UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-Q
| |
(Mark one) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | |
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 001-37581
Aclaris Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 46-0571712 |
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|
Registrant’s telephone number, including area code: (484) 324‑7933324-7933
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |||
Title of Each Class: | Trading Symbol(s) | | Name of Each Exchange on which Registered | |
Common Stock, $0.00001 par value | ACRS | | 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 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‑TS-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‑acceleratednon-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‑212b-2 of the Securities Exchange Act of 1934:
| | |
Large accelerated filer | | Accelerated filer |
| | |
Non-accelerated filer | | Smaller reporting company |
| | |
| | Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒
The number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, as of the close of business on NovemberAugust 6, 20172020 was 30,834,67942,722,780.
ACLARIS THERAPEUTICS, INC.
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Notes to Unaudited Condensed Consolidated Financial Statements | | 6 | ||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 24 | ||
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Item 3. Quantitative and Qualitative Disclosures about Market Risk | | 41 | ||
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | 45 | ||
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACLARIS THERAPEUTICS, INC.INC.
CONDENSED CONSOLIDATED BALANCE SHEETSSHEETS
(UNAUDITED)(Unaudited)
(In thousands, except share and per share data)
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| September 30, |
| December 31, |
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| 2017 |
| 2016 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 60,055 |
| $ | 30,171 |
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Marketable securities |
|
| 167,793 |
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| 107,051 |
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Accounts receivable, net |
|
| 658 |
|
| — |
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Prepaid expenses and other current assets |
|
| 5,616 |
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| 1,334 |
|
Total current assets |
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| 234,122 |
|
| 138,556 |
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Marketable securities |
|
| — |
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| 36,912 |
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Property and equipment, net |
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| 1,203 |
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| 481 |
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Intangible assets |
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| 7,367 |
|
| — |
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Goodwill |
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| 18,504 |
|
| — |
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Other assets |
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| 195 |
|
| 136 |
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Total assets |
| $ | 261,391 |
| $ | 176,085 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
| $ | 6,483 |
| $ | 2,845 |
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Accrued expenses |
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| 3,510 |
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| 3,378 |
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Total current liabilities |
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| 9,993 |
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| 6,223 |
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Contingent consideration |
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| 4,378 |
|
| — |
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Other liabilities |
|
| 375 |
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| 372 |
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Deferred tax liability |
|
| 2,386 |
|
| — |
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Total liabilities |
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| 17,132 |
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| 6,595 |
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Stockholders’ Equity: |
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Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at September 30, 2017 and December 31, 2016 |
|
| — |
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| — |
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Common stock, $0.00001 par value; 100,000,000 shares authorized at September 30, 2017 and December 31, 2016; 30,834,679 and 26,059,181 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
|
| — |
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| — |
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Additional paid‑in capital |
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| 380,873 |
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| 260,671 |
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Accumulated other comprehensive loss |
|
| (113) |
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| (269) |
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Accumulated deficit |
|
| (136,501) |
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| (90,912) |
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Total stockholders’ equity |
|
| 244,259 |
|
| 169,490 |
|
Total liabilities and stockholders’ equity |
| $ | 261,391 |
| $ | 176,085 |
|
| | | | | | | |
|
| June 30, | | December 31, |
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| 2020 |
| 2019 |
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| | | | | |
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Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 32,587 | | $ | 35,937 | |
Marketable securities | |
| 35,528 | |
| 39,078 | |
Accounts receivable, net | | | 775 | | | 704 | |
Prepaid expenses and other current assets | |
| 2,065 | |
| 3,118 | |
Discontinued operations - current assets | | | — | | | 4,966 | |
Total current assets | |
| 70,955 | |
| 83,803 | |
Property and equipment, net | |
| 2,230 | |
| 2,470 | |
Intangible assets | | | 7,161 | | | 7,199 | |
Other assets | |
| 4,653 | |
| 4,825 | |
Total assets | | $ | 84,999 | | $ | 98,297 | |
Liabilities and Stockholders’ Equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 5,502 | | $ | 9,917 | |
Accrued expenses | |
| 9,344 | |
| 7,721 | |
Current portion of lease liabilities | | | 610 | | | 637 | |
Discontinued operations - current liabilities | | | 2,289 | | | 4,157 | |
Total current liabilities | |
| 17,745 | |
| 22,432 | |
Other liabilities | | | 3,331 | |
| 3,736 | |
Long-term debt, net | | | 10,573 | | | — | |
Contingent consideration | | | 3,435 | | | 1,668 | |
Deferred tax liability | |
| 549 | |
| 549 | |
Total liabilities | |
| 35,633 | |
| 28,385 | |
Stockholders’ Equity: | | | | | | | |
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and 0 shares issued or outstanding at June 30, 2020 and December 31, 2019 | | | — | | | — | |
Common stock, $0.00001 par value; 100,000,000 shares authorized at June 30, 2020 and December 31, 2019; 42,691,114 and 41,485,638 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | |
| — | |
| — | |
Additional paid‑in capital | |
| 530,061 | |
| 523,505 | |
Accumulated other comprehensive income (loss) | |
| 15 | |
| (66) | |
Accumulated deficit | |
| (480,710) | |
| (453,527) | |
Total stockholders’ equity | |
| 49,366 | |
| 69,912 | |
Total liabilities and stockholders’ equity | | $ | 84,999 | | $ | 98,297 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ACLARIS THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(Unaudited)
(In thousands, except share and per share data)
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Revenue |
| $ | 684 |
| $ | — |
| $ | 684 |
| $ | — |
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Cost of revenue |
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| 453 |
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| — |
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| 453 |
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| — |
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Gross profit |
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| 231 |
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| — |
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| 231 |
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| — |
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Operating expenses: |
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Research and development |
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| 10,864 |
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| 7,162 |
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| 26,601 |
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| 26,533 |
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General and administrative |
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| 8,123 |
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| 3,650 |
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| 20,611 |
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| 10,407 |
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Total operating expenses |
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| 18,987 |
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| 10,812 |
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| 47,212 |
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| 36,940 |
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Loss from operations |
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| (18,756) |
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| (10,812) |
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| (46,981) |
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| (36,940) |
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Other income, net |
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| 564 |
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| 118 |
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| 1,392 |
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| 336 |
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Net loss |
| $ | (18,192) |
| $ | (10,694) |
| $ | (45,589) |
| $ | (36,604) |
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Net loss per share, basic and diluted |
| $ | (0.63) |
| $ | (0.50) |
| $ | (1.68) |
| $ | (1.76) |
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Weighted average common shares outstanding, basic and diluted |
|
| 28,834,808 |
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| 21,415,871 |
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| 27,180,244 |
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| 20,752,590 |
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Other comprehensive loss: |
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Unrealized gain (loss) on marketable securities, net of tax of $0 |
| $ | 63 |
| $ | (12) |
| $ | 7 |
| $ | 144 |
|
Foreign currency translation adjustments |
|
| (10) |
|
| (43) |
|
| 149 |
|
| (49) |
|
Total other comprehensive income (loss) |
|
| 53 |
|
| (55) |
|
| 156 |
|
| 95 |
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Comprehensive loss |
| $ | (18,139) |
| $ | (10,749) |
| $ | (45,433) |
| $ | (36,509) |
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| | Three Months Ended | | Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
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| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Revenues: | | | | | | | | | | | | | |
Contract research | | $ | 1,853 | | $ | 886 | | $ | 3,042 | | $ | 2,149 | |
Other revenue | | | 193 | | | — | | | 411 | | | — | |
Total revenue | | | 2,046 | | | 886 | | | 3,453 | | | 2,149 | |
| | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | |
Cost of revenue | | | 1,389 | | | 994 | | | 2,658 | | | 2,201 | |
Research and development |
| | 6,466 | | | 17,519 | |
| 15,909 | |
| 37,161 | |
General and administrative |
| | 5,572 | | | 7,469 | |
| 11,773 | |
| 14,926 | |
Goodwill impairment | | | — | | | 18,504 | | | — | | | 18,504 | |
Total costs and expenses |
| | 13,427 | |
| 44,486 | |
| 30,340 | |
| 72,792 | |
Loss from operations |
| | (11,381) | |
| (43,600) | |
| (26,887) | |
| (70,643) | |
| | | | | | | | | | | | | |
Other income (expense), net |
| | (189) | |
| (85) | |
| (11) | |
| (315) | |
Loss from continuing operations | | | (11,570) | | | (43,685) | | | (26,898) | | | (70,958) | |
Loss from discontinued operations | | | (27) | | | (6,191) | | | (285) | | | (16,483) | |
Net loss | | $ | (11,597) | | $ | (49,876) | | $ | (27,183) | | $ | (87,441) | |
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Net loss per share, basic and diluted | | $ | (0.28) | | $ | (1.21) | | $ | (0.65) | | $ | (2.12) | |
Weighted average common shares outstanding, basic and diluted | |
| 42,133,646 | |
| 41,274,808 | |
| 41,876,037 | |
| 41,261,808 | |
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Other comprehensive income (loss): | | | | | | | | | | | | | |
Unrealized gain (loss) on marketable securities, net of tax of $0 | | $ | (37) | | $ | 30 | | $ | 23 | | $ | 64 | |
Foreign currency translation adjustments | | | 5 | | | 27 | | | 58 | | | 13 | |
Total other comprehensive income (loss) | |
| (32) | |
| 57 | |
| 81 | |
| 77 | |
Comprehensive loss | | $ | (11,629) | | $ | (49,819) | | $ | (27,102) | | $ | (87,364) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ACLARIS THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF
(UNAUDITED)(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | |
| |
| | Common Stock | | Additional | | Other | | | | Total |
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| | | | Par | | Paid‑in | | Comprehensive | | Accumulated | | Stockholders’ |
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| Shares |
| Value |
| Capital |
| Income (Loss) |
| Deficit |
| Equity |
| |||||
Balance at December 31, 2019 | | 41,485,638 | | $ | — | | $ | 523,505 | | $ | (66) | | $ | (453,527) | | $ | 69,912 | |
Vesting of restricted stock units | | 346,582 | | | — | | | (121) | | | — | | | — | | | (121) | |
Fair value of warrants issued | | — | | | — | | | 378 | | | — | | | — | | | 378 | |
Unrealized gain on marketable securities | | — | | | — | | | — | | | 60 | | | — | | | 60 | |
Foreign currency translation adjustment | | — | | | — | | | — | | | 53 | | | — | | | 53 | |
Stock-based compensation expense | | — | | | — | | | 3,453 | | | — | | | — | | | 3,453 | |
Net loss | | — | | | — | | | — | | | — | | | (15,586) | | | (15,586) | |
Balance at March 31, 2020 | | 41,832,220 | | $ | — | | $ | 527,215 | | $ | 47 | | $ | (469,113) | | $ | 58,149 | |
| | | | | | | | | | | | | | | | | | |
Vesting of restricted stock units | | 858,894 | | | — | | | (463) | | | — | | | — | | | (463) | |
Unrealized loss on marketable securities | | — | | | — | | | — | | | (37) | | | — | | | (37) | |
Foreign currency translation adjustment | | — | | | — | | | — | | | 5 | | | — | | | 5 | |
Stock-based compensation expense | | — | | | — | | | 3,309 | | | — | | | — | | | 3,309 | |
Net loss | | — | | | — | | | — | | | — | | | (11,597) | | | (11,597) | |
Balance at June 30, 2020 | | 42,691,114 | | $ | — | | $ | 530,061 | | $ | 15 | | $ | (480,710) | | $ | 49,366 | |
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| | | | | | | | | | Accumulated | | | | | | | |
| | Common Stock | | Additional | | Other | | | | Total | |||||||
| | | | Par | | Paid‑in | | Comprehensive | | Accumulated | | Stockholders’ | |||||
|
| Shares |
| Value |
| Capital |
| Income (Loss) |
| Deficit |
| Equity | |||||
Balance at December 31, 2018 | | 41,210,725 | | $ | — | | $ | 507,366 | | $ | (69) | | $ | (292,173) | | $ | 215,124 |
Vesting of restricted stock units | | 58,918 | | | — | | | (188) | | | — | | | — | | | (188) |
Unrealized gain on marketable securities | | — | | | — | | | — | | | 34 | | | — | | | 34 |
Foreign currency translation adjustment | | — | | | — | | | — | | | (14) | | | — | | | (14) |
Stock-based compensation expense | | — | | | — | | | 4,862 | | | — | | | — | | | 4,862 |
Net loss | | — | | | — | | | — | | | — | | | (37,565) | | | (37,565) |
Balance at March 31, 2019 | | 41,269,643 | | $ | — | | $ | 512,040 | | $ | (49) | | $ | (329,738) | | $ | 182,253 |
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Exercise of stock options and vesting of restricted stock units | | 8,927 | | | — | | | (18) | | | — | | | — | | | (18) |
Unrealized gain on marketable securities | | — | | | — | | | — | | | 30 | | | — | | | 30 |
Foreign currency translation adjustment | | — | | | — | | | — | | | 27 | | | — | | | 27 |
Stock-based compensation expense | | — | | | — | | | 4,814 | | | — | | | — | | | 4,814 |
Net loss | | — | | | — | | | — | | | — | | | (49,876) | | | (49,876) |
Balance at June 30, 2019 | | 41,278,570 | | $ | — | | $ | 516,836 | | $ | 8 | | $ | (379,614) | | $ | 137,230 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Accumulated |
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| Common Stock |
| Additional |
| Other |
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| Total |
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| Par |
| Paid‑in |
| Comprehensive |
| Accumulated |
| Stockholders’ |
| |||||
|
| Shares |
| Value |
| Capital |
| Loss |
| Deficit |
| Equity |
| |||||
Balance at December 31, 2016 |
| 26,059,181 |
| $ | — |
| $ | 260,671 |
| $ | (269) |
| $ | (90,912) |
| $ | 169,490 |
|
Issuance of common stock under the at-the-market sales agreement, net of offering costs of $691 |
| 635,000 |
|
| — |
|
| 19,311 |
|
| — |
|
| — |
|
| 19,311 |
|
Issuance of common stock in connection with public offering, net of underwriting discounts and commissions and offering costs of $5,352 |
| 3,747,602 |
|
| — |
|
| 80,918 |
|
| — |
|
| — |
|
| 80,918 |
|
Issuance of common stock in connection with the acquisition of Confluence |
| 349,527 |
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|
| 9,675 |
|
| — |
|
| — |
|
| 9,675 |
|
Exercise of stock options and vesting of restricted stock units |
| 43,369 |
|
| — |
|
| 168 |
|
| — |
|
| — |
|
| 168 |
|
Unrealized loss on marketable securities |
| — |
|
| — |
|
| — |
|
| 7 |
|
| — |
|
| 7 |
|
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| 149 |
|
| — |
|
| 149 |
|
Stock-based compensation expense |
| — |
|
| — |
|
| 10,130 |
|
| — |
|
| — |
|
| 10,130 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| (45,589) |
|
| (45,589) |
|
Balance at September 30, 2017 |
| 30,834,679 |
| $ | — |
| $ | 380,873 |
| $ | (113) |
| $ | (136,501) |
| $ | 244,259 |
|
4
ACLARIS THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | |
| | Six Months Ended |
| ||||
| | June 30, | | ||||
|
| 2020 |
| 2019 |
| ||
Cash flows from operating activities: |
| |
|
| |
| |
Net loss | | $ | (27,183) | | $ | (87,441) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Depreciation and amortization | |
| 1,182 | |
| 4,457 | |
Stock-based compensation expense | |
| 6,762 | |
| 9,676 | |
Change in fair value of contingent consideration | | | 1,767 | | | 734 | |
Goodwill impairment charge | | | — | | | 18,504 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | | 4,895 | | | (14,509) | |
Prepaid expenses and other assets | |
| 890 | |
| 2,579 | |
Accounts payable | |
| (6,026) | |
| (583) | |
Accrued expenses | |
| 87 | |
| 13,887 | |
Net cash used in operating activities | |
| (17,626) | |
| (52,696) | |
Cash flows from investing activities: | | | | | | | |
Purchases of property and equipment | |
| (141) | |
| (525) | |
Purchases of marketable securities | |
| (27,139) | |
| (89,407) | |
Proceeds from sales and maturities of marketable securities | |
| 30,735 | |
| 117,500 | |
Net cash provided by (used in) investing activities | |
| 3,455 | |
| 27,568 | |
Cash flows from financing activities: | | | | | | | |
Proceeds from debt financing (including warrants), net of issuance costs | | | 10,913 | | | — | |
Finance lease payments | | | (92) | | | (240) | |
Proceeds from exercise of employee stock options and the issuance of stock | | | — | | | 3 | |
Net cash provided by (used in) financing activities | |
| 10,821 | |
| (237) | |
Net decrease in cash and cash equivalents | |
| (3,350) | |
| (25,365) | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 35,937 | |
| 57,019 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 32,587 | | $ | 31,654 | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | |
Additions to property and equipment included in accounts payable | | $ | 339 | | $ | 392 | |
Operating lease asset recorded as a result of new accounting standard | | $ | — | | $ | 2,132 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ACLARIS THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net loss |
| $ | (45,589) |
| $ | (36,604) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 221 |
|
| 80 |
|
Stock-based compensation expense |
|
| 10,130 |
|
| 4,194 |
|
Non-cash charges related to Vixen acquisition |
|
| — |
|
| 2,784 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
| (4,331) |
|
| 110 |
|
Accounts payable |
|
| 3,130 |
|
| 915 |
|
Accrued expenses |
|
| (14) |
|
| 1,990 |
|
Net cash used in operating activities |
|
| (36,453) |
|
| (26,531) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (658) |
|
| (170) |
|
Acquisition of Confluence, net of cash acquired |
|
| (9,647) |
|
| — |
|
Purchases of marketable securities |
|
| (120,496) |
|
| (33,747) |
|
Proceeds from sales and maturities of marketable securities |
|
| 96,674 |
|
| 49,832 |
|
Net cash (used in), provided by investing activities |
|
| (34,127) |
|
| 15,915 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds from issuance of common stock in connection with private placement, net of issuance costs |
|
| — |
|
| 18,547 |
|
Proceeds from issuance of common stock under the at-the-market sales agreement, net of issuance costs |
|
| 19,311 |
|
| — |
|
Proceeds from issuance of common stock in connection with public offering, net of issuance costs |
|
| 80,918 |
|
| — |
|
Proceeds from the exercise of employee stock options |
|
| 235 |
|
| 14 |
|
Net cash provided by financing activities |
|
| 100,464 |
|
| 18,561 |
|
Net increase in cash and cash equivalents |
|
| 29,884 |
|
| 7,945 |
|
Cash and cash equivalents at beginning of period |
|
| 30,171 |
|
| 9,851 |
|
Cash and cash equivalents at end of period |
| $ | 60,055 |
| $ | 17,796 |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
Additions to property and equipment included in accounts payable |
| $ | 20 |
| $ | 13 |
|
Fair value of stock issued in connection with Confluence acquisition |
| $ | 9,675 |
| $ | — |
|
Fair value of stock issued in connection with Vixen acquisition |
| $ | — |
| $ | 2,355 |
|
Offering costs included in accounts payable |
| $ | 107 |
| $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ACLARIS THERAPEUTICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. Organization and Nature of Business
Overview
Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012. OnIn July 17, 2015, Aclaris Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned subsidiary of Aclaris Therapeutics, Inc. On March 24, 2016, Vixen Pharmaceuticals, Inc. (“Vixen”) became a wholly-owned subsidiary of Aclaris Therapeutics, Inc. (see Note 12). OnIn August 3, 2017, Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.) (“Confluence”) was acquired by Aclaris Therapeutics, Inc. and became a wholly-owned subsidiary thereof (see Note 3).thereof. Aclaris Therapeutics, Inc., ATIL Vixen and Confluence are referred to collectively as the “Company”.“Company.” The Company is a dermatologist-ledclinical-stage biopharmaceutical company focused on identifying, developing and commercializing innovative and differentiated therapies to address significant unmet needs in medical and aesthetic dermatology. The Company’s leadnovel drug candidate, A-101 40% Topical Solution, is a proprietary high‑concentration formulation of hydrogen peroxide topical solution that the Company is developing as a prescription treatmentcandidates for seborrheic keratosis (“SK”), a common non‑malignant skin tumor.immuno-inflammatory diseases. The Company currently has completed three Phase 3 clinical trialsa pipeline of A-101 40% Topical Solution in patients with SK, and in February 2017 submitted a New Drug Application (“NDA”) todrug candidates focused on immuno-inflammatory diseases, as well as one product approved by the U.S. Food and Drug Administration (“FDA”). The NDA was accepted by that it is not currently distributing, marketing or selling, and other investigational drug candidates. In September 2019, the FDA in May 2017 and the Prescription Drug User Fee Act (“PDUFA”) target action date forCompany announced the completion of the FDA’sa strategic review of its business, as a result of which it refocused its resources on its immuno-inflammatory development programs. The Company is pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), the NDA is December 24, 2017.Company’s non-marketed FDA-approved product.
