Purchases of property and equipment

(21)

(23)

Net cash provided by investing activities

 

26,445

 

26,310

Financing activities

Proceeds from underwritten public offering, net of issuance costs

24,559

Proceeds from private offering of public equity, net of issuance costs

104,261

Proceeds from at-the-market offering, net of issuance costs

16,270

Proceeds from exercise of common stock options

6

Net cash provided by financing activities

 

104,267

 

40,829

Net increase in cash, cash equivalents and restricted cash

 

106,847

 

42,715

Cash, cash equivalents and restricted cash, beginning of period

25,051

10,376

Cash, cash equivalents and restricted cash, end of period

$

131,898

$

53,091

Supplemental disclosure of non-cash transactions:

Conversion of Series X Preferred Stock into common stock

$

168,920

$

Non-cash dividend on convertible preferred stock

$

24,437

$

Reclassification of warrant liability to additional paid-in capital

$

3,468

$

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

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Astria Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.     Organization and Operations

The Company

Astria Therapeutics, Inc. (the “Company”), formerly known as Catabasis Pharmaceuticals, Inc., is a biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics. Its mission is to bring hope with life-changing therapies to patients and families. On October 26, 2020, the Company announced that the Phase 3 PolarisDMD trial of the Company’s previous lead product candidate, edasalonexent, for the treatment of Duchenne muscular dystrophy (“DMD”) did not meet its primary and secondary endpoints. Based on these results, the Company announced that it was stopping activities related to the development of edasalonexent, including the Company’s ongoing open-label extension trial. On January 28, 2021, the Company acquired Quellis Biosciences, Inc (“Quellis”). The Company’s lead product candidate, which was acquired in the Quellis acquisition, is STAR-0215 (formerly known as QLS-215), a monoclonal antibody inhibitor of plasma kallikrein in preclinical development for the treatment of hereditary angioedema, or HAE, a rare, debilitating and potentially life-threatening disease. The Company was incorporated in the State of Delaware on June 26, 2008.

Reverse Stock Split

On August 19, 2021, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-six (1:6) pursuant to a Certificate of Amendment to its Certificate of Incorporation filed with the Secretary of State of the State of Delaware. The reverse stock split was reflected on Nasdaq beginning with the opening of trading on August 20, 2021. Pursuant to the reverse stock split, every six shares of the Company's issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of the common stock. Amounts of common stock resulting from the reverse stock split were rounded down to the nearest whole share and any resulting fractional shares were cancelled for cash. The number of authorized shares of the Company's common stock remained unchanged. The reverse stock split affected all issued and outstanding shares of the Company's common stock, and the respective numbers of shares of common stock underlying the Company’s outstanding Series X Preferred Stock, outstanding stock options, outstanding warrants and the Company's equity incentive plans were proportionately adjusted. All share and per share amounts of the common stock included in the accompanying condensed consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital.

Agreement and Plan of Merger

On January 28, 2021, the Company acquired Quellis (the “Quellis Acquisition”).  Under the terms of that certain agreement and plan of merger, dated January 28, 2021 (the “Merger Agreement”), the Company issued to the stockholders of Quellis 555,444 shares of the Company’s common stock, par value $0.001 per share, and 50,504 shares of newly designated Series X redeemable convertible preferred stock (“Series X Preferred Stock”) (as described below). The Series X Preferred Stock had a conversion value on the closing date of $122.7 million. In addition, the Company assumed options granted under the Quellis stock option plan, which became options to purchase 55,414 shares of the Company’s common stock, a warrant to purchase 2,805 shares of Series X Preferred Stock at an exercise price of $341.70 per share, and a warrant to purchase 30,856 shares of the Company’s common stock at an exercise price of $2.10 per share, which warrants are exercisable until December 14, 2030. Upon stockholder approval of the Conversion Proposal (as defined below) on June 2, 2021, the warrant to purchase Series X Preferred Stock was converted into the right to purchase 467,500 shares of the Company’s common stock, at a per share exercise price of $2.10 per share.

Stock Purchase Agreement and Series X Preferred Stock

Concurrent with the Quellis Acquisition, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with certain institutional and accredited investors. Pursuant to the Purchase Agreement, the Company sold an aggregate of 35,573 shares of Series X Preferred Stock for gross proceeds of approximately $110.0 million, and net proceeds of $104.3 million (the “February 2021 Financing”). Each share of Series X Preferred Stock is convertible into 166.67 shares of common stock. In accounting for the Purchase Agreement, the Company recorded a beneficial conversion feature of $19.6 million and issuance costs of $5.7 million. The combined

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total was treated as a discount to the value of Series X Preferred Stock, See Note 2 – “Summary of Significant Accounting Policies” for further discussion.