Liquidity
The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. At SeptemberAs of June 30, 2017,2020, the Company had cash, cash equivalents and restricted cash and marketable securities of $227,848$68,115 and an accumulated deficit of $136,501.$480,710. Since inception, the Company has incurred net losses and negative cash flows from its operations. Prior to the acquisition of Confluence in August 2017, the Company had never generated any revenue. There iscan be no assurance that profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing basis. In addition, development activities, including clinical and preclinical testing and commercialization of the Company’s productsdrug candidates, will require significant additional financing. The future viability of the Company is dependent on its ability to successfully develop its drug candidates and to generate cashrevenue from operating activitiesidentifying and consummating transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize its development assets or to raise additional capital to finance its operations. The Company will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop its preclinical compounds, and to support its discovery efforts. Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable the Company to continue to implement its long-term business strategy. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If the Company is unable to raise sufficient additional capital or generate revenue from transactions with third-party partners for the development and/or commercialization of its drug candidates, it may need to substantially curtail planned operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.
In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that its consolidated financial statements are issued. As of the report date, the Company believes the actions described below are probable of being implemented effectively and of alleviating the conditions or events that exist which raise substantial doubt about its ability to continue as a going concern within one year after the date of the issuance of these condensed consolidated financial statements. The Company believes its existing
6
cash, cash equivalents and marketable securities are sufficient to fund its operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of these condensed consolidated financial statements.
The Company has taken a number of actions to support its operations and meet its liquidity needs. In September 2019, the Company announced the completion of a strategic review and its decision to refocus its resources on its immuno-inflammatory development programs and to pursue strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA. As a result of this decision, the Company restructured its operations and terminated employees, which lowered operating costs. In October 2019, the Company sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) to further its focus on its development programs and improve cash flow. In March 2020, the Company borrowed $11,000 under a term loan facility with Silicon Valley Bank.
The Company’s plans to further alleviate the substantial doubt about its going concern, which are probable of effectively being implemented and mitigating these conditions, primarily include its ability to control the timing and spending on its research and development programs. The Company may also consider other plans to fund its operations including: (1) raising additional capital through debt or equity financings; (2) identifying third-party partners to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA, which may generate revenue and/or milestone payments; (3) reducing spending on one or more research and development programs by delaying or discontinuing development; and/or (4) further restructuring its operations to change its overhead structure. Finally, additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable the Company to continue to implement its long-term business strategy.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements of the Company include the consolidated accounts of the Companyoperating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, ATIL Confluence and Vixen.Confluence. All materialsignificant intercompany transactions have been eliminated. Based upon the revenue from contract research services, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations.
Discontinued Operations
In September 2019, the Company announced the completion of a strategic review and its decision to refocus its resources on its immuno-inflammatory development programs and to actively seek partners for its commercial products.
The accompanying condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to the Company’s commercial products as discontinued operations (see Note 15).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, research and development expenses, contingent consideration and the valuation of stock-based awards. Estimates are periodically
6
reviewed in light of changes in circumstances, facts and experience. The COVID-19 pandemic has resulted in a global slowdown of economic activity. As of the date of issuance of these financial statements, the Company is not aware of any specific event
7
or circumstance that would require an update to its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from the Company’s estimates.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of SeptemberJune 30, 2017,2020, the condensed consolidated statements of operations and comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the condensed consolidated statement of stockholders’ equity for the ninethree and six months ended SeptemberJune 30, 2017,2020 and 2019, and the condensed consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements contained in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 15, 2017February 25, 2020 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of SeptemberJune 30, 2017,2020, the results of its operations and comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019, its changes in stockholders’ equity for the three and six months ended June 30, 2020 and 2019 and its cash flows for the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. The condensed consolidated balance sheet data as of December 31, 20162019 was derived from audited financial statements but does not include all disclosures required by GAAP. The financial data and other information disclosed in these notes related to the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 are unaudited. The results for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of results to be expected for the year ending December 31, 2017,2020, any other interim periods, or any future year or period. The unaudited interim financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 20162019 included in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2017.February 25, 2020.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 20162019 included in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2017. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies other than those noted below. February 25, 2020.
In February 2017, the Company paid a $2.0 million PDUFA fee to the FDA in conjunction with the filing of its NDA for A-101 40% Topical Solution. The Company has requested a waiverCash, Cash Equivalents and refund of this PDUFA fee from the FDA, and the amount has been recorded in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet. Restricted Cash
Revenue Recognition
The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents. Cash equivalents, which have consisted of money market accounts, commercial paper and corporate debt securities with original maturities of less than three months, are stated at fair value. Restricted cash as of June 30, 2020 consisted of $1,753 placed in escrow pursuant to the asset purchase agreement with EPI Health, LLC (“EPI Health”) (see Note 13 for additional information).
Revenue Recognition
The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
To determine revenue recognition in accordance with ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. At contract inception, the Company assesses the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct. The Company recognizes the revenue that is allocated to each distinct performance obligation when (or as) that
8
performance obligation is satisfied. The Company only recognizes revenue when collection of the earnings processconsideration it is complete, whichentitled to under SEC Staff Accountinga contract with a customer is probable.
Bulletin No. 104, Topic No. 13, “Revenue Recognition,” is when revenue is realized or realizable and earned, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
Contract Research
The Company earns contract research revenue from the provision of laboratory services to clients through Confluence, its wholly-owned subsidiary. Laboratory serviceContract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered. Revenue related to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts.
7
Under ASC Topic 606, the Company elected to apply the “right to invoice” practical expedient when recognizing contract research revenue. The Company also receivesrecognizes contract research revenue from grants underin the Small Business Innovation Research programamount to which it has the right to invoice.
Other Revenue
Licenses of the National Institutes of Health (“NIH”). The Company, through its Confluence subsidiary, currently has two active grants from NIH which are related to early-stage research.Intellectual Property – The Company recognizes revenue received from non-refundable, upfront fees related to these grants as amounts become reimbursable under each grant, whichthe licensing of intellectual property when the intellectual property is generally when research is performeddetermined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the related costscustomer is able to use and benefit from the license.
Milestone Payments – At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are incurred.considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the amount allocated to the license of intellectual property. Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.
Intangible Assets
Intangible assets include both finite liveddefinite-lived and indefinite livedindefinite-lived assets. Finite livedDefinite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Indefinite livedDefinite-lived intangible assets are not amortized. In-processconsist of a research technology platform the Company acquired through the acquisition of Confluence. Indefinite-lived intangible assets consist of an in-process research and development (“IPR&D”) assetsdrug candidate acquired in a business combinationthrough the acquisition of Confluence. IPR&D assets are considered indefinite livedindefinite-lived until the completion or abandonment of the associated research and development efforts. The Company testscost of IPR&D is either amortized over its estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned.
Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, which the Company performs during the fourth quarter, or ifwhen indicators of an impairment are present. The Company recognizes impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.
Leases
Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets. The Company evaluates leases at their inception to determine if they are an operating lease or a finance lease. A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the
9
underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term. Leases that do not meet the finance lease criteria are accounted for as an operating lease.
The Company recognizes assets and liabilities for leases at their inception based upon the present value of all payments due under the lease. The Company uses an implicit interest rate to determine the present value of finance leases, and its incremental borrowing rate to determine the present value of operating leases. The Company determines incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease. The Company recognizes expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method. The Company includes estimates for any residual value guarantee obligations under its leases in lease liabilities recorded on its condensed consolidated balance sheet.
Right-of-use assets are included in other assets and property and equipment, net on the Company’s condensed consolidated balance sheet for operating and finance leases, respectively. Obligations for lease payments are included in current portion of lease liabilities and other liabilities on the Company’s condensed consolidated balance sheet for both operating and finance leases.
Contingent Consideration
The Company initially recorded thea contingent consideration liability related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition. ChangesThe ultimate amount of future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones. The Company estimates the fair value of the contingent consideration liability related to the achievement of regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. The Company estimates the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. Significant assumptions used in the Company’s estimates include the probability of success of achieving regulatory and sales milestones, which are based upon an asset’s current stage of development and ranged between 4% and 15%. The Company evaluates fair value estimates of contingent consideration liabilities on a periodic basis. Any change in fair value reflectreflects new information about the likelihood of the payment of the contingent consideration and the passage of time. For example, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug, differ from the Company’s assumptions, then the fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent consideration, if any, will be recorded as income or expense in the Company’s condensed consolidated statement of operations.
Concentration of Credit Risk and of Significant Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company holds all cash, cash equivalents and marketable securities balances at 1 accredited financial institution, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company is dependent on third-party manufacturers to supply drug product, including all underlying components, for its research and development activities, including preclinical and clinical testing. These activities could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients or other components.
10
Recently Issued Accounting Pronouncements
In January 2017,November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations-ClarifyingASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Definition of a Business (Topic 805). Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU provide a screen to determine when a set of acquired assets and/or activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments in this ASU will reduce the number of transactions that meet the definition of a business. ASU 2017-01 isare effective for annual reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, including interim periods within those years, and early adoption will be permitted.2019. The Company is assessingadopted this standard as of January 1, 2020, the potential impact of ASU 2017-01which on its consolidated financial statements. statements was not significant.
In January 2017,August 2018, the FASB issued ASU 2017-04, Intangibles-Goodwill2018-15, Intangibles—Goodwill and Other-SimplifyingOther—Internal-Use Software (Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the Test for Goodwill Impairment (Topic 350). Under the amendmentsinternal-use software guidance in this ASU, an entity should perform its annual,ASC 350-40 to determine which implementation costs to capitalize as assets or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.expense as incurred. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. ASU 2017-04standard is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted.including interim periods within such fiscal years. The Company is assessingadopted this standard as of January 1, 2020, the potential impact of ASU 2017-04which on its consolidated financial statements. statements was not significant.
In May 2014,August 2018, the FASB issued ASU 2014-09, Revenue from Contracts with Customers(Topic 606)2018-13, Fair Value Measurement (Topic 820). Under this ASU, The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This update eliminates certain disclosure requirements for fair value measurements for all entities, should recognize revenue in an amount that reflectsrequires public entities to disclose certain new information and modifies some of the consideration to which they expect to be entitled to in exchange for goods and services provided. ASU 2014-09existing disclosure requirements. The standard is effective for annual reporting periodsfiscal years beginning after December 15, 2017.2019, including interim periods within such fiscal years. The Company is assessingadopted this standard as of January 1, 2020, the potential impact of ASU 2014-09which on its consolidated financial statements.statements was not significant.
8
3. Acquisition of Confluence
On August 3, 2017, the Company entered into an Agreement and Plan of Merger with Confluence, Aclaris Life Sciences, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Merger Sub”), and Fortis Advisors LLC, as representative of the holders of Confluence equity (the “Agreement and Plan of Merger”). Pursuant to the terms of the Agreement and Plan of Merger, the Merger Sub merged with and into Confluence, with Confluence surviving as a wholly-owned subsidiary of the Company, resulting in the Company’s acquisition of 100% of the outstanding shares of Confluence. Pursuant to the terms of the Agreement and Plan of Merger, the Company gave aggregate consideration with a fair value of $24,322 to the equity holders of Confluence, subject to a customary post-closing working capital adjustment. Confluence was a privately held biotechnology company focused on the discovery and development of kinase inhibitors to treat inflammatory and immunological disorders and cancer. Confluence also provides laboratory services under contract research arrangements to pharmaceutical and biotech companies looking to supplement their research and development efforts with difficult-to-execute specialty skills and programs. The acquisition of Confluence will add small molecule drug discovery and preclinical development capabilities, which the Company expects will allow it to bring early-stage research and development activities in-house that the Company currently outsources to third parties.
The Company has also agreed to pay the Confluence equity holders contingent consideration of up to $80,000, based upon the achievement of certain development, regulatory and commercial milestones set forth in the Agreement and Plan of Merger. Of the contingent consideration, $2,500 may be paid in shares of the Company’s common stock upon the achievement of a specified development milestone. In addition, the Company has agreed to pay the Confluence equity holders specified future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition, if the Company sells, licenses or transfers any of the intellectual property acquired from Confluence pursuant to the Agreement and Plan of Merger to a third party, the Company will be obligated to pay the Confluence equity holders a portion of any incremental consideration (in excess of the development and milestone payments described above) that the Company receives from such sales, licenses or transfers in specified circumstances.
The following table summarizes the fair value of total consideration given to the Confluence equity holders pursuant to the Agreement and Plan of Merger:
|
|
|
|
Cash consideration paid |
| $ | 10,269 |
Aclaris common stock issued |
|
| 9,675 |
Contingent consideration |
|
| 4,378 |
Total fair value of consideration to Confluence equity holders |
| $ | 24,322 |
The Company funded the acquisition and transaction expenses with cash on hand.
The Company accounted for this transaction as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the assets acquired and liabilities assumed in this transaction were recorded at their respective fair values on the date of acquisition using assumptions that are subject to change. The Company expects to finalize its allocation of the purchase price upon the finalization of valuations for the identified intangible assets, final resolution of the post-closing working capital adjustment and certain tax accounts that are based on the best estimates of management. The completion and filing of federal and state tax returns for the acquired entity may result in adjustments to the carrying value of assets and liabilities.
9
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed in the acquisition of Confluence as of the acquisition date:
|
|
|
|
Cash and cash equivalents |
| $ | 622 |
Accounts receivable, net |
|
| 574 |
Other current assets |
|
| 89 |
Property and equipment |
|
| 268 |
Other intangible assets |
|
| 751 |
IPR&D |
|
| 6,629 |
Goodwill |
|
| 18,504 |
Total assets acquired |
|
| 27,437 |
|
|
|
|
Accounts payable and accrued expenses |
|
| 656 |
Deferred tax liability |
|
| 2,386 |
Other liabilities |
|
| 73 |
Total liabilities assumed |
|
| 3,115 |
|
|
|
|
Total net assets acquired |
| $ | 24,322 |
The estimated fair value of the IPR&D, and other identified intangibles, acquired was determined using a replacement cost method which estimates the cost that would be required to rebuild the intangible assets identified in the acquisition of Confluence. The acquisition of Confluence resulted in the recognition of goodwill in the amount $18,504 which represents the value of new products and technologies to be developed in the future as well as the value of the employee workforce acquired.
The following supplemental unaudited pro forma information presents the Company’s financial results, for the periods presented, as if the acquisition of Confluence had occurred on January 1, 2016. This supplemental unaudited pro forma financial information has been prepared for comparative purposes only, and is not necessarily indicative of what actual results would have been had the acquisition of Confluence occurred on January 1, 2016, nor is this information indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 1,063 |
| $ | 937 |
| $ | 3,366 |
| $ | 2,617 |
|
Gross profit |
|
| 384 |
|
| 452 |
|
| 1,102 |
|
| 1,184 |
|
Total operating expenses |
|
| 18,822 |
|
| 11,464 |
|
| 48,122 |
|
| 39,273 |
|
Net loss |
|
| (17,875) |
|
| (10,891) |
|
| (45,627) |
|
| (37,769) |
|
The supplemental unaudited pro forma financial results for the three and nine months ended September 30, 2017 include adjustments to exclude $997 and $1,351, respectively, of acquisition-related expenses, as well as $217 and $888, respectively, to exclude revenue billed to the Company by Confluence. The supplemental unaudited pro forma financial results for the three and nine months ended September 30, 2017 includes an adjustment for amortization expense related to the other intangible assets acquired.
There were no acquisition-related expenses incurred, or revenue billed to the Company by Confluence, for the three and nine months ended September 30, 2016, and accordingly, no adjustments are necessary for these items in the supplemental pro forma financial results for those time periods. The supplemental unaudited pro forma financial results
10
for the three and nine months ended September 30, 2016 includes an adjustment for amortization expense related to the other intangible assets acquired.
4.3. Fair Value of Financial Assets and Liabilities
The following tables present information about the fair value measurements of the Company’s financial assets and liabilities which are measured at fair value on a recurring and non-recurring basis, and indicate the level of the fair value hierarchy utilized to determine such fair values:
| | | | | | | | | | | | | |
| | June 30, 2020 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets: |
| |
|
| |
|
| |
|
| |
| |
Cash equivalents | | $ | 16,754 | | $ | — | | $ | — | | $ | 16,754 | |
Marketable securities | |
| — | | | 35,528 | | | — | | | 35,528 | |
Total assets | | $ | 16,754 | | $ | 35,528 | | $ | — | | $ | 52,282 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | |
Acquisition-related contingent consideration | | $ | — | | $ | — | | $ | 3,435 | | $ | 3,435 | |
Total liabilities | | $ | — | | $ | — | | $ | 3,435 | | $ | 3,435 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
| $ | 44,670 |
| $ | 13,983 |
| $ | — |
| $ | 58,653 |
|
Marketable securities |
|
| — |
|
| 167,793 |
|
| — |
|
| 167,793 |
|
Total Assets |
| $ | 44,670 |
| $ | 181,776 |
| $ | — |
| $ | 226,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration |
| $ | — |
| $ | — |
| $ | 4,378 |
| $ | 4,378 |
|
Total liabilities |
| $ | — |
| $ | — |
| $ | 4,378 |
| $ | 4,378 |
|
11
| | | | | | | | | | | | | |
| | December 31, 2019 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets: |
| |
|
| |
|
| |
|
| |
| |
Cash equivalents | | $ | 21,277 | | $ | — | | $ | — | | $ | 21,277 | |
Marketable securities | |
| — | | | 39,078 | | | — | | | 39,078 | |
Total assets | | $ | 21,277 | | $ | 39,078 | | $ | — | | $ | 60,355 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | |
Acquisition-related contingent consideration | | $ | — | | $ | — | | $ | 1,668 | | $ | 1,668 | |
Total liabilities | | $ | — | | $ | — | | $ | 1,668 | | $ | 1,668 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
| $ | 11,522 |
| $ | 12,691 |
| $ | — |
| $ | 24,213 |
|
Marketable securities |
|
| — |
|
| 143,963 |
|
| — |
|
| 143,963 |
|
Total |
| $ | 11,522 |
| $ | 156,654 |
| $ | — |
| $ | 168,176 |
|
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company’s cash equivalents consisted of investments with maturities of less than three months and included a money market fund, which was valued based upon Level 1 inputs, and the Company’s marketable securities consisted of investments with maturities of more than three months and included commercial paper, andcorporate debt, asset-backed securities and government obligations, which were valued based upon Level 2 inputs. In determining the fair value of its Level 2 investments, the Company relied on quoted prices for identical securities in markets that are not active. These quoted prices were obtained by the Company with the assistance of a third-party pricing service based on available trade, bid and other observable market data for identical securities. On a quarterly basis,Quarterly, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of thosethe quoted prices.prices provided. The Company evaluates whether adjustments to third-party pricing is necessary and, historically, the Company has not made adjustments to the quoted prices obtained from the third-party pricing service. During the ninesix months ended SeptemberJune 30, 20172020 and the year ended December 31, 2016,2019, there were no transfers between Level 1, Level 2 and Level 3. The increase in contingent consideration of $1,767 during the six months ended June 30, 2020 was the result of updates to the Company’s assumptions as a result of the successful completion of a Phase 1 clinical trial for ATI-450.
11
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the fair value of the Company’s available for sale marketable securities by type of security was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| September 30, 2017 |
| |||||||||||||||||||||||
|
|
|
|
| Gross |
| Gross |
|
|
|
| |||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| |||||||||||||||||
|
| Cost |
| Gain |
| Loss |
| Value |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | June 30, 2020 |
| |||||||||||||||||||||||
| | | | | Gross | | Gross | | | |
| |||||||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair |
| |||||||||||||||||
| | Cost | | Gain | | Loss | | Value |
| |||||||||||||||||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Corporate debt securities |
| $ | 39,432 |
| $ | — |
| $ | (9) |
| $ | 39,423 |
| | $ | 5,688 | | $ | 2 | | $ | — | | $ | 5,690 | |
Commercial paper |
|
| 76,130 |
|
| — |
|
| — |
|
| 76,130 |
| | | 15,768 | | | — | | | — | | | 15,768 | |
Asset-backed securities |
|
| 20,752 |
|
| — |
|
| (3) |
|
| 20,749 |
| | | 1,408 | | | — | | | (1) | | | 1,407 | |
U.S. government agency debt securities |
|
| 31,521 |
|
| — |
|
| (30) |
|
| 31,491 |
| | | 12,637 | | | 26 | | | — | | | 12,663 | |
Total marketable securities |
| $ | 167,835 |
| $ | — |
| $ | (42) |
| $ | 167,793 |
| | $ | 35,501 | | $ | 28 | | $ | (1) | | $ | 35,528 | |
| | | | | | | | | | | | | |
| | December 31, 2019 |
| ||||||||||
| | | | | Gross | | Gross | | | |
| ||
| | Amortized | | Unrealized | | Unrealized | | Fair |
| ||||
| | Cost | | Gain | | Loss | | Value |
| ||||
Marketable securities: |
| |
|
| |
|
| |
|
| |
| |
Corporate debt securities | | $ | 7,815 | | $ | 2 | | $ | — | | $ | 7,817 | |
Commercial paper | | | 15,129 | | | — | | | — | | | 15,129 | |
Asset-backed securities | | | 8,004 | | | 4 | | | — | | | 8,008 | |
U.S. government agency debt securities | |
| 8,126 | | | 1 | | | (3) | |
| 8,124 | |
Total marketable securities | | $ | 39,074 | | $ | 7 | | $ | (3) | | $ | 39,078 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| ||||||||||
|
|
|
|
| Gross |
| Gross |
|
|
|
| ||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
|
| Cost |
| Gain |
| Loss |
| Value |
| ||||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
| $ | 51,352 |
| $ | — |
| $ | (59) |
| $ | 51,293 |
|
Commercial paper |
|
| 20,463 |
|
| — |
|
| — |
|
| 20,463 |
|
Asset-backed securities |
|
| 28,692 |
|
| 6 |
|
| (1) |
|
| 28,697 |
|
U.S. government agency debt securities |
|
| 43,505 |
|
| 8 |
|
| (3) |
|
| 43,510 |
|
Total marketable securities |
| $ | 144,012 |
| $ | 14 |
| $ | (63) |
| $ | 143,963 |
|
5.12
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
| |||||||
|
|
| September 30, |
|
| December 31, |
| |||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | | June 30, | | | December 31, | | |||||||
| | 2020 | | 2019 |
| |||||||||
Computer equipment |
| $ | 593 |
| $ | 310 |
|
| $ | 1,317 |
| $ | 1,315 | |
Manufacturing equipment |
|
| 518 |
|
| 149 |
| |||||||
Finance lease right-of-use assets | | | 435 | | | 435 | | |||||||
Lab equipment |
|
| 265 |
|
| — |
| | | 1,292 | | | 1,250 | |
Furniture and fixtures |
|
| 125 |
|
| 115 |
| | | 647 | | | 647 | |
Leasehold improvements |
|
| 33 |
|
| 33 |
| | | 1,200 | | | 889 | |
Property and equipment, gross |
|
| 1,534 |
|
| 607 |
| |
| 4,891 | |
| 4,536 | |
Accumulated depreciation |
|
| (331) |
|
| (126) |
| |
| (2,661) | |
| (2,066) | |
Property and equipment, net |
| $ | 1,203 |
| $ | 481 |
| | $ | 2,230 | | $ | 2,470 | |
Depreciation expense was $103$297 and $32$393 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $208$595 and $80$795 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
5. Intangible Assets
12
the following:
| | | | | | | | | | | | | | | |
| | | | | Gross Cost | | Accumulated Amortization | ||||||||
| | | Remaining | | | June 30, | | | December 31, | | | June 30, | | | December 31, |
| | | Life (years) | | 2020 | | 2019 |
| 2020 | | 2019 | ||||
Other intangible assets | | | 7.1 | | | 751 | | | 751 | | | 219 | | | 181 |
Total definite-lived intangible assets | | | | | | 751 | | | 751 | | | 219 | | | 181 |
IPR&D | | | na | | | 6,629 | | | 6,629 | | | — | | | — |
Total intangible assets | | | | | $ | 7,380 | | $ | 7,380 | | $ | 219 | | $ | 181 |
As of June 30, 2020, estimated future amortization expense is as follows:
| | | | |
Year Ending December 31, |
| |
| |
2020 | | $ | 37 | |
2021 | |
| 75 | |
2022 | |
| 75 | |
2023 | | | 75 | |
2024 | | | 75 | |
Thereafter | | | 195 | |
Total | | $ | 532 | |
6. Accrued Expenses
Accrued expenses consisted of the following:
| | | | | | | |
| | | June 30, | | | December 31, | |
| | 2020 | | 2019 |
| ||
Employee compensation expenses | | $ | 2,489 | | $ | 3,321 | |
Research and development expenses | | | 1,134 | | | 2,857 | |
Professional fees | | | 112 | | | 168 | |
Payable to EPI Health | | | 4,950 | | | — | |
Other | |
| 659 | |
| 1,375 | |
Total accrued expenses | | $ | 9,344 | | $ | 7,721 | |
|
|
|
|
|
|
|
|
|
|
| September 30, |
|
| December 31, |
|
|
| 2017 |
| 2016 |
| ||
Research and development expenses |
| $ | 866 |
| $ | 1,166 |
|
Employee compensation expenses |
|
| 1,899 |
|
| 1,732 |
|
Commercial expenses |
|
| 322 |
|
| — |
|
Vixen contract payable |
|
| 100 |
|
| 100 |
|
Other |
|
| 323 |
|
| 380 |
|
Total accrued expenses |
| $ | 3,510 |
| $ | 3,378 |
|
13
Payable to EPI Health
7. Stockholders’ Equity
Preferred Stock
As of SeptemberJune 30, 20172020, the Company had $4,950 payable to EPI Health (see Note 15 for additional information).
7. Debt
Loan and Security Agreement – Silicon Valley Bank
In March 2020, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”). The Loan and Security Agreement provides for $11,000 in term loans, of which the Company borrowed the entire amount on March 30, 2020. The Loan and Security Agreement is secured by substantially all of the assets of the Company other than intellectual property. In connection with the Loan and Security Agreement, the Company issued to SVB a warrant to purchase up to 460,251 shares of common stock (the “Warrant”). The proceeds of the Loan and Security Agreement were allocated to the term loan and Warrant using a relative fair value approach.
The term loan repayment schedule provides for interest only payments beginning April 1, 2020 and continuing through March 1, 2022, followed by 24 consecutive equal monthly installments of principal, plus monthly payments of accrued interest, starting on April 1, 2022 and continuing through the maturity date of March 1, 2024. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date. The Loan and Security Agreement provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%.
The Loan and Security Agreement includes a final payment fee equal to 5% of the original principal amount borrowed. The Company has the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for any prepayment on or prior to the first anniversary of March 30, 2020, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.
8. Stockholders’ Equity
Preferred Stock
As of June 30, 2020 and December 31, 2016,2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock. NoThere were 0 shares of preferred stock were outstanding as of SeptemberJune 30, 20172020 or December 31, 2016.2019.
Common Stock
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 100,000,000 shares of $0.00001 par value common stock.
Each share of common stock entitles the holder to one1 vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to any preferential dividend rights of any series of preferred stock that may be outstanding. NoNaN dividends have been declared through SeptemberJune 30, 2017.2020.
At-The-Market Equity OfferingWarrants
On November 2, 2016, the Company entered into an at-the-market sales agreement with Cowen and Company, LLC to sell the Company’s securities under a shelf registration statement filed in November 2016. During the three months ended September 30, 2017, the Company did not issue any shares of common stock under the at-the-market sales agreement. As of September 30, 2017, the Company had issued and sold an aggregate of 635,000 shares of common stock under the at-the-market sales agreement at a weighted average price per share of $31.50, for aggregate gross proceeds of $20,003. The Company incurred expenses of $691 inIn connection with the shares issued under the at-the-market sales agreement.
Public Offering of Common Stock
On August 10, 2017, the Company entered into an underwriting agreement pursuant to whichLoan and Security Agreement with SVB, the Company issued the Warrant to SVB. The Warrant has an initial exercise price of $0.956 per share, subject to adjustment as provided in the Warrant. The Warrant became immediately exercisable in full upon the funding of the term loan facility. The Warrant will terminate, if not earlier exercised, on the earlier of March 29, 2030 and sold 3,747,602 sharesthe closing of commoncertain merger or other transactions in which the consideration is cash, stock underof a registration statement on Form S-3 (the “Public Offering”), including the underwriters’ partial exercisepublicly-traded acquirer or a combination thereof. The Company assigned a fair value of their option to purchase additional shares. The shares
14
$378 to the public atWarrant using a price of $23.02 per share, for gross proceeds of $86,270.Black-Scholes valuation methodology, and also concluded that the Warrant was indexed to its own stock and therefore classified the Warrant as an equity instrument.
The Company paid underwriting discounts and commissions of $5,176 to the underwriters in connection with the Public Offering. In addition, the Company incurred expenses of $176 in connection with the Public Offering. The
net offering proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $80,918. 9. Stock-Based Awards
8. Stock‑Based Awards
2017 Inducement Plan
On July 31, 2017, the Company’s board of directors adopted the 2017 Inducement Plan (the “2017 Inducement Plan”). The 2017 Inducement Plan is a non-shareholder approved stock plan adopted pursuant to the “inducement exception” provided under NASDAQ listing rules. The only employees eligible to receive grants of awards under the 2017 Inducement Plan are individuals who satisfy the standards for inducement grants under NASDAQ rules, generally including individuals who were not previously an employee or director of the Company. Under the terms of the 2017 Inducement Plan upon adoption, the Company may grant up to 1,000,000 shares of common stock pursuant to nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit (“RSU”) awards, and other stock awards. The shares of common stock underlying any awards that expire, or are otherwise terminated, settled in cash or repurchased by the Company under the 2017 Inducement Plan will be added back to the shares of common stock available for issuance under the 2017 Inducement Plan. As of September 30, 2017, 622,452 shares of common stock were available for grant under the 2017 Inducement Plan.
2015 Equity Incentive Plan
OnIn September 15, 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”), and on September 16, 2015, the Company’s stockholders approved the 2015 Plan. The 2015 Plan became effective in connection with the Company’s initial public offering in October 2015. Beginning at the time the 2015 Plan became effective, no further grants may be made under the Company’s 2012 Equity Compensation Plan, as amended and restated (the “2012 Plan”). The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, RSUrestricted stock unit (“RSU”) awards, performance stock awards, cash-based awards and other stock-based awards. The number of shares initially reserved for issuance under the 2015 Plan was 1,643,872 shares of common stock. The number of shares of common stock that may be issued under the 2015 Plan will automatically increase on January 1 of each year beginning on January 1, 2016 and ending on January 1, 2025, in an amount equal to the lesser of (i) 4.0% of the shares of the Company’s common stock outstanding on December 31 of the preceding calendar year or (ii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that expire, are otherwise terminated, settled in cash or repurchased by the Company under the 2015 Plan and the 2012 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. As of January 1, 2017,2020, the number of shares of common stock that may be issued under the 2015 Plan was automatically increased by 1,042,3671,451,997 shares. As of SeptemberJune 30, 2017, 1,368,9042020, 1,922,147 shares remained available for grant under the 2015 Plan.
2017 Inducement Plan
In July 2017, the Company’s board of directors adopted the 2017 Inducement Plan (the “2017 Inducement Plan”). The 2017 Inducement Plan is a non-stockholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules. The Company had 443,000 stock options and 44,390 RSUs outstanding as of June 30, 2020 under the 2017 Inducement Plan. All shares of common stock that were eligible for issuance under the 2017 Inducement Plan after October 1, 2018, including any shares underlying any awards that expire or are otherwise terminated, reacquired to satisfy tax withholding obligations, settled in cash or repurchased by the Company in the future that would have been eligible for re-issuance under the 2017 Inducement Plan, were retired.
2012 Equity Compensation Plan
Upon the 2015 Plan becoming effective, no0 further grants can be made under the 2012 Plan. The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which 1,003,647609,628 and 1,049,667745,735 were outstanding as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. Stock options granted under the 2012 Plan vestvested over four years and expire after ten years. As required, the exercise price for the stock options granted under the 2012 Plan was not less than the fair value of common shares as determined by the Company as of the date of grant.
14
Stock Option Valuation
The weighted average assumptions the Company used to estimate the fair value of stock options granted during the six months ended June 30, 2020 and 2019 were as follows:
| | | | | | | |
|
| Six Months Ended | | | |||
| | June 30, | | | |||
| | 2020 | | | 2019 | |
|
Risk-free interest rate |
| 0.87 | % | | 2.53 | % | |
Expected term (in years) |
| 6.1 | | | 6.3 | | |
Expected volatility |
| 85.19 | % | | 101.70 | % | |
Expected dividend yield |
| 0 | % | | 0 | % | |
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
| |||
|
| September 30, |
|
| |||
|
| 2017 |
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
| 1.89 | % |
| 1.41 | % |
|
Expected term (in years) |
| 6.2 |
|
| 6.5 |
|
|
Expected volatility |
| 93.84 | % |
| 96.60 | % |
|
Expected dividend yield |
| 0 | % |
| 0 | % |
|
15
The Company recognizes compensation expense for awards over their vesting period. Compensation expense for awards includes the impact of forfeitures in the period when they occur.
Stock Options
The following table summarizes stock option activity from January 1, 2017 through Septemberfor the six months ended June 30, 2017:2020:
| | | | | | | | | | | |
|
| |
| | |
| Weighted |
| | |
|
| | | | Weighted | | Average | | | |
| |
| | | | Average | | Remaining | | Aggregate |
| ||
| | Number | | Exercise | | Contractual | | Intrinsic |
| ||
| | of Shares | | Price | | Term | | Value |
| ||
| | | | | | | (in years) | | | |
|
Outstanding as of December 31, 2019 |
| 3,102,221 | | $ | 20.33 |
| 6.55 | | $ | 148 | |
Granted |
| 734,800 | | | 1.30 | | | | | | |
Exercised |
| — | | | — | | | | | | |
Forfeited and cancelled |
| (557,222) | | | 21.33 | | | | | | |
Outstanding as of June 30, 2020 |
| 3,279,799 | | $ | 15.90 |
| 6.99 | | $ | 316 | |
Options vested and expected to vest as of June 30, 2020 |
| 3,279,799 | | $ | 15.90 |
| 6.99 | | $ | 316 | |
Options exercisable as of June 30, 2020 |
| 1,897,671 | | $ | 19.16 |
| 5.79 | | $ | 79 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
| Average |
|
|
|
| |
|
|
|
| Average |
| Remaining |
| Aggregate |
| ||
|
| Number |
| Exercise |
| Contractual |
| Intrinsic |
| ||
|
| of Shares |
| Price |
| Term |
| Value |
| ||
|
|
|
|
|
|
| (in years) |
|
|
|
|
Outstanding as of December 31, 2016 |
| 2,702,350 |
| $ | 18.94 |
| 9.05 |
| $ | 24,434 |
|
Granted |
| 617,500 |
|
| 26.47 |
|
|
|
|
|
|
Exercised |
| (36,738) |
|
| 6.40 |
|
|
|
|
|
|
Forfeited and cancelled |
| (40,281) |
|
| 21.09 |
|
|
|
|
|
|
Outstanding as of September 30, 2017 |
| 3,242,831 |
| $ | 20.49 |
| 8.60 |
| $ | 21,704 |
|
Options vested and expected to vest as of September 30, 2017 |
| 3,242,831 |
| $ | 20.49 |
| 8.60 |
| $ | 21,704 |
|
Options exercisable as of September 30, 2017 |
| 828,823 | (1) | $ | 10.95 |
| 7.73 |
| $ | 12,666 |
|
|
|
The weighted average grant date fair value of stock options granted during the ninesix months ended SeptemberJune 30, 20172020 was $20.41$0.93 per share.
The intrinsic value of a stock option is calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock, and cannot be less than zero.
15
Restricted Stock Units
The following table summarizes RSU activity from January 1, 2017 through Septemberfor the six months ended June 30, 2017:2020:
| | | | | | |
| | | | Weighted | | |
| | | | Average | | |
| | | | Grant Date | | |
| | Number | | Fair Value | | |
| | of Shares | | Per Share | | |
| | | | | | |
Outstanding as of December 31, 2019 | | 3,592,915 | | $ | 4.62 | |
Granted | | 998,385 | | | 1.26 | |
Vested | | (1,618,634) | | | 3.09 | |
Forfeited and cancelled | | (444,265) | | | 4.12 | |
Outstanding as of June 30, 2020 | | 2,528,401 | | $ | 4.36 | |
|
|
|
|
|
|
|
|
|
|
| Weighted |
| |
|
|
|
| Average |
| |
|
|
|
| Grant Date |
| |
|
| Number |
| Fair Value |
| |
|
| of Shares |
| Per Share |
| |
Outstanding as of December 31, 2016 |
| 219,614 |
| $ | 27.43 |
|
Granted |
| 88,547 |
|
| 26.59 |
|
Vested |
| (9,299) |
|
| 20.32 |
|
Forfeited and cancelled |
| (4,531) |
|
| 27.05 |
|
Outstanding as of September 30, 2017 |
| 294,331 |
| $ | 27.41 |
|
16
Stock-Based Compensation
Stock‑Based Compensation
The following table summarizes stock‑basedStock-based compensation expense recorded byincluded in total costs and expenses on the Company:condensed consolidated statement of operations included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, |
| September 30, |
| |||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended | | Six Months Ended |
| |||||||||||||||||||||
| | June 30, | | June 30, |
| |||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||||||||||||
Cost of revenue |
| $ | 130 |
| $ | — |
| $ | 130 |
| $ | — |
|
| $ | 252 |
| $ | 223 |
| $ | 512 |
| $ | 429 | |
Research and development |
|
| 1,332 |
|
| 623 |
|
| 3,853 |
|
| 1,577 |
| | | 939 | | | 1,721 | | | 1,755 | | | 3,315 | |
General and administrative |
|
| 2,211 |
|
| 995 |
|
| 6,147 |
|
| 2,617 |
| |
| 2,118 | |
| 2,654 | |
| 4,495 | |
| 5,126 | |
Total stock-based compensation expense |
| $ | 3,673 |
| $ | 1,618 |
| $ | 10,130 |
| $ | 4,194 |
| | $ | 3,309 | | $ | 4,598 | | $ | 6,762 | | $ | 8,870 | |
As of SeptemberJune 30, 2017,2020, the Company had unrecognized stock‑basedstock-based compensation expense for stock options and RSUs of $37,674$8,195 and $6,090,$8,604, respectively, which is expected to be recognized over weighted average periods of 3.061.52 years and 2.932.13 years, respectively.
9.