As a result of the Quellis Acquisition and the February 2021 Financing, the Company issued the following Series X Preferred Stock or warrants to purchase Series X Preferred Stock:

Series X

Preferred

    

Stock

Outstanding shares issued in merger

50,504

Outstanding shares issued in February 2021 Financing

 

35,573

Warrants assumed in merger

 

2,805

Total

 

88,882

At its 2021 Annual Meeting of Stockholders on June 2, 2021, the Company’s stockholders approved the conversion of the Company’s Series X Preferred Stock into shares of the Company’s common stock in accordance with Nasdaq Listing Rule 5635(a) (the “Conversion Proposal”). Following stockholder approval of the Conversion Proposal, each share of Series X Preferred Stock then outstanding automatically converted into 166.67 shares of the Company’s common stock, subject to certain beneficial ownership limitations, including that a holder of Series X Preferred Stock is prohibited from converting shares of Series X Preferred Stock into shares of the Company’s common stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than a specified percentage (as of September 30, 2021, these percentages are set at 4.99% to 9.99% and can be adjusted by the holder to a number between 4.99% and 19.99)% of the total number of shares of the Company’s common stock issued and outstanding immediately after giving effect to such conversion. As of September 30, 2021, 54,622 shares of Series X Preferred Stock were converted into 9,103,664 shares of common stock and 31,455 shares of Series X Preferred Stock remained outstanding. Each share of Series X Preferred Stock is convertible into 166.67 shares of common stock and therefore the number of shares of underlying common stock issuable upon conversion of the remaining outstanding shares of Series X Preferred Stock is 5,242,501. Outstanding shares of Series X Preferred Stock are subject to conversion at the option of the holder.

Prior to stockholder approval of the Conversion Proposal, the terms of the Series X Preferred Stock included a cash redemption feature. This cash redemption feature resulted in substantial doubt about the Company’s ability to continue as a going concern as disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) and the Company’s quarterly report on Form 10-Q for the three months ended March 31, 2021.  Upon stockholder approval of the Conversion Proposal, the cash redemption feature was eliminated and, consequently, there is no longer substantial doubt about the Company’s ability to continue as a going concern for at least twelve months subsequent to the issuance of these financial statements.

Holders of Series X Preferred Stock are entitled to receive dividends, subject to certain beneficial ownership limitations, on shares of Series X Preferred Stock equal, on an as-if-converted-to-common-stock basis, and in the same form as dividends actually paid on shares of the Company’s common stock. Except as otherwise required by law, the Series X Preferred Stock does not have voting rights. However, as long as any shares of Series X Preferred Stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series X Preferred Stock, (i) alter or change adversely the powers, preferences or rights given to the Series X Preferred Stock or alter or amend the Certificate of Designation that authorized the Series X Preferred Stock, amend or repeal any provision of, or add any provision to, the Company’s Certificate of Incorporation or bylaws, or file any articles of amendment, certificate of designations, preferences, limitations and relative rights of any series of preferred stock, if such action would adversely alter or change the preferences, rights, privileges or powers of, or restrictions provided for the benefit of the Series X Preferred Stock, (ii) issue further shares of Series X Preferred Stock or increase or decrease (other than by conversion) the number of authorized shares of Series X Preferred Stock, or (iii) enter into any agreement with respect to any of the foregoing.

January 2020 Financing

On January 30, 2020, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc. relating to an underwritten public offering (the “January 2020 Financing”) of 881,666 shares of common stock at a price to the public of $30.00 per share, including 115,000 shares issued upon the exercise in full by Oppenheimer & Co. Inc. of its overallotment option. This resulted in gross proceeds of $26.5 million, and net proceeds of $24.6 million.

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Liquidity

The Company has entered into various sales agreements with Cowen and Company LLC (“Cowen”), pursuant to which the Company could issue and sell shares of common stock under at-the-market offering programs. On May 20, 2021, the Company terminated its sales agreement with Cowen. On June 30, 2021, the Company entered into an Open Market Sale AgreementSM with Jefferies LLC (“Jefferies”), pursuant to which the Company can issue and sell shares of common stock of up to $25.0 million under at-the-market offering programs (collectively, with the Cowen at-the-market offering program, the “ATM Programs”). The Company pays 3% of the gross proceeds from any common stock sold through the ATM Programs. As of June 30, 2021, the Company has not sold any shares of common stock pursuant to the Jefferies agreement and, as a result, $25.0 million of common stock remains available for sale under the Jefferies agreement.