10. Net Loss per Share
Basic and diluted net loss per share is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, |
| September 30, |
| |||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended | | Six Months Ended |
| |||||||||||||||||||||
| | June 30, | | June 30, |
| |||||||||||||||||||||
| | 2020 | | 2019 |
| 2020 |
| 2019 | | |||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
| | |
|
| |
| |
Net loss |
| $ | (18,192) |
| $ | (10,694) |
| $ | (45,589) |
| $ | (36,604) |
| | $ | (11,597) | | $ | (49,876) | | $ | (27,183) | | $ | (87,441) | |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Weighted average shares of common stock outstanding |
|
| 28,834,808 |
|
| 21,415,871 |
|
| 27,180,244 |
|
| 20,752,590 |
| |
| 42,133,646 | |
| 41,274,808 | |
| 41,876,037 | |
| 41,261,808 | |
Net loss per share, basic and diluted |
| $ | (0.63) |
| $ | (0.50) |
| $ | (1.68) |
| $ | (1.76) |
| | $ | (0.28) | | $ | (1.21) | | $ | (0.65) | | $ | (2.12) | |
The Company’s potentially dilutive securities, which included stock options, RSUs and RSUs,warrants, have been excluded from the computation of diluted net loss per share since the effect would be to reduce the net loss per share. Therefore, the weighted average number of shares of common sharesstock outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The following table presents potential shares of common sharesstock excluded from the calculation of diluted net loss per
16
share attributable to common stockholders for both the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. All share amounts presented in the table below represent the total number outstanding as of SeptemberJune 30, 20172020 and 2016.2019.
|
|
|
|
|
| |||||
|
|
|
| |||||||
|
| September 30, |
| |||||||
|
| 2017 |
| 2016 |
| |||||
|
|
|
|
|
| |||||
| | | | | | |||||
| | |
| |||||||
| | June 30, | | |||||||
| | 2020 | | 2019 |
| |||||
Options to purchase common stock |
| 3,242,831 |
| 1,913,419 |
| | 3,279,799 | | 4,010,423 | |
Restricted stock unit awards |
| 294,331 |
| 85,000 |
| | 2,528,401 | | 1,959,587 | |
Total potential common shares |
| 3,537,162 |
| 1,998,419 |
| |||||
Warrants issued to SVB | | 460,251 | | — | | |||||
Total potential shares of common stock | | 6,268,451 | | 5,970,010 | | |||||
10. Commitments and Contingencies
17
11. Leases
Operating Leases
Agreements for Office Space
In August 2013,November 2017, the Company entered into a sublease agreement with Auxilium Pharmaceuticals, LLC (the “Sublandlord”) pursuant to which it subleases 33,019 square feet of office space for its headquarters in Wayne, Pennsylvania. The sublease has a term that runs through October 2023. If for any reason the lease between Chesterbrook Partners, LP (“the Landlord”) and Sublandlord is terminated or expires prior to October 2023, the Company’s sublease will automatically terminate.
In February 2019, the Company entered into a sublease agreement with a related party (see Note 11) for office space which is its corporate headquarters. The sublease was subsequently amended and restated in March 2014, for its office space with a term ending on November 30, 2016. The Company further amended the terms of this sublease agreement in December 2014, August 2015, February 2016, October 2016 and July 2017 to increase the square footage of the space being subleased and/or agree to new sublease terms. The August 2015 amendment extended the term of the lease to November 2019.
In November 2016, the Company entered into a lease agreement with a third party for additional office space in the same building as its headquarters with a term beginning in February 2017 and ending in November 2019.
Confluence occupies21,056 square feet of office and laboratory space in St. Louis, Missouri under the terms of an agreement which it entered intoMissouri. The lease commenced in March 2017June 2019 and which expires in December 2017. has a term that runs through June 2029.
RentSupplemental balance sheet information related to operating leases is as follows:
| | | | | | |
| | | June 30, | | | December 31, |
Operating Leases: | | 2020 | | 2019 | ||
Gross cost | | $ | 5,213 | | $ | 5,213 |
Accumulated amortization | | | (789) | | | (480) |
Other assets | | $ | 4,424 | | $ | 4,733 |
| | | | | | |
Other current liabilities | | $ | 567 | | $ | 526 |
Other liabilities | | | 3,253 | | | 3,548 |
Total operating lease liabilities | | $ | 3,820 | | $ | 4,074 |
Amortization expense related to operating lease right-of-use assets and liabilities was $110$253 and $66$143 for the three months ended SeptemberJune 30, 2020 and 2019, respectively, and $510 and $286 for the six months ended June 30, 2020 and 2019, respectively.
Finance Leases
Laboratory Equipment
The Company leases laboratory equipment which is used in its laboratory space in St. Louis, Missouri under 2 finance lease financing arrangements which the Company entered into in August 2017 and 2016, respectively,October 2017. The leases have terms which end in October 2020 and $284 and $178 for the nine months ended September 30, 2017 and 2016,December 2020, respectively. The Company recognizes rent expense on a straight-line basis over the term of the lease and has accrued for rent expense incurred but not yet paid.
As of September 30, 2017, future minimum lease payments under these agreements were as follows:
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
2017 |
| $ | 114 |
|
2018 |
|
| 394 |
|
2019 |
|
| 368 |
|
2020 |
|
| — |
|
2021 |
|
| — |
|
Thereafter |
|
| — |
|
Total |
| $ | 876 |
|
17
11.12. Related Party Transactions
Mallinckrodt plc
In August 2013,April 2018, Bryan Reasons was appointed to the Company’s board of directors. Subsequently, in March 2019, Mr. Reasons became the Chief Financial Officer of Mallinckrodt plc. Prior to Mr. Reasons joining Mallinckrodt plc, the Company entered into a subleasemaster services agreement with NeXeption, Inc. ("NeXeption"a subsidiary (“Mallinckrodt”), which was subsequently amended and restated of Mallinckrodt plc in March 2014 and further amended in December 2014. In August 2015,November 2018, pursuant to an Assignment and Assumption Agreement, NeXeption, Inc. assigned all interests, rights, duties and obligations underwhich Confluence provides laboratory services to Mallinckrodt in the sublease to NST Consulting, LLC, a wholly-owned subsidiaryordinary course of NST, LLC. Followingbusiness. Mr. Reasons was not involved in the Assignment and Assumption Agreement, the sublease was further amended in August 2015, February 2016, October 2016 and July 2017. Mr. Stephen Tullman, the chairmannegotiation or execution of the Company’s board of directors, wasagreement, but may be deemed to have an interest in the ongoing transactions based on his employment as an executive officer of NeXeptionMallinckrodt plc. As of June 30, 2020 and is alsoDecember 31, 2019, the manager of NST Consulting, LLCCompany had invoiced Mallinckrodt for $292 and NST, LLC. Total payments made$57, respectively, under the sublease during the three months ended September 30, 2017 and 2016 were $106 and $64, respectively, and during the nine months ended September 30, 2017 and 2016 were $231 and $179, respectively.master services agreement. Mr. Reasons had no financial interest in these transactions.
In February 2014, the Company entered into a services agreement with NST, LLC (the “NST Services Agreement”), pursuant to which NST, LLC provided certain pharmaceutical development, management and other administrative services to the Company. Under the same agreement, the Company also provided services to another company under common control with the Company and NST, LLC and was reimbursed by NST, LLC for those services. In addition to Mr. Tullman’s role as manager of NST, LLC, several of the Company’s executive officers are members of NST, LLC.
The NST Services Agreement was amended in December 2014 pursuant to which NST, LLC assigned all interests, rights, duties and obligations under the NST Services Agreement to NST Consulting, LLC. Under the NST Services Agreement, as amended, NST Consulting, LLC provides services to the Company and the Company provides services to another company under common control with the Company and NST Consulting, LLC. The NST Services Agreement was further amended in August 2015, November 2015, January 2016, December 2016 and May 2017 to reduce the amount of services the Company is obligated to provide to NST Consulting, LLC and the amount of services NST Consulting, LLC is obligated to provide to the Company. The Company may offset any payments owed by the Company to NST Consulting, LLC against payments that are owed by NST Consulting, LLC to the Company for the provision of personnel, including consultants, to the Company.
18
During the three and nine months ended September 30, 2017 and 2016, amounts included in the consolidated statement of operations and comprehensive loss for the NST Services Agreement are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Services provided by NST Consulting, LLC |
| $ | 49 |
| $ | 79 |
| $ | 161 |
| $ | 237 |
|
Services provided to NST Consulting, LLC |
|
| — |
|
| (15) |
|
| (18) |
|
| (45) |
|
General and administrative expense, net |
| $ | 49 |
| $ | 64 |
| $ | 143 |
| $ | 192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services provided by NST Consulting, LLC |
| $ | — |
| $ | 60 |
| $ | — |
| $ | 181 |
|
Services provided to NST Consulting, LLC |
|
| — |
|
| (21) |
|
| — |
|
| (63) |
|
Research and development expense, net |
| $ | — |
| $ | 39 |
| $ | — |
| $ | 118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services provided by NST Consulting, LLC |
| $ | 49 |
| $ | 139 |
| $ | 161 |
| $ | 418 |
|
Services provided to NST Consulting, LLC |
|
| — |
|
| (36) |
|
| (18) |
|
| (108) |
|
Total, net |
| $ | 49 |
| $ | 103 |
| $ | 143 |
| $ | 310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments made to NST |
| $ | 35 |
| $ | 88 |
| $ | 218 |
| $ | 263 |
|
The Company had $17 and $91 payable to NST Consulting, LLC under the NST Services Agreement as of September 30, 2017 and December 31, 2016, respectively.
12.13.Agreements Related to Intellectual Property
Assignment Asset Purchase Agreement – EPI Health, LLC
In October 2019, the Company sold RHOFADE to EPI Health pursuant to an asset purchase agreement. EPI Health agreed to pay the Company a high single-digit royalty calculated as a percentage of net sales on a country-by-country basis until the date that the patent rights related to RHOFADE have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country. The Company recorded royalty income under the asset purchase agreement of $411 and $0 during the six months ended June 30, 2020 and 2019, respectively. EPI Health has also agreed to pay the Company potential sales milestone payments of up to $20,000 in the aggregate upon the achievement of specified levels of net sales of products covered by the asset purchase agreement, and 25% of any upfront, license, milestone, maintenance or fixed payment received by EPI Health in connection with any license or sublicense of the assets transferred in the disposition in any territory outside of the United States, subject to specified exceptions.
Agreement and Finder’s Services AgreementPlan of Merger – Confluence
In August 2012,2017, the Company entered into an assignment agreement withAgreement and Plan of Merger, pursuant to which it acquired Confluence (the “Confluence Agreement”). In November 2018, the EstateCompany achieved a development milestone specified in the Confluence Agreement, as a result of Mickey Miller, or the Miller Estate, under which the Company acquired somepaid the former Confluence equity holders $2,500 in cash and issued them 253,208 shares of its common stock with a fair value of $2,200. Under the intellectual property rights covering A-101. In connection with obtaining the assignment of the intellectual property from the Miller Estate,Confluence Agreement, the Company also entered into a separate finder’s services agreement with KPT Consulting, LLC. In February 2016, underagreed to pay the termsformer Confluence equity holders aggregate remaining contingent consideration of the assignment agreement and the finder’s services agreement, the Company made a milestone payment of $300 upon the dosing of the first human subject with A-101 40% Topical Solution in the Company’s Phase 3 clinical trial. In April 2017, the Company made an additional milestone payment of $1,000up to $75,000 based upon the achievement of specified regulatory and commercial milestones. The payments were recorded as general and administrative expenses in the Company’s consolidated statement of operations.
Under the finder’s services agreement,In addition, the Company is obligated to make additional milestone payments of up to $4,500 upon the achievement of specified commercial milestones. Under each of the assignment agreement and the finder’s services agreement, the Company is also obligatedagreed to pay royalties on sales of A-101 or related products, atthe former Confluence equity holders future royalty payments calculated as a low single-digit percentagespercentage of net sales, subject to reduction in specified circumstances. The Company has not made any royalty payments to date under either agreement. Both agreements will terminate upon the expiration of the last pending, viable patent claim of the patents acquired under the assignment agreement, but no sooner than 15 years from the effective date of the agreements.
19
Stock Purchase Agreement with Vixen Pharmaceuticals, Inc. and License Agreement with Columbia University
On March 24, 2016, the Company entered into a stock purchase agreement (the “Vixen Agreement”) with Vixen, JAK1, LLC, JAK2, LLC and JAK3, LLC (together with JAK1, LLC and JAK2, LLC, the “Selling Stockholders”) and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the Selling Stockholders. Pursuant to the Vixen Agreement, the Company acquired all shares of Vixen’s capital stock from the Selling Stockholders (the “Vixen Acquisition”). Following the Vixen Acquisition, Vixen became a wholly-owned subsidiary of the Company. Pursuant to the Vixen Agreement, the Company paid $600 upfront and issued an aggregate of 159,420 shares of the Company’s common stock to the Selling Stockholders. The Company is obligated to make annual payments of $100 on March 24th of each year, through March 24, 2022, with such amounts being creditable against specified future payments that may be paid under the Vixen Agreement.
The Company is obligated to make aggregate payments of up to $18,000 to the Selling Stockholders upon the achievement of specified pre-commercialization milestones for three products in the United States, the European Union and Japan, and aggregate payments of up to $22,500 upon the achievement of specified commercial milestones. With respect to any commercialized products covered by the Vixen Agreement, the Company is obligated to pay low single-digit royalties on net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. IfIn addition, if the Company sublicensessells, licenses or transfers any of Vixen’s patent rights and know-howthe intellectual property acquired from Confluence pursuant to the VixenConfluence Agreement to a third party, the Company will be obligated to pay a portion of any consideration the Company receives from such sublicenses in specified circumstances.
As a result of the transaction with Vixen, the Company became party to the Exclusive License Agreement, by and between Vixen and the Trustees of Columbia University in the City of New York (“Columbia”), dated as of December 31, 2015 (the “License Agreement”). Under the License Agreement, the Company is obligated to pay Columbia an annual license fee of $10, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under the License Agreement. The Company is also obligated to pay up to an aggregate of $11,600 upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments. If the Company sublicenses any of Columbia’s patent rights and know-how acquired pursuant to the License Agreement, it will be obligated to pay Columbiaformer Confluence equity holders a portion of any consideration received from such sublicensessale, license or transfer in specified circumstances. The
License and Collaboration Agreement – Rigel Pharmaceuticals, Inc.
In August 2015, the Company entered into an exclusive, worldwide license and collaboration agreement with Rigel Pharmaceuticals, Inc. (“Rigel”) for the development and commercialization of products containing two specified JAK inhibitors, which the Company refers to as ATI-501 and ATI-502. Under the agreement, the Company agreed to make aggregate payments of up to $80,000 upon the achievement of specified development milestones. In September 2019, the Company made a milestone payment of $4,000 to Rigel upon the achievement of a specified development milestone. With respect to any products the Company commercializes under the agreement, the Company will pay Rigel quarterly tiered royalties as determined on its annual net sales of each product at a country-by-country and product-by-product basis, are payablehigh single-digit percentage of annual net sales, subject to specified reductions, until the date that all of the patent rights for that product have expired, the expiration of any market exclusivity period granted byas determined on a regulatory bodycountry-by-country and product-by-product basis or, in specified countries under specified circumstances, ten years from the first commercial sale of such product. The License Agreement terminates on
In connection with an amendment of the dateagreement with Rigel in October 2019, the Company paid Rigel an amendment fee of expiration$1,500 in 3 installments of all royalty obligations thereunder unless earlier terminated by either party for a material breach, subject$500 in each of January 2020, April 2020 and July 2020. In addition, the parties modified certain other development milestones, and the Company agreed to a specified cure period. The Company may also terminateincrease the License Agreement without cause at any timepotential payments payable upon advance written noticethe achievement of such milestones from $10,000 to Columbia.
The Company accounted for the transaction with Vixen as an asset acquisition as the arrangement did not meet the definition of a business pursuant to the guidance prescribed in Accounting Standards Codification Topic 805, Business Combinations. The Company concluded the transaction with Vixen did not meet the definition of a business because the transaction principally resulted$10,500 in the acquisition of the License Agreement. The Company did not acquire tangible assets, processes, protocols or operating systems. In addition, at the time of the transaction, there were no activities being conducted related to the licensed patents. The Company expensed the acquired intellectual property as of the acquisition date on the basis that the cost of intangible assets purchased from others for use in research and development activities, and that have no alternative future uses, are expensed at the time the costs are incurred. Accordingly, the Company recorded the $600 upfront payment, the fair value of the shares of common stock issued of $2,355, and the present value of the six non-contingent annual payments as research and development expense in the nine months ended September 30, 2016. Additionally, the Company will record as expense any contingent milestone payments or royalties in the period in which such liabilities are incurred.aggregate.
2019
13.14. Income Taxes
The Company did not record a federal or state income tax benefit for losses incurred during the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 due to the Company’s conclusion that a valuation allowance is required.was required for those periods.
14. Subsequent Events
15. Discontinued Operations
On November 2, 2017,The components of loss from discontinued operations as reported in the Company’s condensed consolidated statement of operations were as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Revenues: | | | | | | | | | | | | |
Product sales, net |
| $ | — |
| $ | 4,979 |
| $ | — |
| $ | 8,757 |
Total revenue, net | | | — | | | 4,979 | | | — | | | 8,757 |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of revenue | | | — | | | 1,709 | | | — | | | 3,279 |
Research and development |
| | — | | | 103 | | | 1 | | | 380 |
Sales and marketing | | | 27 | | | 6,805 | | | 283 | | | 16,499 |
General and administrative |
| | — | | | 893 | | | 1 | | | 1,763 |
Amortization of definite-lived intangible | | | — | | | 1,660 | | | — | | | 3,319 |
Total costs and expenses |
| | 27 | |
| 11,170 | | | 285 | | | 25,240 |
Loss from discontinued operations |
| $ | (27) | | $ | (6,191) | | $ | (285) | | $ | (16,483) |
| | | | | | | | | | | | |
Net loss from discontinued operations per share, basic and diluted | | $ | (0.00) | | $ | (0.15) | | $ | (0.01) | | $ | (0.40) |
Weighted average common shares outstanding, basic and diluted | |
| 42,133,646 | |
| 41,274,808 | |
| 41,876,037 | |
| 41,261,808 |
The following table presents the details of product sales, net included in discontinued operations:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
ESKATA |
| $ | — |
| $ | 272 | | $ | — |
| $ | 344 |
RHOFADE | | | — | | | 4,707 | | | — | | | 8,413 |
Total product sales, net | | $ | — | | $ | 4,979 | | $ | — | | $ | 8,757 |
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The following table presents information related to assets and liabilities reported as discontinued operations in the Company’s condensed consolidated balance sheet:
| | | | | | | | | | | | |
| | | | | | | | June 30, | | December 31, | ||
| | | | | | |
| 2020 |
| 2019 | ||
Accounts receivable, net | | | | | | |
| $ | — |
| $ | 4,966 |
Discontinued operations - current assets | | | | | | | | $ | — | | $ | 4,966 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Accounts payable | | | | | | | | $ | 36 | | $ | 1,705 |
Accrued expenses | | | | | | |
| | 2,253 | | | 2,452 |
Discontinued operations - current liabilities | | | | | | | | $ | 2,289 | | $ | 4,157 |
| | | | | | | | | | | | |
The following table presents certain non-cash items related to discontinued operations, which are included in the Company’s condensed consolidated statement of cash flows:
| | | | | | | | | | | | |
| | | | | | | | Six Months Ended | ||||
| | | | | | | | June 30, | ||||
| | | | | | | | 2020 |
| 2019 | ||
Depreciation and amortization | | | | | | | | $ | — |
| $ | 3,552 |
Stock-based compensation expense | | | | | | | | | — | | | 806 |
Total non-cash items | | | | | | | | $ | — | | $ | 4,358 |
The Company relied on Allergan Sales, LLC (“Allergan”) to distribute RHOFADE on its behalf pursuant to the terms of a transition services agreement. Accounts receivable, net as of June 30, 2020 and December 31, 2019 included $0 and $4,966, respectively, related to amounts invoiced by Allergan for sales of RHOFADE. In addition, during the three months ended June 30, 2020, in accordance with the asset purchase agreement with EPI Health (see Note 13 for additional information), the Company entered into a Sublease Agreement (the “Sublease”) with Auxilium Pharmaceuticals, LLC, a Delaware limited liability company (the “Sublandlord”), under whichreceived cash from Allergan related to sales of RHOFADE that occurred after the date the Company will lease 33,019 square feetsold RHOFADE to EPI Health. Accordingly, the Company had $4,950 payable to EPI Health, which is included in accrued expenses on the Company’s condensed consolidated balance sheet as of spaceJune 30, 2020.
16. Segment Information
The Company has 2 reportable segments, therapeutics and contract research. The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for its corporate headquarters.immuno-inflammatory diseases. The termcontract research segment earns revenue from the provision of laboratory services to clients through Confluence, the Company’s wholly-owned subsidiary. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis. Corporate and other includes general and administrative expenses as well as eliminations of intercompany transactions. The Company does not report balance sheet information by segment since it is not reviewed by the chief operating decision maker, and all of the Sublease will begin on December 1, 2017 and expire on October 31, 2023. Under the Sublease, base rent for the period from December 1, 2017 through February 28, 2018 shall be abated, after which the Company will pay an initial base rent of $47 per month through February 28, 2019. Beginning March 1, 2019, the monthly base rent will increase annually as specifiedCompany’s tangible assets are held in the Sublease. In addition, the Company will pay its pro rata share of the annual operating expenses associated with the premises, calculated as set forth in the Sublease.United States.
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The Company’s results of operations by segment for the three and six months ended June 30, 2020 and 2019 are summarized in the tables below:
| | | | | | | | | | | | |
| | | | Contract | | Corporate | | Total | ||||
Three Months Ended June 30, 2020 | | Therapeutics | | Research | | and Other | | Company | ||||
Total revenue | | $ | 193 | | $ | 3,657 | | $ | (1,804) | | $ | 2,046 |
Cost of revenue | | | — | | | 3,082 | | | (1,693) | | | 1,389 |
Research and development | | | 6,577 | | | — | | | (111) | | | 6,466 |
General and administrative | | | — | | | 688 | | | 4,884 | | | 5,572 |
Loss from operations | | $ | (6,384) | | $ | (113) | | $ | (4,884) | | $ | (11,381) |
Loss from discontinued operations | | $ | (27) | | $ | — | | $ | — | | $ | (27) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | Contract | | Corporate | | Total | ||||
Three Months Ended June 30, 2019 | | Therapeutics | | Research | | and Other | | Company | ||||
Total revenue | | $ | — | | $ | 3,807 | | $ | (2,921) | | $ | 886 |
Cost of revenue | | | — | | | 3,819 | | | (2,825) | | | 994 |
Research and development | | | 17,615 | | | — | | | (96) | | | 17,519 |
General and administrative | | | 359 | | | 613 | | | 6,497 | | | 7,469 |
Goodwill impairment | | | 18,504 | | | — | | | — | | | 18,504 |
Loss from operations | | $ | (36,478) | | $ | (625) | | $ | (6,497) | | $ | (43,600) |
Loss from discontinued operations | | $ | (5,298) | | $ | — | | $ | (893) | | $ | (6,191) |
| | | | | | | | | | | | |
| | | | Contract | | Corporate | | Total | ||||
Six Months Ended June 30, 2020 | | Therapeutics | | Research | | and Other | | Company | ||||
Total revenue | | $ | 411 | | $ | 7,064 | | $ | (4,022) | | $ | 3,453 |
Cost of revenue | | | — | | | 6,468 | | | (3,810) | | | 2,658 |
Research and development | | | 16,121 | | | — | | | (212) | | | 15,909 |
General and administrative | | | — | | | 1,440 | | | 10,333 | | | 11,773 |
Loss from operations | | $ | (15,710) | | $ | (844) | | $ | (10,333) | | $ | (26,887) |
Loss from discontinued operations | | $ | (284) | | $ | — | | $ | (1) | | $ | (285) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | Contract | | Corporate | | Total | ||||
Six Months Ended June 30, 2019 | | Therapeutics | | Research | | and Other | | Company | ||||
Total revenue | | $ | — | | $ | 8,995 | | $ | (6,846) | | $ | 2,149 |
Cost of revenue | | | — | | | 8,856 | | | (6,655) | | | 2,201 |
Research and development | | | 37,352 | | | — | | | (191) | | | 37,161 |
General and administrative | | | 477 | | | 1,145 | | | 13,304 | | | 14,926 |
Goodwill impairment | | | 18,504 | | | — | | | — | | | 18,504 |
Loss from operations | | $ | (56,333) | | $ | (1,006) | | $ | (13,304) | | $ | (70,643) |
Loss from discontinued operations | | $ | (14,720) | | $ | — | | $ | (1,763) | | $ | (16,483) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Intersegment Revenue
Revenue for the contract research segment included $4,022 and $6,846 for services performed on behalf of the therapeutics segment for the six months ended June 30, 2020 and 2019, respectively. All intersegment revenue has been eliminated in the Company’s condensed consolidated statement of operations.
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17. Legal Proceedings
Securities Class Action
On July 30, 2019, plaintiff Linda Rosi (“Rosi”) filed a putative class action complaint captioned Rosi v. Aclaris Therapeutics, Inc., et al. in the U.S. District Court for the Southern District of New York against the Company and certain of its executive officers. The complaint alleges that the defendants violated federal securities laws by, among other things, failing to disclose an alleged likelihood that regulators would scrutinize advertising materials related to ESKATA and find that the materials minimized the risks or overstated the efficacy of the product. The complaint seeks unspecified compensatory damages on behalf of Rosi and all other persons and entities that purchased or otherwise acquired the Company’s securities between May 8, 2018 and June 20, 2019.
On September 5, 2019, an additional plaintiff, Robert Fulcher (“Fulcher”), filed a substantially identical putative class action complaint captioned Fulcher v. Aclaris Therapeutics, Inc., et al. in the same court against the same defendants.
On November 6, 2019, the court consolidated the Rosi and Fulcher actions (together, the “Consolidated Securities Action”) and appointed Fulcher “lead plaintiff” for the putative class.
On January 24, 2020, Fulcher filed a consolidated amended complaint in the Consolidated Securities Action, naming 2 additional executive officers as defendants, extending the putative class period to August 12, 2019, and adding allegations concerning, among other things, alleged statements and omissions throughout the putative class period concerning ESKATA’s risks, tolerability and effectiveness. The defendants filed a motion to dismiss the consolidated amended complaint on April 17, 2020. Fulcher filed an opposition to the defendants’ motion on June 15, 2020, and the defendants filed a reply to such opposition on August 4, 2020. The motion remains under judicial consideration.
The Company and the other defendants dispute plaintiffs’ claims in the Consolidated Securities Action and intend to defend the matter vigorously.
Stockholder Derivative Action
On November 15, 2019, plaintiff Keith Allred (“Allred”) filed a derivative stockholder complaint captioned Allred v. Walker et al. in the U.S. District Court for the Southern District of New York against certain of the Company’s directors and executive officers. The complaint alleges that the defendants, among other things, breached their fiduciary duties as directors and/or officers in connection with the claims alleged in the Consolidated Securities Action. The complaint seeks, among other things, unspecified compensatory damages on behalf of the Company.
On November 25, 2019, an additional plaintiff, Bruce Brown (“Brown”), filed a substantially identical complaint captioned Brown v. Walker et al. in the same court against the same defendants.
On December 12, 2019, the court consolidated the Allred and Brown actions under the caption In re Aclaris Therapeutics, Inc. Derivative Litigation (the “Consolidated Derivative Action”) and directed that future derivative cases filed in or transferred to the court arising out of substantially the same transactions or events be similarly consolidated. Thereafter, on January 11, 2020, the court stayed – subject to certain conditions – all deadlines in the Consolidated Derivative Action pending resolution of the defendants’ anticipated motion to dismiss the Consolidated Securities Action.
The defendants dispute plaintiffs’ claims in the Consolidated Derivative Action and intend to defend the matter vigorously.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements due to a number of factors, including risks related to:
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These and other factorsstatements. Factors that could cause or contribute to these differences are describedinclude those below in this Quarterly Report on Form 10-Q and those in Part II – Item 1A,our Annual Report on Form 10-K, in each case under the caption “Risk Factors,” and under similar captions in our other filings with the Securities and Exchange Commission.Commission, or SEC. Statements made herein are as of the date of the filing of this Form 10-Q with the
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Securities and Exchange Commission SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2016,2019, which are included in our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC on March 15, 2017.February 25, 2020.
Overview
We are a dermatologist-ledclinical-stage biopharmaceutical company focused on identifying, developing and commercializing innovative and differentiated therapies to address significant unmet needs in medical and aesthetic dermatology. Our leadnovel drug candidate, A-101 40% Topical Solution, iscandidates for immuno-inflammatory diseases. We currently have a proprietary formulationpipeline of high-concentration hydrogen peroxide topical solution that we are developingdrug candidates focused on immuno-inflammatory diseases, as a prescription treatment for seborrheic keratosis, or SK, a common non-malignant skin tumor. In the first quarter of 2016, we initiated two multi-center, randomized, double blinded, vehicle-controlled Phase 3 clinical trials andwell as one open-label Phase 3 clinical trial of A-101 40% Topical Solution in patients with SK. In November 2016, we announced positive top-line results from the two pivotal Phase 3 clinical trials, which are summarized below. Based on these results, we submitted a New Drug Application, or NDA, for A-101 40% Topical Solution for the treatment of SK toproduct approved by the U.S. Food and Drug Administration, or FDA, that we are not currently distributing, marketing or selling, and other investigational drug candidates. In September 2019, we announced the completion of a strategic review of our business, as a result of which we refocused our resources on our immuno-inflammatory development programs. We are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product.
We submitted an Investigational New Drug Application, or IND, in February 2017, andApril 2019 for ATI-450, an investigational oral, novel, small molecule selective mitogen-activated protein kinase-activated protein kinase 2, orMK2, inhibitor compound, for the NDAtreatment of rheumatoid arthritis, which was accepted for filingallowed by the FDA in May 2017. 2019. MK2 is a key regulator of pro-inflammatory mediators including TNFα, IL1β, IL6, IL8 and other essential pathogenic signals in chronic immuno-inflammatory diseases, as well as in cancer. As an oral drug candidate, we are developing ATI-450 as a potential alternative to injectable anti-TNF/IL1/IL6 biologics for treating certain immuno-inflammatory diseases.
We initiated a Phase 1 single and multiple ascending dose clinical trial in 77 healthy subjects in August 2019. Final data from this trial demonstrated that ATI-450 resulted in marked inhibition of TNFα, IL1β, IL8 and IL6. We also observed that ATI-450 had dose-proportional pharmacokinetics with a terminal half-life of 9-12 hours in the multiple ascending dose cohort, and had no meaningful food effect or drug-drug interaction with methotrexate. ATI-450 was generally well-tolerated at all doses tested in the trial. The Prescription Drug User Fee Act,most common adverse events (reported by 2 or PDUFA, target action date formore subjects who received ATI-450) observed during the trial were dizziness, headache, upper respiratory tract infection, constipation, abdominal pain, and nausea.
Following the completion of the FDA’s reviewPhase 1 clinical trial, in March 2020 we initiated a Phase 2a clinical trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-450 in subjects with moderate to severe rheumatoid arthritis. Due to the COVID-19 pandemic, we temporarily paused enrollment. We resumed enrolling subjects, and the first subject was dosed, in May 2020. At this time, we are actively recruiting for this trial. Given the continuing evolution of the NDA is December 24, 2017. We also submitted a Marketing Authorization Application, or MAA,COVID-19 pandemic, we now anticipate reporting data from this trial in the European Union in July 2017. first half of 2021.
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We are also planning to initiate a Phase 2a clinical trial of ATI-450 in cryopyrin-associated periodic syndrome (CAPS), an Ilβ-driven disease, in the second half of 2020.
We are also supporting an investigator-initiated Phase 2a, randomized, double-blind, placebo-controlled clinical trial to investigate the safety and efficacy of ATI-450, when used in addition to standard of care therapy, as a potential treatment for cytokine release syndrome in 36 hospitalized patients with COVID-19. The primary endpoint in this trial is the proportion of subjects who are free from respiratory failure by day 14. We are providing funding and clinical drug supply to the University of Kansas Medical Center, the sponsor of the trial. The first subject was dosed in August 2020.
We submitted an IND in June 2020 for ATI-1777, an investigational topical “soft” Janus kinase, or JAK, 1/3 inhibitor compound, for the treatment of moderate to severe atopic dermatitis, and now plan to progress to the first-in-human trial of ATI-1777 in subjects with moderate to severe atopic dermatitis. “Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure. We expect to initiate a Phase 1/2a multicenter, randomized, double-blind, vehicle-controlled trial to investigate the safety, tolerability, pharmacokinetics and efficacy of topically applied ATI-1777 in subjects with moderate to severe atopic dermatitis in the second half of 2020. The primary endpoint will assess efficacy at four weeks.
We are developing ATI-2138, an investigational oral ITK/TXK/JAK3, or ITJ, inhibitor compound, as a potential treatment for psoriasis and/or inflammatory bowel disease, which are both T-cell mediated autoimmune diseases. The ITJ compound interrupts T cell signaling through the combined inhibition of ITK/TXK/JAK3 pathways in lymphocytes. We expect to file an IND for ATI-2138 in 2021.
We are pursuing strategic alternatives, including seeking a partner, to further develop, obtain regulatory approval and/or commercialize, as applicable, our drug candidate A-101 45% Topical Solution as a prescriptionpotential treatment for common warts, also known as verruca vulgaris. Additionally, in 2015, we in-licensed exclusive, worldwide rights to certain inhibitors of the Janus kinase, orwell as ATI-501 and ATI-502, our other JAK family of enzymes, for specified dermatological conditions, including alopecia areata, or AA, vitiligo and androgenetic alopecia, or AGA. In 2016, we acquired additional intellectual property rights for the development and commercialization of certain JAK inhibitors for specified dermatological conditions. We intend to continue to in-license or acquire additional druginhibitor candidates, and technologies to build a fully integrated dermatology company.
In November 2016, we completed two pivotal Phase 3 clinical trials of A-101 40% Topical Solution in a combined 937 patients who each had a total of four target SK lesions located on the face, trunk and extremities. Each trial met all primary and secondary endpoints for that trial, achieving clinically and statistically significant clearance of SK lesions. Additionally, we completed an open-label safety trial of A-101 40% Topical Solution in November 2016, in which we enrolled 147 patients. Across all three clinical trials, there were no treatment-related serious adverse events among patients treated with A-101 40% Topical Solution, and the most common adverse events reported were nasopharyngitis and sinusitis which were determined to be unrelated to A-101 40% Topical Solution. Based on these results, we submitted an NDA for A-101 40% Topical Solution for the treatment of SK to the FDA in February 2017, and the NDA was accepted by the FDA in May 2017. We also submitted an MAA in the European Union in July 2017. The PDUFA target action date for the completion of the FDA’s review of the NDA is December 24, 2017. If approved, A-101 40% Topical Solution would become the first FDA-approved medication for the treatment of SK.
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We are also developing A-101 45% Topical Solution for the treatment of common warts. Although common warts are generally not harmful and in most cases eventually clear without medical treatment, they may be painful and aesthetically unattractive and are contagious. On an annual basis, 1.9 million people are diagnosed with common warts. Common warts can be removed with slow-acting, over-the-counter products containing salicylic acid. As with SK, cryosurgery is the most frequently used in-office treatment for common warts. No prescription drugs have been approved by the FDA for the treatment of common warts. We completed a Phase 2 clinical trial in August 2016 evaluating 40% and 45% concentrations of A-101 for the treatment of common warts. In this Phase 2 clinical trial, in which 90 patients completed an eight-week treatment period, we observed statistically significant improvements in the mean change in the Physician’s Wart Assessment, or PWA, score and in complete clearance of common warts in patients treated with the 45% concentration of A-101 compared to placebo. In June 2017, we commenced two additional Phase 2 clinical trials of A-101 45% Topical Solution to assess the dose frequency in adult and pediatric patients with common warts. We have completed enrollment in these trials, with a total of 316 patients enrolled at 34 investigational centers in the United States. We expect to report data from these additional Phase 2 clinical trials in the first half of 2018.
In addition, we are developing the JAK inhibitors, ATI-50001 and ATI-50002, which we in-licensed from Rigel Pharmaceuticals, Inc., or Rigel, as potential treatments for AA. AA is an autoimmune dermatologic condition typically characterized by patchy non-scarring hair loss on the scalpalopecia, and body. More severe forms of AA include total scalp hair loss, known as alopecia totalis, and total hair loss on the scalp and body, known as alopecia universalis. AA affects up to 2.0% of people globally at some point during their lifetime (i.e. incidence) and up to 0.2% of people are affected at any given time (i.e. prevalence) - with two-thirds of affected individuals being 30 years old or younger at the time of disease onset. Treatment options for the less severe, patchy forms of AA include corticosteroids, either topically applied or injected directly into the scalp where the bare patches are located, or the induction of an allergic reaction at the site of hair loss using a topical contact sensitizing agent, an approach known as topical immunotherapy. The same treatment options are utilized for the more severe forms of AA, although utilization of these treatment options for the more severe forms of AA is limited due to limited efficacy, certain side effects, and their impracticality for extensive surface areas.ESKATA, our non-marketed FDA-approved product.
We are developing ATI-50001 as an oral treatment for AA and ATI-50002 as a topical treatment for AA and vitiligo, a disorder in which white patches of skin appear on different parts of the body. We submitted an Investigational New Drug application, or IND, to the FDA for ATI-50001 in October 2016, and we completed a Phase 1 clinical trial to evaluate the pharmacokinetic and pharmacodynamic properties of this drug candidate in the first quarter of 2017. We plan to initiate a Phase 2 dose-ranging clinical trial of ATI-50001 for the treatment of AA in the first half of 2018. We submitted an IND to the FDA for ATI-50002 for the treatment of AA in July 2017. We have initiated two Phase 2 clinical trials of ATI-50002 for the treatment of AA in which we expect to enroll a total of up to 36 patients, with data expected to be available in the first half of 2018. We expect to initiate one additional Phase 2 dose-ranging clinical trial of ATI-50002 for the treatment of AA in November 2017 in which we plan to enroll approximately 120 patients at 20 investigational centers in the United States. We expect data for this additional Phase 2 clinical trial to be available in the second half of 2018. We also plan to initiate a Phase 2 clinical trial of ATI-50002 for the treatment of vitiligo by the end of 2017. We are also developing another series of JAK inhibitors for the treatment of AGA.
In August 2017, we acquired Confluence Life Sciences, Inc. or Confluence. The acquisition of Confluence adds small molecule drug discovery and preclinical development capabilities which, we expect, will allow us to bring early-stage research and development activities in-house that we currently outsource to third parties. Through the acquisition of Confluence, we also acquired several preclinical product candidates, including additional JAK inhibitors known as “soft” JAK inhibitors, as well as inhibitors of the MK-2 signaling pathway and inhibitors of interleukin-2-inducible T cell kinase, or ITK. We paid $10.3 million in cash and issued 349,527 shares of our common stock with a value of $9.7 million, to the former equity holders of Confluence. We are obligated to pay up to $80.0 million to the former Confluence equityholders upon the achievement of specified development, regulatory and commercial milestones, as well as low single-digit royalties upon net sales of covered products and a portion of any amounts we may receive from the further sale, out-license or transfer of the acquired intellectual property to third parties.
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Since our inception in July 2012, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing A-101 40% Topical Solution for the treatment of SK, building our intellectual property portfolio, developing our supply chain and engaging in other discovery and clinical activities in dermatology. Through the date of this report, we have financed our operations with sales of our convertible preferred stock, as well as net proceeds from our initial public offering, or IPO, in October 2015, a private placement of our common stock in June 2016, public offerings of our common stock in November 2016 and August 2017, and an at-the-market facility with Cowen and Company LLC, or Cowen that we entered into in November 2016. We do not expect to generate significant revenue unless and until we obtain marketing approval for and commercialize A-101 40% Topical Solution for the treatment of SK or one of our other current or future drug candidates.