During the nine months ended September 30, 2020, the Company sold an aggregate of 392,288 shares of common stock pursuant to the ATM Programs, at an average price of $42.76 per share, for net proceeds of $16.3 million after deducting sales commissions and offering expenses. There was no activity from the ATM Programs during the nine months ended September 30, 2021.

As of September 30, 2021, the Company had an accumulated deficit of $446.3 million and had available cash and cash equivalents of $131.8 million. The Company has been primarily involved with research and development activities and has incurred operating losses and negative cash flows from operations since its inception. The Company has not generated any product revenues and has financed its operations primarily through public offerings and private placements of its equity securities. There can be no assurance that the Company will be able to obtain additional debt, equity or other financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations, and financial condition.

The Company is subject to a number of risks similar to other life science companies, including, but not limited to, successful discovery and development of its drug candidates, raising additional capital, development by its competitors of new technological innovations, protection of proprietary technology and regulatory approval and market acceptance of the Company’s products. The Company anticipates that it will continue to incur significant operating losses for the next several years as it continues to develop its product candidates.

2.     Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying financial statements and the related disclosures are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Additionally, certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted from this report. Accordingly, these condensed financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2020 and notes thereto included in the 2020 Annual Report on Form 10-K.

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, including those adjustments that are of a normal and recurring nature, which are necessary to fairly present the Company’s results for the interim periods presented. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021, or for any future period.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Astria Securities Corporation and Quellis Biosciences, LLC, successor in interest to Quellis. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from such estimates.

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The Company utilizes certain estimates to record expenses relating to research and development contracts. These contract estimates, which are primarily related to the length of service of each contract and the amount of service provided as of each measurement date, are determined by the Company based on input from internal project management, as well as from the Company’s service providers.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss attributable to common shareholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the Company’s dilutive net loss per share calculation, preferred stock, stock options and warrants to purchase common stock and preferred stock were considered to be common stock equivalents but were excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share were the same for all periods presented.

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

Three and Nine Months Ended September 30, 

    

2021

    

2020

Series X Preferred Stock (1)

5,242,501

Stock options

 

1,334,399

 

222,710

Common stock warrants

 

1,530,380

 

1,032,291

 

8,107,280

1,255,001

(1)    Shown as common stock equivalents

Cash, Cash Equivalents and Restricted Cash

The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet that sum to the total of the same such amount shown in the statement of cash flows is as follows (in thousands):

September 30, 

    

2021

    

2020

Cash and cash equivalents

$

131,777

$

52,856

Restricted cash (1)

121

235

Total

$

131,898

$

53,091

(1)    Included in prepaid expenses and other current assets and other assets.

Acquired In-Process Research and Development

The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets, which includes transaction costs. Goodwill is not recognized in asset acquisitions. In an asset acquisition, the cost allocated to acquire in-process research and development (“IPR&D”) with no alternative future use is charged to expense at the acquisition date. Refer to Note 3, “Acquisition of Quellis” for a more detailed description of the accounting policy utilized for the recent asset acquisition.

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Preferred Stock Discount

As discussed above, in February 2021, the Company issued Series X Preferred Stock in a private placement transaction. It was determined that this transaction resulted in recognition of a beneficial conversion feature, which was valued based on the difference between the price of the shares of common stock on the date of commitment and the conversion price on the closing date, resulting in a total value of $19.6 million. Additionally, the Company incurred total issuance costs of $5.7 million related to the private placement. Both of these features were recorded as a discount on Series X Preferred Stock recognized at the close of the transaction. These features are analogous to preferred dividends and are recorded as a non-cash return to holders of Series X Preferred Stock through additional paid in capital. The discount related to the beneficial conversion feature is recognized through the earliest possible date of conversion, which occurred upon the shareholder approval of the conversion in June 2021. The issuance costs are recognized as a dividend at the time of conversion to common shares. As of September 30, 2021, $24.4 million of the above amounts were accounted for as a non-cash return related to shares of Series X Preferred Stock, and $0.9 million remained to be recognized upon future conversion.

Recent Accounting Pronouncements - Not Yet Adopted

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326). This standard requires a financial asset to be presented at amortized cost basis at the net amount expected to be collected. It also requires that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. In November 2019, the FASB issued an amendment making this ASU effective for annual reporting periods beginning after December 15, 2022 for smaller reporting companies, early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s 2020 Annual Report on Form 10-K, and there were no significant changes to such policies in the three and nine months ended September 30, 2021 that had a material impact on the Company’s results of operations or financial position.