Since our inception, we have incurred significant operating losses. Our net loss was $48.1$27.2 million for the six months ended June 30, 2020 and $161.4 million for the year ended December 31, 2016 and $45.6 million for the nine months ended September 30, 2017.2019. As of SeptemberJune 30, 2017,2020, we had an accumulated deficit of $136.5$480.7 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical development and clinical trials, seek marketing approval and pursue commercialization of any approved drug candidate.development. In addition, our drug candidates, even if wethey are approved by regulatory agencies for marketing, may not achieve commercial success. We may also not be successful in pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for any ofand/or commercialize our drug candidates we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional drug candidates.ESKATA. Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. As a result, we will need substantial additional funding to support our continuing operations.
We have historically financed our operations primarily with sales of equity securities and pursue our growth strategy. Until such time as we can generate significant revenueincurring indebtedness in the form of loans from product sales, if ever,commercial lenders. In the near term, we expect to finance our operations through the sale of equity, debt financings orthese and other capital sources, including potential collaborationspartnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our drug candidates.
Impact of COVID-19 on Our Business
The global outbreak of COVID-19 continues to rapidly evolve. We have implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for our employees, intended to protect the health and safety of our employees while enabling us to continue to develop our pipeline of drug candidates or delayand provide contract research services to our pursuitclients. We are focused on ensuring the continuity of our operations. In March 2020, we
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initiated a Phase 2a clinical trial of ATI-450 as a potential in-licenses or acquisitions. treatment for moderate to severe rheumatoid arthritis. Due to the COVID-19 pandemic, we temporarily paused enrollment. We resumed enrolling subjects, and the first subject was dosed, in May 2020. At this time, we are actively recruiting for this trial. Given the continuing evolution of the COVID-19 pandemic, we now anticipate reporting data from this trial in the first half of 2021.
If COVID-19 continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and prospects, including the timing of our clinical trials and development programs. The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines, stay-at-home orders, social distancing requirements, business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. Accordingly, we do not yet know the full extent of the potential impacts on our business, our preclinical and clinical development and regulatory activities.
Components of Our Results of Operations
Revenue
We recognize revenue when the earnings process is complete, which under SEC Staff AccountingContract Research
Bulletin No. 104, Topic No. 13, “Revenue Recognition,” is when revenue is realized or realizable and earned, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
We earn revenue from the provision of laboratory services to clients through Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.), or Confluence, our wholly-owned subsidiary. Laboratory serviceContract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered. Revenue related to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts.
We also receive revenue from grants under the Small Business Innovation Research program of the National Institutes of Health, or NIH. Through our Confluence subsidiary, we currently have two active grants from NIH which are related to early-stage research. We recognize revenue related to these grants as amounts become reimbursable under each grant, which is generally when research is performed and the related costs are incurred.
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Cost of Revenue
Cost of revenue consists of the costs incurred in connection with the provision of laboratorycontract research services to our clients through Confluence. Cost of revenue primarily includes:
| employee-related expenses, which include salaries, benefits and stock-based compensation; |
| outsourced professional scientific services; |
| depreciation of laboratory equipment; |
| facility-related costs; and |
| laboratory materials and supplies used to support the services provided. |
Research and Development Expenses
Research and development expenses consist of expenses incurred in connection with the discovery and development of our drug candidates. These expenses primarily include:
| expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our clinical trials and preclinical studies; |
| manufacturing scale-up expenses and the cost of acquiring and manufacturing active pharmaceutical ingredients and preclinical and clinical trial |
| outsourced professional scientific development services; |
| medical affairs expenses related to our drug candidates, including investigator-initiated studies; |
● | employee-related expenses, which include salaries, benefits and stock-based compensation; |
| depreciation of manufacturing equipment; |
| payments made under agreements with third parties under which we have acquired or licensed intellectual property; |
| expenses relating to regulatory activities, including filing fees paid to regulatory agencies; |
26
| laboratory materials and supplies used to support our research |
| ● | non-cash charges related to the revaluation of contingent consideration. |
Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates. We expense research and development costs as incurred. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, investigator sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials, and are tracked on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses, which are included within “Personnel and other costs” in the table below, to specific research and development programs.
The following table summarizes our research and development expenses for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (In thousands) | ||||||||||
A-101 Topical Solution (40% and 45%) |
| $ | 3,750 |
| $ | 3,326 |
| $ | 7,031 |
| $ | 13,029 |
JAK inhibitors |
|
| 2,753 |
|
| 1,893 |
|
| 7,639 |
|
| 4,901 |
Vixen acquisition |
|
| — |
|
| — |
|
| — |
|
| 3,385 |
Other research expenses |
|
| 407 |
|
| 50 |
|
| 508 |
|
| 140 |
Total project-related expenses |
|
| 6,910 |
|
| 5,269 |
|
| 15,178 |
|
| 21,455 |
Personnel and other costs |
|
| 2,622 |
|
| 1,270 |
|
| 7,570 |
|
| 3,501 |
Stock-based compensation |
|
| 1,332 |
|
| 623 |
|
| 3,853 |
|
| 1,577 |
Total research and development expenses |
| $ | 10,864 |
| $ | 7,162 |
| $ | 26,601 |
| $ | 26,533 |
26
Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we increase personnel costs, including stock-based compensation, continue to conduct pre-commercial activities related to A-101 40% Topical Solution for the treatment of SK, and conduct clinical trials and prepare regulatory filings for our other drug candidates.
The successful development of our drug candidates is highly uncertain. At this time, weWe cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:
| the number of clinical sites included in the trials; |
| the length of time required to enroll suitable |
| the number of |
| the number of doses |
| the impact on the timing of our clinical trials due to the COVID-19 pandemic; |
● | the duration of |
| the results of our clinical trials. |
Our expenditures are subject to additional uncertainties, including the terms and timingpreparation of marketing approvals,regulatory filings for our drug candidates, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving marketing approval for any of our drug candidates. We may obtain unexpected results from our clinical trials.trials or other development activities. We may elect to discontinue, delay or modify the development, including clinical trials, of some drug candidates or focus on others. A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Drug commercialization will take several years and millions of dollars in development costs.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance, investor relations and legal functions, including stock-based compensation and travel expenses and recruiting expenses. Other generalGeneral and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for marketing, legal, auditing and tax services, and insurance costs, as well as payments made under our related party services agreement and milestone payments under our finder’s services agreement.
costs. We anticipate that our general and administrative expenseswe will increase as a result ofincur increased personnel costs, including stock-based compensation, expanded infrastructure and higher consulting, legal and tax-related services associated with maintaining compliance with NASDAQ and SEC requirements, accounting and investor relations costs, and director and officer insurance premiums and legal expenses associated with being a public company. Additionally, if and when we believe a marketing approval of a drug candidate appears likely, we anticipate an increasedefending the current lawsuits described in payroll and other expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that drug candidate.this report.
27
Other Income (Expense), Net
Other income (expense), net primarily consists of interest earned on our cash, cash equivalents and marketable securities, interest expense related to our debt obligations and finance leases, and gains and losses on transactions denominated in foreign currencies.
27
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP.generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, contingent consideration and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. ActualWe evaluate our estimates and judgments on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. WeExcept as described below, we believe there have been no material changes to our criticalsignificant accounting policies and use of estimates as disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, 20162019 included in our 2016 Annual Report on Form 10-K filed with the SEC on March 15, 2017.February 25, 2020.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
To determine revenue recognition in accordance with ASC Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. We recognize revenue when collection of the consideration we are entitled to under a contract with a customer is probable. At contract inception, we assess the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct. We recognize revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied.
Contract Research
Revenue related to laboratory services is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts. Under ASC Topic 606, we elected to apply the “right to invoice” practical expedient when recognizing contract research revenue. We recognize contract research revenue in the amount to which we have the right to invoice.
Intangible Assets
IntangibleOur intangible assets include both finite liveddefinite-lived and indefinite livedindefinite-lived assets. Finite livedDefinite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Indefinite livedOur definite-lived intangible assets are not amortized. In-processconsist of a research technology platform acquired through the acquisition of Confluence. Our indefinite-lived intangible assets consist of an in-process research and development, assetsor IPR&D, drug candidate also acquired in a business combinationthrough the acquisition of Confluence. IPR&D assets are considered indefinite livedindefinite-lived until the completion or abandonment of the associated research and development efforts. We testThe cost of IPR&D assets is either amortized over their estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned.
Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least
28
annually, which we perform during the fourth quarter, or ifwhen indicators of an impairment are present. We recognize impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.
Leases
Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets. We evaluate leases at their inception to determine if they are an operating lease or a finance lease. A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term. Leases that do not meet the finance lease criteria are accounted for as an operating lease.
We recognize assets and liabilities for leases at their inception based upon the present value of all payments due under the lease. We use an implicit interest rate to determine the present value of finance leases, and our incremental borrowing rate to determine the present value of operating leases. We determine incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease. We recognize expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method. We include estimates for any residual value guarantee obligations under our leases in lease liabilities recorded on our condensed consolidated balance sheet.
Right-of-use assets are included in other assets and property and equipment, net on our condensed consolidated balance sheet for operating and finance leases, respectively. Obligations for lease payments are included in current portion of lease liabilities and other liabilities on our condensed consolidated balance sheet for both operating and finance leases.
Contingent Consideration
We initially recorded thea contingent consideration liability related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition. ChangesThe ultimate amount of future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones. We estimate the fair value of the contingent consideration liability related to the achievement of regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. Significant assumptions used in our estimates include the probability of success of achieving regulatory and sales milestones, which are based upon an asset’s current stage of development and ranged between 4% and 15%. We evaluate fair value estimates of contingent consideration liabilities on a periodic basis. Any change in fair value reflectreflects new information about the likelihood of the payment of the contingent consideration and the passage of time. For example, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug, differ from our assumptions, then the fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent consideration, if any, will be recorded as income or expense in our condensed consolidated statement of operations.
Recently Issued Accounting Pronouncements
In January 2017,November 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2017-01, Business Combinations-Clarifying2018-18, Collaborative Arrangements (Topic 808): Clarifying the DefinitionInteraction Between Topic 808 and Topic 606,
29
which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU provide a screen to determine when a set of acquired assets and/or activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments in this ASU will reduce the number of transactions that meet the definition of a business. ASU 2017-01 isare effective for annual reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, including interim periods within those years, and early adoption will be permitted.2019. We are assessingadopted this standard as of January 1, 2020, the potential impact of ASU 2017-01which on our consolidated financial statements. statements was not significant.
28
In January 2017,August 2018, the FASB issued ASU 2017-04, Intangibles-Goodwill2018-15, Intangibles—Goodwill and Other-SimplifyingOther—Internal-Use Software (Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the Test for Goodwill Impairment (Topic 350). Under the amendmentsinternal-use software guidance in this ASU, an entity should perform its annual,Accounting Standards Codification, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount byASC, 350-40 to determine which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocatedimplementation costs to that reporting unit.capitalize as assets or expense as incurred. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. ASU 2017-04standard is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted.including interim periods within such fiscal years. We are assessingadopted this standard as of January 1, 2020, the potential impact of ASU 2017-04which on our consolidated financial statements. statements was not significant.
In May 2014,August 2018, the FASB issued ASU 2014-09, Revenue from Contracts with Customers(Topic 606)2018-13, Fair Value Measurement (Topic 820). Under this ASU, The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This update eliminates certain disclosure requirements for fair value measurements for all entities, should recognize revenue in an amount that reflectsrequires public entities to disclose certain new information and modifies some of the consideration to which they expect to be entitled to in exchange for goods and services provided. ASU 2014-09existing disclosure requirements. The standard is effective for annual reporting periodsfiscal years beginning after December 15, 2017.2019, including interim periods within such fiscal years. We are assessingadopted this standard as of January 1, 2020, the potential impact of ASU 2014-09which on our consolidated financial statements. statements was not significant.
30
Results of Operations
Comparison of Three Months Ended SeptemberJune 30, 20172020 and 20162019
| | | | | | | | | | | ||||||||||
| | Three Months Ended June 30, | | | |
| ||||||||||||||
|
| 2020 |
| 2019 |
| Change |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three Months Ended September 30, |
|
|
|
| ||||||||||||||
|
| 2017 |
| 2016 |
| Change |
| |||||||||||||
|
| (In thousands) |
| |||||||||||||||||
Revenue |
| $ | 684 |
| $ | — |
| $ | 684 |
| ||||||||||
| | (In thousands) |
| |||||||||||||||||
Revenues: | | | | | | | | | | | ||||||||||
Contract research | | $ | 1,853 | | $ | 886 | | $ | 967 | | ||||||||||
Other revenue | | | 193 | | | — | | | 193 | | ||||||||||
Total revenue | | | 2,046 | | | 886 | | | 1,160 | | ||||||||||
| | | | | | | | | | | ||||||||||
Costs and expenses: | | | | | | | | | | | ||||||||||
Cost of revenue |
|
| 453 |
|
| — |
|
| 453 |
| | | 1,389 | | | 994 | | | 395 | |
Gross profit |
|
| 231 |
|
| — |
|
| 231 |
| ||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
| ||||||||||
Research and development |
|
| 10,864 |
|
| 7,162 |
|
| 3,702 |
| |
| 6,466 | |
| 17,519 | |
| (11,053) | |
General and administrative |
|
| 8,123 |
|
| 3,650 |
|
| 4,473 |
| |
| 5,572 | |
| 7,469 | |
| (1,897) | |
Total operating expenses |
|
| 18,987 |
|
| 10,812 |
|
| 8,175 |
| ||||||||||
Goodwill impairment | | | — | | | 18,504 | | | (18,504) | | ||||||||||
Total costs and expenses | |
| 13,427 | |
| 44,486 | |
| (31,059) | | ||||||||||
Loss from operations |
|
| (18,756) |
|
| (10,812) |
|
| (7,944) |
| |
| (11,381) | |
| (43,600) | |
| 32,219 | |
Other income, net |
|
| 564 |
|
| 118 |
|
| 446 |
| ||||||||||
| | | | | | | | | | | ||||||||||
Other income (expense), net | |
| (189) | |
| (85) | |
| (104) | | ||||||||||
Loss from continuing operations | | | (11,570) | | | (43,685) | | | 32,115 | | ||||||||||
Loss from discontinued operations | | | (27) | | | (6,191) | | | 6,164 | | ||||||||||
Net loss |
| $ | (18,192) |
| $ | (10,694) |
| $ | (7,498) |
| | $ | (11,597) | | $ | (49,876) | | $ | 38,279 | |
29
Revenue
Revenue
RevenueContract research revenue was $ 0.7$1.9 million and $0.9 million for the three months ended SeptemberJune 30, 2017,2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence, which we acquired in August 2017. We did not generate anyConfluence. Other revenue inconsisted of $0.2 million of royalties earned on net sales of RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, pursuant to the three months ended September 30, 2016.asset purchase agreement with EPI Health, LLC, or EPI Health.
Cost of Revenue
Cost of revenue was $ 0.5$1.4 million and $1.0 million for the three months ended SeptemberJune 30, 2017,2020 and was comprised entirely of costs incurred2019, respectively, and related to provideproviding laboratory services to our clients through Confluence, which we acquired in August 2017. We did not incur any costConfluence.
31
Research and Development Expenses
The following table summarizes our research and development expenses:
| | | | | | | | | |
| | Three Months Ended | | | | ||||
| | June 30, | | | | ||||
| | 2020 |
| 2019 | | Change | |||
| | (In thousands) | |||||||
ATI-450 |
| $ | 740 |
| $ | 1,184 |
| $ | (444) |
ATI-1777 | | | 1,102 | | | 653 | | | 449 |
ATI-2138 | | | 1,102 | | | 781 | | | 321 |
Other JAK inhibitors | | | 186 | | | 4,765 | | | (4,579) |
A-101 45% Topical Solution | | | 52 | | | 4,403 | | | (4,351) |
Other research and development expenses | | | 601 | | | 686 | | | (85) |
Personnel expenses | | | 1,744 | | | 2,592 | | | (848) |
Stock-based compensation | | | 939 | | | 1,721 | | | (782) |
Change in contingent consideration | | | — | | | 734 | | | (734) |
Total research and development expenses | | $ | 6,466 | | $ | 17,519 | | $ | (11,053) |
Research and development expenses were $10.9 million for ATI-450 primarily consisted of preclinical development activities during the three months ended SeptemberJune 30, 2017, compared to $7.2 million2019 and initial activities for a Phase 2a clinical trial during the three months ended SeptemberJune 30, 2016. The increase of $3.7 million was2020. Expenses for ATI-1777 were higher during the three months ended June 30, 2020 primarily driven by an increase of $1.2 million of expensesdue to initial activities related to a Phase 1/2a clinical trial which we expect to initiate in the second half of 2020. Expenses for ATI-2138 were higher primarily due to preclinical development activities during the three months ended June 30, 2020. Expenses related to our other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019. Expenses related to A-101 45% Topical Solution an increase of $0.9 million in preclinical and clinical trial development expenses related to the JAK inhibitor technology, an increase of $0.3 million in expenses related to the scale-up of commercial manufacturing for A-101 40% Topical Solution, an increase of $0.6 million in payroll-related expensesdecreased primarily due to higher headcount, an increase of $0.7 million in stock-based compensation expense, and a $0.6 million increase in expenses related to medical affairs activities. We also incurred $0.3 million of expenses related to drug discovery research performed by Confluence, which we acquired in August 2017; and therefore did not incur similar expenses in the three months ended September 30, 2016. The increases noted above were partially offset by a $1.2 million decrease in costs associated with the development of A-101 40% Topical Solution as a result of the completion of our Phase 3 clinical trials during 2019. Other research and development expenses, which primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the three months ended June 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502. Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in November 2016.September 2019. The change in contingent consideration during the three months ended June 30, 2019 was the result of updates to our assumptions as a result of the filing of an IND for ATI-450.
General and Administrative Expenses
GeneralThe following table summarizes our general and administrative expenses:
| | | | | | | | | |
| | Three Months Ended | | | | ||||
| | June 30, | | | | ||||
| | 2020 |
| 2019 | | Change | |||
| | (In thousands) | |||||||
Personnel expenses |
| $ | 1,671 |
| $ | 2,136 |
| $ | (465) |
Professional and legal fees | | | 831 | | | 1,184 | | | (353) |
Facility and support services | |
| 422 | |
| 652 | |
| (230) |
Other general and administrative expenses | | | 530 | | | 843 | | | (313) |
Stock-based compensation | | | 2,118 | | | 2,654 | | | (536) |
Total general and administrative expenses | | $ | 5,572 | | $ | 7,469 | | $ | (1,897) |
Personnel and stock-based compensation expenses decreased primarily due to lower headcount. Professional and legal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and current lawsuits described in this report, and were $8.1lower year-over-year primarily as a result of lower legal fees. Facility and support services included general office expenses, information technology costs and other expenses, and have decreased primarily due to lower information technology costs resulting from lower headcount. Other general and
32
administrative expenses included travel, insurance and marketing costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.
Goodwill Impairment
During the three months ended June 30, 2019, we performed an interim impairment analysis due to a decline in our stock price. Our impairment analysis noted that our stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value. As a result, we recorded a goodwill impairment charge of $18.5 million writing off the full balance of goodwill.
Other Income (Expense), net
Other expense, net for the three months ended SeptemberJune 30, 2017, compared2020 was $0.2 million and primarily included interest expense related to $3.7 millionour term loan facility with Silicon Valley Bank, or SVB, which we borrowed in March 2020, as well as interest on our finance leases, partially offset by interest income earned on our cash and investments. Other expense, net for the three months ended June 30, 2019 was $0.1 million and primarily included interest expense incurred on our debt with Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.