3.     Acquisition of Quellis

On January 28, 2021, the Company completed the Quellis Acquisition in accordance with the terms of the Merger Agreement as discussed in Note 1, “Organization and Operations. Under the terms of the Merger Agreement, the Company issued 555,444 shares of common stock and 50,504 shares of Series X Preferred Stock. Each share of Series X Preferred Stock is convertible into 166.67 shares of Common Stock, subject to certain conditions.

The Company concluded that the Quellis Acquisition was not the acquisition of a business, as substantially all of the fair value of the non-monetary assets acquired was concentrated in a single identifiable asset, STAR-0215.

The Company determined that the cost to acquire the Quellis assets was $170.7 million, based on the fair value of the equity consideration issued and including direct costs of the acquisition of $1.8 million. The net assets acquired in connection with the Quellis Acquisition were recorded at their estimated fair values as of January 28, 2021, which is the date the Quellis Acquisition was completed. The following table summarizes the net assets acquired based on their estimated fair values as of January 28, 2021 (in thousands):

Acquired IPR&D

    

$

164,612

Cash and cash equivalents

 

8,307

Prepaid expenses and other assets

 

136

Accounts payable

 

(1,974)

Accrued liabilities

 

(400)

Net acquired tangible assets

$

170,681

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In the estimation of fair value of the asset purchase consideration, the Company used the carrying value of the cash and cash equivalents, prepaid expenses, accounts payable and accrued liabilities as the most reliable indicator of fair value based on the associated short-term nature of the balances. The remaining fair value was attributable to the acquired IPR&D. As STAR-0215 had not, at the time of the Quellis Acquisition, received regulatory approval in any territory, the cost attributable to the IPR&D was expensed in the Company’s consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2021 as the acquired IPR&D had no alternative future use, as determined by the Company in accordance with U.S. GAAP.

4.     Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability. There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2021 or 2020.

The Company’s investment portfolio may include fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company apply other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. The Company validates the prices provided by its third party pricing services by obtaining market values from other pricing sources and analyzing pricing data in certain instances. The Company has from time to time invested in certain reverse repurchase agreements which are collateralized by deposits in the form of U.S. Government Securities and Obligations for an amount no less than 102% of their value. The Company has not recorded an asset or liability for the collateral as the Company was not permitted to sell or re-pledge the collateral. The collateral had at least the prevailing credit rating of U.S. Government Treasuries and Agencies. The Company utilized a third-party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the reverse repurchase agreements on a daily basis.

The Company accounted for warrants to purchase its stock pursuant to Accounting Standards Codification (“ASC”) Topic 470, Debt, and ASC Topic 480, Distinguishing Liabilities from Equity, and classifies warrants for common stock and preferred stock as liabilities or equity. The warrants classified as liabilities are reported at their estimated fair value and any changes in fair value are reflected in research and development expense. The warrants classified as equity are reported at their estimated fair value with no subsequent remeasurement.

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Below is a summary of assets and liabilities measured at fair value on a recurring basis (in thousands):

As of September 30, 2021

Quoted Prices

Significant

Significant

in Active

Observable

Unobservable

Markets

Inputs

Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

Cash and cash equivalents:

Money market funds

$

1,847

$

$

$

1,847

Reverse repurchase agreements

39,000

39,000

Total assets

$

1,847

$

39,000

$

$

40,847

As of December 31, 2020

Quoted Prices

Significant

Significant

in Active

Observable

Unobservable

Markets

Inputs

Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

Cash and cash equivalents:

Money market funds

$

22,999

$

$

$

22,999

Short-term investments:

Reverse repurchase agreements

20,000

20,000

Total assets

$

22,999

$

20,000

$

$

42,999

At September 30, 2021 and December 31, 2020, cash equivalents approximated their fair value due to their short-term nature.

In connection with the Quellis Acquisition, the Company issued a warrant to purchase 2,805 shares of Series X Preferred Stock at an exercise price of $341.70 per share. Upon stockholder approval of the Conversion Proposal, and reflecting the reverse stock split, the warrant became a warrant to purchase 467,500 shares of common stock at a purchase price of $2.10. This was originally accounted for as a liability until stockholder approval of the Conversion Proposal on June 2, 2021, at which point the warrant was reclassified to permanent equity. The warrant liability was valued based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company estimated the fair value of the warrant liability using Black-Scholes option-pricing models and assumptions that are based on the individual characteristics of the warrants on the valuation date, as well as assumptions including the fair value per share of the underlying security, the remaining contractual term of the warrant, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying security (in thousands).

    

September 30, 2021

Balance at beginning of year

$

Issuance of warrant

 

4,332

Decrease in the fair value of the warrant

(864)

Reclassification of warrant liability to additional paid in-capital

 

(3,468)

Ending balance

$

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5.     Short-Term Investments

The Company did not hold any short-term investments at September 30, 2021. The following table summarizes the short-term investments held at December 31, 2020 (in thousands):

Gross Unrealized

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

December 31, 2020

Reverse repurchase agreements

$

20,000

$

$

$

20,000

Total

$

20,000

$

$

$

20,000

The contractual maturities of all short-term investments held at December 31, 2020 were one year or less. There were no short-term investments in an unrealized loss position at December 31, 2020.

Gross realized gains and losses on the sales of short-term investments are included in other income, net. Unrealized holding gains or losses for the period that have been included in accumulated other comprehensive income, as well as gains and losses reclassified out of accumulated other comprehensive income into other income, net were not material to the Company’s condensed consolidated results of operations. The cost of investments sold or the amount reclassified out of the accumulated other comprehensive income into other income, net is based on the specific identification method for purposes of recording realized gains and losses. All proceeds in the three and nine-month periods ended September 30, 2021 and 2020 related to maturities of underlying investments. The gains on proceeds from maturities of short-term investments were not material to the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2021 and 2020.

6.     Accrued Expenses

Accrued expenses consisted of the following (in thousands):

September 30, 

December 31, 

    

2021

    

2020

Accrued compensation

$

1,513

$

1,719

Accrued contracted research costs

1,211

1,726

Accrued professional fees

612

356

Accrued other

249

Accrued severance

396

Total

$

3,585

$

4,197

7.     Stockholders’ Equity

Preferred Stock

Under the Company’s amended and restated certificate of incorporation, the Company has 5,000,000 shares of preferred stock authorized for issuance, with a $0.001 par value per share. Preferred stock may be issued from time to time in one or more series, each series to have such terms as stated or expressed in the resolutions providing for the issue of such series adopted by the board of directors of the Company. Preferred stock which may be redeemed, purchased or acquired by the Company may be reissued except as otherwise provided by law. As of September 30, 2021, the Company had 31,455 shares of Series X Preferred Stock outstanding. Each share of Series X Preferred Stock is convertible into 166.67 shares of common stock and therefore the number of shares of underlying common

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stock issuable upon conversion of the Series X Preferred Stock is 5,242,501. Refer to Note 1 – “Organization and Operations” regarding the Company’s issuance of Series X Preferred Stock in January 2021 and February 2021.

Outstanding Warrants

The following table presents information about warrants that are issued and outstanding at September 30, 2021:  

Year Issued

    

Equity Instrument

    

Warrants Outstanding

    

Exercise Price

    

Date of Expiration

2015

 

Common Stock

204

$

732.72

 

3/30/2022

2018

 

Common Stock

699,962

$

72.00

 

6/21/2023

2019

 

Common Stock

331,858

$

37.50

 

2/7/2024

2021

Common Stock

498,356

$

2.10

12/14/2030

Total

 

1,530,380

 

 

Weighted average exercise price

$

41.84

 

Weighted average life in years

 

  

 

4.30

8.     Reserved for Future Issuance

The Company has reserved for future issuance the following shares of common stock:

 

September 30, 

December 31, 

    

2021

    

2020

Series X Preferred Stock

5,242,501

Warrants for the purchase of common stock

 

1,530,380

 

1,032,291

Options outstanding to purchase common stock

 

1,334,399

 

227,846

Options available for future issuance to purchase common stock

254,748

322,695

Shares reserved for the employee stock purchase plan

 

30,904

24,825

Total

 

8,392,932

 

1,607,657

As of September 30, 2021, the Company also had 31,455 shares of Series X Preferred Stock outstanding. Each share of Series X Preferred Stock outstanding is convertible into 166.67 shares of the Company’s common stock, subject to certain beneficial ownership limitations at the holder’s option. See Note 1 – “Organization and Operations” for additional detail.

9.     Stock Incentive Plans

A summary of the Company’s stock option activity and related information follows:

Weighted

Average

Weighted-

Remaining

Aggregate

Average

Contractual

Intrinsic Value

    

Shares

    

Exercise Price

    

Term (years)

    

(in thousands)

Outstanding at December 31, 2020

 

227,846

$

68.25

 

8.13

$

Granted

 

1,113,982

$

16.21

Assumed in Quellis Acquisition

55,414

$

1.73

Exercised

(2,992)

$

2.10

Cancelled or forfeited

 

(58,344)

$

62.08