Loss from Discontinued Operations
In September 30, 2016.2019, we announced the completion of a strategic review and our decision to refocus on our immuno-inflammatory development programs and to actively seek partners for our commercial products. The increase of $4.5 million was primarily attributablecondensed consolidated financial statements have been recast for all periods presented to an increase of $0.7 million in payroll-relatedreflect the assets, liabilities, revenue and expenses due to increased headcount, $1.2 million in higher stock-based compensation expense. In addition, we had a $1.4 million increase in market research expenses and a $0.2 million increase in sales operations expenses, both related to pre-commercial activitiesour commercial products as discontinued operations (see Note 15 to the condensed consolidated financial statements included in this report for A-101 40% Topical Solution. We also incurred $0.4 million of professional fees in conjunction with our acquisition of Confluence, for which there were no similar amounts in the prior year period.additional information).
Other Income, Net
The $0.4 million increase in other income, net was primarily due to higher invested balances of marketable securities as a result of funds received from our financing transactions in 2016 and 2017.
3033
Comparison of NineSix Months Ended SeptemberJune 30, 20172020 and 20162019
| | | | | | | | | | | ||||||||||
| | Six Months Ended June 30, | | | |
| ||||||||||||||
|
| 2020 |
| 2019 |
| Change |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Nine Months Ended September 30, |
|
|
|
| ||||||||||||||
|
| 2017 |
| 2016 |
| Change |
| |||||||||||||
|
| (In thousands) |
| |||||||||||||||||
Revenue |
| $ | 684 |
| $ | — |
| $ | 684 |
| ||||||||||
| | (In thousands) |
| |||||||||||||||||
Revenues: | | | | | | | | | | | ||||||||||
Contract research | | $ | 3,042 | | $ | 2,149 | | $ | 893 | | ||||||||||
Other revenue | | | 411 | | | — | | | 411 | | ||||||||||
Total revenue | | | 3,453 | | | 2,149 | | | 1,304 | | ||||||||||
| | | | | | | | | | | ||||||||||
Costs and expenses: | | | | | | | | | | | ||||||||||
Cost of revenue |
|
| 453 |
|
| — |
|
| 453 |
| | | 2,658 | | | 2,201 | | | 457 | |
Gross profit |
|
| 231 |
|
| — |
|
| 231 |
| ||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
| ||||||||||
Research and development |
|
| 26,601 |
|
| 26,533 |
|
| 68 |
| |
| 15,909 | |
| 37,161 | |
| (21,252) | |
General and administrative |
|
| 20,611 |
|
| 10,407 |
|
| 10,204 |
| |
| 11,773 | |
| 14,926 | |
| (3,153) | |
Total operating expenses |
|
| 47,212 |
|
| 36,940 |
|
| 10,272 |
| ||||||||||
Goodwill impairment | | | — | | | 18,504 | | | (18,504) | | ||||||||||
Total costs and expenses | |
| 30,340 | |
| 72,792 | |
| (42,452) | | ||||||||||
Loss from operations |
|
| (46,981) |
|
| (36,940) |
|
| (10,041) |
| |
| (26,887) | |
| (70,643) | |
| 43,756 | |
Other income, net |
|
| 1,392 |
|
| 336 |
|
| 1,056 |
| ||||||||||
| | | | | | | | | | | ||||||||||
Other income (expense), net | |
| (11) | |
| (315) | |
| 304 | | ||||||||||
Loss from continuing operations | | | (26,898) | | | (70,958) | | | 44,060 | | ||||||||||
Loss from discontinued operations | | | (285) | | | (16,483) | | | 16,198 | | ||||||||||
Net loss |
| $ | (45,589) |
| $ | (36,604) |
| $ | (8,985) |
| | $ | (27,183) | | $ | (87,441) | | $ | 60,258 | |
Revenue
RevenueContract research revenue was $ 0.7$3.0 million and $2.1 million for the ninesix months ended SeptemberJune 30, 2017,2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence, which we acquired in August 2017. We did not generate anyConfluence. Other revenue inconsisted of $0.4 million of royalties earned on net sales of RHOFADE pursuant to the nine months ended September 30, 2016.asset purchase agreement with EPI Health.
Cost of Revenue
Cost of revenue was $ 0.5$2.7 million and $2.2 million for the ninesix months ended SeptemberJune 30, 2017,2020 and was comprised entirely of costs incurred2019, respectively, and related to provideproviding laboratory services to our clients through Confluence, which we acquired in August 2017. We did not incur any cost of revenue in the nine months ended September 30, 2016. Confluence.
Research and Development Expenses
The following table summarizes our research and development expenses:
| | | | | | | | | |
| | Six Months Ended | | | | ||||
| | June 30, | | | | ||||
| | 2020 |
| 2019 | | Change | |||
| | (In thousands) | |||||||
ATI-450 |
| $ | 2,734 |
| $ | 3,419 |
| $ | (685) |
ATI-1777 | | | 1,859 | | | 2,372 | | | (513) |
ATI-2138 | | | 1,603 | | | 1,683 | | | (80) |
Other JAK inhibitors | | | 635 | | | 8,691 | | | (8,056) |
A-101 45% Topical Solution | | | 532 | | | 9,863 | | | (9,331) |
Other research and development expenses | | | 1,356 | | | 1,826 | | | (470) |
Personnel expenses | | | 3,668 | | | 5,258 | | | (1,590) |
Stock-based compensation | | | 1,755 | | | 3,315 | | | (1,560) |
Change in contingent consideration | | | 1,767 | | | 734 | | | 1,033 |
Total research and development expenses | | $ | 15,909 | | $ | 37,161 | | $ | (21,252) |
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Research and development expenses were $26.6 million for ATI-450 during the ninesix months ended SeptemberJune 30, 20172019 primarily consisted of preclinical development activities and $26.5 million for the nine months ended September 30, 2016. Although thereactivities related to a Phase 1 clinical trial that was a minimal changecompleted in total researchJanuary 2020. Research and development expenses for ATI-450 during the six months ended June 30, 2020 primarily consisted of initial activities for a Phase 2a clinical trial. Expenses for ATI-1777 were lower primarily due to the completion of preclinical development activities. Expenses for ATI-2138 were comparable period over period as we had decreases of $7.6 millioncompleted early stage development work on candidate selection in 2019 and began preclinical development activities during the costs associated with the development of A-101 40% Topical Solutionsix months ended June 30, 2020. Expenses related to our other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019. Expenses related to A-101 45% Topical Solution decreased primarily due to the completion of our Phase 3 clinical trials in November 2016during 2019. Other research and $3.4 million indevelopment expenses, associated withwhich primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the acquisition of Vixen Pharmaceuticals, Inc., or Vixen, in the ninesix months ended June 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502. Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019. The change in contingent consideration during the six months ended June 30, 2016,2020 was the result of updates to our assumptions as a result of the completion of a successful Phase 1 clinical trial for which thereATI-450, while the change in contingent consideration during the six months ended June 30, 2019 was no similar transaction in the current year period. These decreases were offsetresult of updates to our assumptions as a result of the filing of an IND for ATI-450.
General and Administrative Expenses
The following table summarizes our general and administrative expenses:
| | | | | | | | | |
| | Six Months Ended | | | | ||||
| | June 30, | | | | ||||
| | 2020 |
| 2019 | | Change | |||
| | (In thousands) | |||||||
Personnel expenses |
| $ | 3,268 |
| $ | 4,590 |
| $ | (1,322) |
Professional and legal fees | | | 1,949 | | | 2,417 | | | (468) |
Facility and support services | |
| 933 | |
| 1,356 | |
| (423) |
Other general and administrative expenses | | | 1,128 | | | 1,437 | | | (309) |
Stock-based compensation | | | 4,495 | | | 5,126 | | | (631) |
Total general and administrative expenses | | $ | 11,773 | | $ | 14,926 | | $ | (3,153) |
Personnel and stock-based compensation expenses decreased primarily by an increase of $2.7 million in preclinicaldue to lower headcount. Professional and clinical development expenseslegal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and current lawsuits described in this report, and were lower year-over-year primarily as a result of lower legal fees. Facility and support services included general office expenses, information technology costs and other expenses, and have decreased primarily due to lower information technology costs resulting from lower headcount. Other general and administrative expenses included travel, insurance and marketing costs, and were lower primarily due to reduced travel-related activities in light of the JAK inhibitor technology,COVID-19 pandemic.
Goodwill Impairment
During the six months ended June 30, 2019, we performed an increaseinterim impairment analysis due to a decline in our stock price. Our impairment analysis noted that our stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value. As a result, we recorded a goodwill impairment charge of $1.1$18.5 million writing off the full balance of goodwill.
Other Income (Expense), net
Other expense, net for the six months ended June 30, 2020 was $11,000 and primarily included interest expense related to our term loan facility with SVB which we borrowed in March 2020, as well as interest on our finance leases, substantially offset by interest income earned on our cash and investments. Other expense, net for the six months ended June 30, 2019 was $0.3 million and primarily included interest expense incurred on our debt with Oxford Finance LLC,
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which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.
Loss from Discontinued Operations
In September 2019, we announced the completion of a strategic review and our decision to refocus on our immuno-inflammatory development programs and to actively seek partners for our commercial products. The condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to our Phase 2 clinical trials of A-101 45% Topical Solution an increase of $1.8 million in payroll-related expenses due to higher headcount, a $2.3 million increase in stock-based compensation expense, a $2.0 million increase in expenses related to medical affairs activities, and $0.5 million of regulatory expenses associated with the NDA filing for A-101 40% Topical Solution incurred during the nine months ended September 30, 2017. We also incurred $0.3 million of expenses related to drug discovery research performed by Confluence, which we acquired in August 2017; therefore we did not incur similar expenses in the nine months ended September 30, 2016.
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General and Administrative Expenses
General and administrative expenses were $20.6 million for the nine months ended September 30, 2017, compared to $10.4 million for the nine months ended September 30, 2016. The increase of $10.2 million was primarily attributable to increases of $2.5 million in market research expenses and $0.3 million in salescommercial products as discontinued operations expenses, both related to pre-commercial activities for A-101 40% Topical Solution, an increase of $1.6 million in payroll-related expenses due to increased headcount, $3.5 million in higher stock-based compensation expense and $0.5 million in higher facilities-related costs including rent expense. In addition, milestone payments pursuant(see Note 15 to the finder’s services agreement related to A-101 40% Topical Solution increased $0.7 million over the prior year period. We also incurred $0.6 million of professional feescondensed consolidated financial statements included in conjunction with our acquisition of Confluence,this report for which there were no similar amounts in the prior year period.additional information).
Other Income, Net
The $1.1 million increase in other income, net was primarily due to higher invested balances of marketable securities as a result of funds received from our financing transactions 2016 and 2017.
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our acquisition of Confluence in August 2017, we had never generateddid not generate any revenue. We have financed our operations since inceptionover the last several years primarily through sales of our convertible preferred stock, as well as net proceeds from our IPOequity securities in October 2015, ourpublic offerings and a private placement in June 2016, our public offerings in November 2016transaction. In March 2020, we entered into the Loan and August 2017 and our at-the-market facilitySecurity Agreement with Cowen.SVB.
As of SeptemberJune 30, 2017,2020, we had cash, cash equivalents and restricted cash and marketable securities of $227.8$68.1 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.
We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, over the next five years, other than our subleaseterm loan facility, lease obligations, and contingent obligations under acquisition and intellectual property licensing agreements, which are summarized below under “Contractual Obligations and Commitments.Commitments.”
Initial Public Offering
Loan and Security Agreement with Silicon Valley Bank
On October 13, 2015,
In March 2020 we closed our IPOentered into a Loan and Security Agreement with SVB. The Loan and Security Agreement provides for $11.0 million in term loans, of which we sold 5,750,000 sharesborrowed the entire amount on March 30, 2020. The Loan and Security Agreement is secured by substantially all of common stock at a priceour assets other than intellectual property.
The term loan repayment schedule provides for interest only payments beginning April 1, 2020 and continuing through March 1, 2022, followed by 24 consecutive equal monthly installments of principal, plus monthly payments of accrued interest, starting on April 1, 2022 and continuing through the maturity date of March 1, 2024. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date. The Loan and Security Agreement provides for an annual interest rate equal to the publicgreater of $11.00 per share,(i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%.
The Loan and Security Agreement includes a final payment fee equal to 5% of the original principal amount borrowed. We have the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for aggregate gross proceedsany prepayment on or prior to the first anniversary of $63.3 million. We paid underwriting discountsMarch 30, 2020, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and commissionson or before the second anniversary of $4.4 million,March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.
The Loan and we also incurred expensesSecurity Agreement contains a customary covenant that limits our ability, subject to specified exceptions, to incur additional indebtedness without the prior consent of $2.3 million in connection with the IPO. As a result, the net offering proceeds to us, after deducting underwriting discounts and commissions and expenses, were $56.6 million. SVB.
Private Placement
On June 2, 2016, we closed a private placement in which we sold an aggregate of 1,081,082 shares of common stock at a price of $18.50 per share, for gross proceeds of $20.0 million. We incurred placement agent fees of $1.3 million, and expenses of $0.2 million in connection with the private placement. As a result, the net offering proceeds to us, after deducting placement agent fees and transaction expenses, were $18.5 million.
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November 2016 Public Offering
On November 23, 2016, we closed our follow-on public offering in which we sold 4,600,000 shares of common stock at a price to the public of $22.75 per share, for aggregate gross proceeds of $104.7 million. We paid underwriting discounts and commissions of $6.3 million, and we also incurred expenses of $0.2 million in connection with the offering. As a result, the net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $98.2 million.
At-The-Market Facility
On April 21, 2017, we sold 635,000 shares of our common stock at a weighted average price per share of $31.50, for aggregate gross proceeds of approximately $20.0 million. We paid underwriting discounts and commissions of $0.6 million, and we also incurred expenses of $0.1 million in connection with this sale. The shares were sold through Cowen pursuant to a sales agreement with them dated November 2, 2016. Following these sales, we may offer and sell additional shares of our common stock having an aggregate offering price of up to approximately $55.0 million from time to time through Cowen pursuant to the sales agreement.
August 2017 Public Offering
On August 16, 2017, we closed our follow-on public offering in which we sold 3,747,602 shares of common stock at a price to the public of $23.02 per share, for aggregate gross proceeds of $86.3 million. We paid underwriting discounts and commissions of $5.2 million, and we also incurred expenses of $0.2 million in connection with the offering. As a result, the net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $80.9 million.
Cash Flows
The following table summarizes our cash flows for each of the nine months ended September 30, 2017 and 2016:periods presented:
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|
| Nine Months Ended September 30, |
| ||||
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| 2017 |
| 2016 |
| ||
|
| (In thousands) |
| ||||
Net cash used in operating activities |
| $ | (36,453) |
| $ | (26,531) |
|
Net cash (used in) provided by investing activities |
|
| (34,127) |
|
| 15,915 |
|
Net cash provided by financing activities |
|
| 100,464 |
|
| 18,561 |
|
Net increase in cash and cash equivalents |
| $ | 29,884 |
| $ | 7,945 |
|
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2020 |
| 2019 | ||
| | (In thousands) | ||||
Net cash used in operating activities | | $ | (17,626) | | $ | (52,696) |
Net cash provided by (used in) investing activities | |
| 3,455 | |
| 27,568 |
Net cash provided by (used in) financing activities | |
| 10,821 | |
| (237) |
Net decrease in cash and cash equivalents | | $ | (3,350) | | $ | (25,365) |
Operating Activities
During the ninesix months ended SeptemberJune 30, 2017,2020, operating activities used $36.5$17.6 million of cash primarily resulting from our net loss of $45.6 million and changes in our operating assets and liabilities of $1.2$27.2 million, partially offset by non-cash adjustments of $10.4$9.7 million. Net cash used by changes in our operating assets and liabilities during the ninesix months ended SeptemberJune 30, 20172020 consisted of a $4.3$5.9 million increasenet decrease in accounts payable and accrued expenses, which were partially offset by a $4.9 million decrease in accounts receivable and a $0.9 million decrease in prepaid expenses and other current assets partially offset by a $3.1 million increaseassets. The decrease in accounts payable and accrued expenses.receivable was primarily the result of cash received from Allergan Sales, LLC, or Allergan, related to sales of RHOFADE made during the year ended December 31, 2019. The increasedecrease in prepaid expenses and other current assets was primarily due to a $2.0 million PDUFA fee paid to the FDA in conjunction with the filingamortization of the NDApremiums for A-101 40% Topical Solution, as well as deposits made for clinical supplies and development activitiesour corporate insurance policies, which are expected to be incurred duringwe expense equally over the fourth quarter of 2017.policy term. The increasenet decrease in accounts payable and accrued expenses was primarily due todriven by expenses incurred, but not yet paid, as of December 31, 2019, which were partially offset by cash received from Allergan which related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health. Accordingly, we had $4.9 million payable to EPI Health as of June 30, 2020, which is included in connection withaccrued expenses on our Phase 2 clinical trials for A-101 45% Topical Solution, ATI-50001condensed consolidated balance sheet. Expenses incurred, as of December 31, 2019, and ATI-50002,paid during the six months ended June 30, 2020, primarily included employee annual merit bonuses, as well as the timing of vendor invoicingexpenses related to preclinical development and payments.Phase 1 clinical trial activities for ATI-450, and preclinical development activities for ATI-1777 and ATI-2138. Non-cash expenses of $10.4$9.7 million were primarily composed of stock-based compensation expense.expense of $6.8 million, a charge of $1.7 million related to the change in contingent consideration and depreciation and amortization expense of $1.2 million.
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During the ninesix months ended SeptemberJune 30, 2016,2019, operating activities used $26.5$52.7 million of cash primarily resulting from our net loss of $36.6$87.4 million, partially offset by cash provided by changes in our operating assets and liabilities of $3.0 million and by non-cash adjustments of $7.1$33.4 million. Net cash provided by changes in our operating assets and liabilities during the ninesix months ended SeptemberJune 30, 20162019 consisted primarily of a $2.9$13.3 million increase in accounts payable and accrued expenses.expenses and a $2.9 million decrease in prepaid expenses and other assets, which were partially offset by a $14.5 million increase in accounts receivable. The increase in accounts payable and accrued expenses was primarily due todriven by expenses incurred, but not yet paid, in connection withas of June 30, 2019, as well as the timing of vendor invoicing and payments. Expenses incurred, but not yet paid, as of June 30, 2019 primarily included sales discounts and allowances related to sales of RHOFADE, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical Solution, our Phase 2 clinical trials for ATI-501 and ATI-502 and preclinical development activities for ATI-450. The decrease in prepaid expenses and other assets was due to research and development activities primarily related to preclinical development activities for ATI-450 and ATI-502 which concluded during the timingsix months ended June 30, 2019 and sales and marketing expenses related to our national sales meeting which was held during the six months ended June 30, 2019. The increase in accounts receivable was primarily the result of vendor invoicing and payments.sales of RHOFADE. Non-cash expenses of $7.1$33.4 million were primarily composed of $4.2a goodwill impairment charge of $18.5 million, of stock-based compensation expense of $9.7 million, a charge of $0.7 million related to the change in contingent consideration and $2.8 million associated with the acquisitiondepreciation and amortization expense of Vixen.$4.5 million.
Investing Activities
During the ninesix months ended SeptemberJune 30, 2017,2020, investing activities used $34.1provided $3.5 million of cash, consisting of proceeds from sales and maturities of marketable securities of $96.7$30.7 million, partially offset by purchases of marketable securities of $120.5$27.1 million, $9.6 million for the acquisition of Confluence and purchases of equipment of $0.7$0.1 million.
37
During the ninesix months ended SeptemberJune 30, 2016,2019, investing activities provided $15.9$27.6 million of cash, consisting of proceeds from sales and maturities of marketable securities of $49.8$117.5 million, partially offset by purchases of marketable securities of $33.7$89.4 million, and purchases of equipment of $0.2$0.5 million.
Financing Activities
During the ninesix months ended SeptemberJune 30, 2017,2020, financing activities provided $100.5$10.8 million including $19.3 million in April 2017 under our sales agreement with Cowen,of cash and $80.9consisted of $10.9 million of net proceeds from our August 2017 public offering, as well asborrowings pursuant to the Loan and Security Agreement with SVB offset by $0.1 million of finance lease payments.
During the six months ended June 30, 2019, financing activities used $0.2 million of cash received from the exercise of employee stock options.primarily related to finance lease payments.
During the nine months ended September 30, 2016, financing activities provided $18.6 million of cash primarily from the private placement of our common stock in June 2016.
Funding Requirements
We plan to focus in the near term on the development, marketing approval and potential commercialization of A-101 40% Topical Solution for the treatment of SK. We anticipate we will incur net losses forin the next several yearsnear term as we continue ourthe clinical development of A-101 40% Topical SolutionATI-450 as a potential treatment for rheumatoid arthritis, other immuno-inflammatory diseases and COVID-19 and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the treatmentdevelopment of SKour preclinical compounds, and continue to identify, research and development of A-101 45% Topical Solution for the treatment of common warts and ATI-50001 and ATI-50002 for the treatment of AA, and potentially for other dermatological conditions, as well as for development of other JAK inhibitor compounds. In addition, we plan to continue to invest in discovery efforts to exploredevelop additional drug candidates, build commercial capabilities and expand our corporate infrastructure.candidates. We may not be able to complete the development and initiate commercialization ofgenerate revenue from these programs if, among other things, our clinical trials are not successful, or if the FDA does not approve A-101 40% Topical Solution or our other drug candidates currently in clinical trials when we expect, or at all.all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.
Our primary uses of capital are, and we expect will continue in the near term to be, compensation and related expenses, clinical trial costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support the development and commercialization of our drug candidates.
As a publicly traded company, we have incurredincur and will continue to incur significant legal, accounting and other expenses that we were not required to incur as a private company.expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the NASDAQNasdaq Stock Market LLC, requires public companies to implement specified corporate governance practices that were not applicable to us prior to our IPO. We expect ongoing compliance with these
34
rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.practices.
We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of our unaudited condensed consolidated financial statements that appear in Item 1 of this Quarterly Report on Form 10-Q based on our current operating assumptions including the completion of our Phase 2 clinical trials for A-101 45% Topical Solution for the treatment of common warts and the continued development of ATI-50001 and ATI-50002 as potential treatments for AA and vitiligo. These assumptions may prove to be wrong, and we could utilize our available capital resources sooner than we expect.assumptions. We expect that we will require additional capital to commercialize A-101 40% Topical Solution, if we receive marketing approval,complete the clinical development of ATI-450 and ATI-1777, to develop our preclinical compounds, and to pursue in-licenses or acquisitions of other drug candidates. If we receive marketing approval for A-101 40% Topical Solution, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize that drug candidate.support our discovery efforts. Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If we are unable to raise sufficient additional capital or generate revenue from transactions with third-party partners for the development and/or commercialization of our drug candidates, we may need to substantially curtail our planned operations and the pursuit of our growth strategy.operations.
We may raise additional capital through the sale of equity or convertible debt securities. In such an event, yourour stockholders’ ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a holder of our common stock.
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Because of the numerous risks and uncertainties associated with research development and commercializationdevelopment of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements in the near term will depend on many factors, including:
| the number and |
| the scope, progress, results and costs of |
| ● | the costs, timing and outcome of regulatory review of our drug candidates; |
| ● | the extent to which we in-license or acquire additional drug candidates and technologies; |
| ● | the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; |
| ● | the impact on the timing of our preclinical studies and clinical trials and our business due to the COVID-19 pandemic; |
| ● | our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, and |
| the |
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Contractual Obligations and Commitments
We occupy office space for our headquarters in Malvern,Wayne, Pennsylvania under two operating lease agreements both ofa sublease agreement which have termshas a term through November 2019, that require future aggregate rental payments of $0.1 million during the three months ending December 31, 2017, $0.4 million during the year ending December 31, 2018, and $0.4 million during the year ending December 31, 2019.
Confluence occupiesOctober 2023. We occupy office and laboratory space in St. Louis, Missouri under an operating leasea sublease agreement which has a term through June 2029.
We lease laboratory equipment used in our laboratory space in St. Louis, Missouri under two capital lease financing arrangements which have terms through October 2020 and December 2017,2020.
In March 2020, we borrowed $11.0 million under the Loan and Security Agreement with SVB. Amounts borrowed under the Loan and Security Agreement are subject to interest only through March 2022, after which requires future rentalwe will be required to make principal and interest payments through the maturity date of $0.1 million during the three months ending December 31, 2017.March 2024.
35
Under the assignment agreement with the Estate of Mickey Miller pursuant to which we acquired intellectual property, we have agreed to pay royalties on sales of A-101 40% Topical Solution orESKATA and related products at rates ranging in low single-digit percentages of net sales, as defined in the agreement. Under the related finder’s services agreement with KPT Consulting, LLC, we have agreed to make aggregate paymentsa remaining payment of up to $4.5$3.0 million upon the achievement of a specified commercial milestones.milestone. In addition, we have agreed to pay royalties on sales of A-101 40% Topical Solution orESKATA and related products at a low single-digit percentage of net sales, as defined in the agreement.
Under a commercial supply agreement with a third party, In August 2019, we have agreed to pay a termination feevoluntarily discontinued the commercialization of up to $0.4 millionESKATA in the eventUnited States and withdrew the marketing authorizations we terminatehad previously received for the agreement without cause orproduct in all countries outside of the third party terminates the agreement for cause.United States.
Under a license agreement with Rigel that we entered into in August 2015,Pharmaceuticals, Inc., or Rigel, we have agreed to make remaining aggregate payments of up to $80.0$76.0 million upon the achievement of specified pre-commercializationdevelopment milestones, such as clinical trials and regulatory approvals. Further, we have agreed to pay up to an additional $10.0$10.5 million to Rigel upon the achievement of a second set of development milestones. In addition, in connection with the amendment of the agreement in October 2019, we paid Rigel an amendment fee of $1.5 million in three installments of $500,000 in each of January 2020, April 2020 and July 2020. With respect to any products we commercialize under the agreement, we will pay Rigel quarterly tiered royalties on our annual net sales of each product developed using the licensed JAK inhibitors at a high single-digitsingle digit percentage of annual net sales, subject to specified reductions.
Under a stock purchase agreement with the selling stockholders of Vixen, weone of our former subsidiaries, we are obligated to make aggregate payments of up to $18.0 million upon the achievement of specified pre-commercialization milestones for three products covered by the Vixenacquired patent rights in the United States, the European Union and Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial milestones for products covered by the Vixenacquired patent rights. We are also obligated to make aan annual payment of $0.1 million on March 24th of each year, through March 24, 2022, which
39
amounts are creditable against any specified future payments that may be paid under the stock purchase agreement. With respect to any covered products that we commercialize under the agreement, we are obligated to pay a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. If we sublicense any of the patent rights and know-how acquired pursuant to the stock purchase agreement,, we will be obligated to pay a portion of any consideration we receive from such sublicenses in specified circumstances.
Under a license agreement with The Trustees of Columbia University in the City of New York, or Columbia, we are obligated to pay an annual license fee of $10,000, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under the license agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired pursuant to the license agreement, we will be obligated to pay Columbia a portion of any consideration receivedwe receive from such sublicensessublicense in specified circumstances.
Under an acquisitiona merger agreement with Confluence, we we are obligated to make remaining aggregate payments of up to $80.0$75.0 million upon the achievement of specified development, regulatory and commercialization milestones. With respect to any covered products we commercialize, we are obligated to pay a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. If we sublicensesell, license or transfer any of the patent rights and know-howintellectual property acquired pursuant to the mergeragreement,, we will be obligated to pay a portion of any consideration we receive from such sublicensessale, license or transfer in specified circumstances.
We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts generally
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provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
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 in the rules and regulations of the SEC.
Emerging Growth Company Status
The Jumpstart Our Business StartupsJOBS Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies. We will cease to be an emerging growth company as of December 31, 2020.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in interest rates. Our cash equivalents and marketable securities consist of money market funds, asset-backed securities, commercial paper, corporate debt securities and government agency debt. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, due to the short-term nature and risklow-risk profile of our investment portfolio, we do not expect that an immediate 10% change in market interest rates would have a material effect on the fair market value of our investment portfolio. We have the ability to hold our marketable securities until maturity, and therefore we dowould not expect our operating results or cash flows to be affected significantlyto any significant degree by the effect of a change in market interest rates on our investments.
The Loan and Security Agreement with SVB provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%. To the extent that any present or future credit facilities that we enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we have such debt outstanding, our interest expense would increase. Based upon our debt outstanding of $11.0 million as of June 30, 2020, a 100 basis-point increase in the interest rate on our loan with SVB would result in approximately $0.1 million of additional interest expense on an annualized basis.
The uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets during and subsequent to our quarter ended June 30, 2020.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The term “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, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017,2020, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date at the reasonable assurance level.
Management’s assessment of disclosure controls and procedures excluded consideration of Confluence’s internal control over financial reporting, which was acquired during the third quarter of 2017. This exclusion is consistent with guidance provided by the staff of the SEC that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting for up to one year from the date of acquisition, subject to specified conditions. Confluence’s total assets were $1.3 million as of September 30, 2017 and Confluence’s total revenues were $0.7 million during the three months ended September 30, 2017.
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(b)Changes in Internal ControlsControl Over Financial Reporting
There have not been any changes in our internal controlscontrol over financial reporting during our fiscal quarter ended SeptemberJune 30, 20172020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of our acquisition of Confluence, we are in the process of designing and implementing controls over intangible assets.
PART II. OTHER INFORMATION
FromSecurities Class Action
On July 30, 2019, plaintiff Linda Rosi, or Rosi, filed a putative class action complaint captioned Rosi v. Aclaris Therapeutics, Inc., et al. in the U.S. District Court for the Southern District of New York against us and certain of our executive officers. The complaint alleges that the defendants violated federal securities laws by, among other things, failing to disclose an alleged likelihood that regulators would scrutinize advertising materials related to ESKATA and find that the materials minimized the risks or overstated the efficacy of the product. The complaint seeks unspecified compensatory damages on behalf of Rosi and all other persons and entities that purchased or otherwise acquired our securities between May 8, 2018 and June 20, 2019.
On September 5, 2019, an additional plaintiff, Robert Fulcher, or Fulcher, filed a substantially identical putative class action complaint captioned Fulcher v. Aclaris Therapeutics, Inc., et al. in the same court against the same defendants.
On November 6, 2019, the court consolidated the Rosi and Fulcher actions, or together, the Consolidated Securities Action, and appointed Fulcher “lead plaintiff” for the putative class.
On January 24, 2020, Fulcher filed a consolidated amended complaint in the Consolidated Securities Action, naming two additional executive officers as defendants, extending the putative class period to August 12, 2019, and adding allegations concerning, among other things, alleged statements and omissions throughout the putative class period concerning ESKATA’s risks, tolerability and effectiveness. The defendants filed a motion to dismiss the consolidated amended complaint on April 17, 2020. Fulcher filed an opposition to the defendants’ motion on June 15, 2020, and the defendants filed a reply to such opposition on August 4, 2020. The motion remains under judicial consideration.
We and the other defendants dispute plaintiffs’ claims in the Consolidated Securities Action and intend to defend the matter vigorously.
Stockholder Derivative Action
On November 15, 2019, plaintiff Keith Allred, or Allred, filed a derivative stockholder complaint captioned Allred v. Walker et al. in the U.S. District Court for the Southern District of New York against certain of our directors and executive officers. The complaint alleges that the defendants, among other things, breached their fiduciary duties as directors and/or officers in connection with the claims alleged in the Consolidated Securities Action. The complaint seeks, among other things, unspecified compensatory damages on behalf of our company.
On November 25, 2019, an additional plaintiff, Bruce Brown, or Brown, filed a substantially identical complaint captioned Brown v. Walker et al. in the same court against the same defendants.
On December 12, 2019, the court consolidated the Allred and Brown actions under the caption In re Aclaris Therapeutics, Inc. Derivative Litigation, or the Consolidated Derivative Action, and directed that future derivative cases filed in or transferred to the court arising out of substantially the same transactions or events be similarly consolidated. Thereafter, on January 11, 2020, the court stayed – subject to certain conditions – all deadlines in the
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Consolidated Derivative Action pending resolution of the defendants’ anticipated motion to dismiss the Consolidated Securities Action.
The defendants dispute plaintiffs’ claims in the Consolidated Derivative Action and intend to defend the matter vigorously.
In addition, from time to time, we may beare subject to litigation and claims arising in the ordinary course of business. Webusiness but, except as stated above, we are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.
Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. Except for the new risk factors set forth immediatelyas noted below, our risk factors have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, filed with the SEC on February 25, 2020.
Risks Related to Our Business, Our Financial Position and Capital Needs
Our business has been adversely impacted and could continue to be adversely affected by the evolving and ongoing COVID-19 global pandemic in regions where we or third parties on which we rely have significant manufacturing facilities, concentrations of clinical trial sites or other business operations. The COVID-19 pandemic could adversely affect our operations, including at our headquarters, which is currently subject to a stay-at-home order, and at our clinical trial sites, as well as the business or operations of our manufacturers, CROs or other third parties with whom we conduct business.
Our business has been adversely affected by the effects of the recent and evolving COVID-19 pandemic, which was declared by the World Health Organization as a global pandemic. The COVID-19 pandemic has resulted in travel and other restrictions in order to reduce the spread of the disease, which, among other things, direct businesses and governmental agencies to cease non-essential operations at physical locations, prohibit certain non-essential gatherings, and order cessation of non-essential travel. In response to these public health directives and orders, we have implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for all employees. The effects of our alternative work arrangement policies may negatively impact productivity, disrupt our business and delay our preclinical and clinical programs and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.
Quarantines, executive and similar government orders, and business shutdowns, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Some of our third-party manufacturers which we use for the supply of materials for our drug candidates or other materials necessary to manufacture drug product to conduct preclinical studies and clinical trials are located in countries affected by COVID-19, and should they experience disruptions, such as temporary closures or suspension of services, we would likely experience delays in advancing these studies and trials.
In addition, our clinical trials have been and may continue to be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some subjects may not be able to comply with clinical trial protocols if quarantines impede patient movement
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or interrupt healthcare services. Similarly, our ability to recruit and retain subjects and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact our clinical trial operations. For example, in March 15, 2017. 2020, we initiated a Phase 2a clinical trial of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis. Due to the COVID-19 pandemic, we temporarily paused enrollment. We resumed enrolling subjects, and the first subject was dosed, in May 2020. At this time, we are actively recruiting for this trial. Given the continuing evolution of the COVID-19 pandemic, we now anticipate reporting data from this trial in the first half of 2021.
The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and impact our ability to make scheduled payments pursuant to our Loan and Security Agreement with SVB. In addition, a recession or market correction resulting from the further spread of COVID-19 could materially affect our business and the value of our common stock.
The global pandemic of COVID-19 continues to rapidly evolve. The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines, stay-at-home orders, social distancing requirements and business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. Accordingly, we do not yet know the full extent of the impacts on our business, our preclinical and clinical development and regulatory activities, healthcare systems or the global economy as a whole. However, these impacts could adversely affect our business, financial condition, results of operations and growth prospects.
In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 25, 2020.
We may not realizebe able to generate sufficient cash to service our indebtedness, including the anticipated benefitsLoan and Security Agreement with SVB.
In March 2020, we entered into the Loan and Security Agreement with SVB, pursuant to which we borrowed $11.0 million. Our obligations under the Loan and Security Agreement are secured by substantially all of our acquisition of Confluence.
In August 2017, we acquired Confluence Life Sciences, Inc., or Confluence, including several preclinical drug candidates and Confluence’s contract research services business. Acquisitions are inherently risky,assets except for our intellectual property, and we may not realizeencumber our intellectual property without SVB’s prior written consent. The Loan and Security Agreement contains customary representations, warranties and covenants by us, which covenants, among other things, limit our ability, subject to specified exceptions, to convey, sell, lease, transfer, assign or otherwise dispose of our assets; engage in any business other than the anticipated benefitsbusinesses currently engaged in by us or reasonably related thereto; liquidate or dissolve; undergo specified change of control events; create, incur, assume or be liable for indebtedness; create, incur, allow or suffer any liens on our property; pay dividends and make other restricted payments; make investments; or enter into any material transactions with our affiliates. Our obligations under the acquisition of Confluence. Specifically, weLoan and Security Agreement are subject to acceleration upon the risks that:occurrence of specified events of default, including a material adverse change in our business, operations or financial condition. We may also enter into other debt agreements in the future which may contain similar or more restrictive terms.
Our ability to make scheduled monthly payments or to refinance our debt obligations depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and our performance are subject to certain financial and business factors, as well as prevailing economic and competitive conditions, including the impact of the COVID-19 pandemic, some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we |
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If we arewould be able to take any of these actions, or that these actions would permit us to meet our scheduled debt service obligations. Failure to comply with the covenants and conditions of the Loan and Security Agreement could result in an event of default, which could result in an acceleration of amounts due under the Loan and Security Agreement. We may not have sufficient funds or may be unable to successfully integrate Confluence’s businessarrange for additional financing to repay our indebtedness or to make any accelerated payments, and employees, itSVB could have an adverse effectseek to enforce security interests in the collateral securing such indebtedness, which would harm our business.
Risks Related to Ownership of Our Common Stock
Exclusive forum provisions in our amended and restated certificate of incorporation and amended and restated bylaws could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our future resultsbehalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the market pricethreat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws provide the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation and our amended and restated bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
Our amended and restated certificate of incorporation and amended and restated bylaws further provide any person or entity purchasing or otherwise acquiring any interest in shares of our common stock.
The successstock is deemed to have notice of our acquisition of Confluence will depend, in large part, on ourand consented to the foregoing provisions. These exclusive forum provisions may limit a stockholder’s ability to realize operating synergies from combiningbring a claim in a judicial forum that it finds favorable for disputes with us or our businessdirectors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with Confluence’s business. To realize these anticipated benefits, we must successfully integrate Confluence’s business and employees. This integration will be complex and time-consuming.
The failure to successfully integrate and manageresolving the challenges presented by the integration process may resultdispute in our failure to achieve some orother jurisdictions, all of the anticipated benefits of the merger. Potential difficulties that may be encountered in the integration process include the following:
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If any of these events were to occur, the ability of the combined company to maintain relationships with customers, suppliers and employees or our ability to achieve the anticipated benefits of the merger could be adversely affected, or could reduce our future earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect the market price of our common stock.
Charges to earnings resulting from the merger may cause our operating results to suffer.
Under accounting principles, we will allocate the total purchase price of the merger to Confluence’s net tangible assets and intangible assets based on their fair values as of the date of the merger, and we will record the excess of the purchase price over those fair values as goodwill. Our management’s estimates of fair value will be based upon assumptions that they believe to be reasonable but that are inherently uncertain. The following factors, among others, could result in material charges that would cause our financial results to be negatively impacted:
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Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would negatively impact our results of operations.
Our sublease could terminate if the master lease is terminated for any reason, thus terminating our rights to access our corporate headquarters.
We sublease space for our corporate headquarters. While the term of the sublease extends until October 31, 2023, if for any reason the master lease is terminated or expires prior to October 31, 2023, our sublease will also automatically terminate. In such an event, we would need to obtain a new direct lease with the master landlord or negotiate and enter into a new lease for office space at a different location, which mayseriously harm our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
None.
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Exhibit | Document | |
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3.1 | | |
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3.2 | | |
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10.2*# | | |
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31.1* | | Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act. |
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31.2* | | Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act. |
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32.1** | | |
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101.INS | | XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* | Filed herewith. |
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** | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| ACLARIS THERAPEUTICS, INC. | |
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Date: | By: | /s/ Neal Walker |
| | Neal Walker |
| | President and Chief Executive Officer |
| | (On behalf of the Registrant) |
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Date: | By: | /s/ Frank Ruffo |
| | Frank Ruffo |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
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