UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2023
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: 001-33004
|
Acer Therapeutics Inc.
(Exact name of registrant as specified in its charter)
Delaware | One Gateway Center, Suite 356 300 Washington Street | 32-0426967 |
(State or other jurisdiction of | Newton, MA02458 | (I.R.S. Employer |
Incorporation or organization) | (Address of principal executive | Identification No.) |
offices and zip code) |
(844) 902-6100
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Common Stock, $0.0001 par value per share | ACER | 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-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☑ | Smaller reporting company | ☑ |
Emerging growth company | |||
☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2017,May 15, 2023, there were 6,450,76624,300,073 shares of the issuer’s Common Stock outstanding.
ACER THERAPEUTICS INC.
For the ninethree months ended September 30, 2017
INDEX
Page | ||
1 | ||
Item 1. | ||
3 | ||
4 | ||
5 | ||
6 | ||
Notes to | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34 |
Item 3. | 50 | |
Item 4. | 50 | |
Item 1. | 51 | |
Item 1A. | 51 | |
Item | 91 | |
Item 5. | 91 | |
Item 6. | 93 | |
95 | ||
SUMMARY RISK FACTORS
Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q. Investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, including our condensed financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission. Our business operations could also be affected by factors that we currently consider to be immaterial or that are unknown to us at the present time. If any of these risks occur, our business, financial condition, and results of operations could be materially and adversely affected, and the trading price of our common stock could decline.
Summary Risk Factors
•1
2
PART I - FINANCIAL INFORMATION Item 1. ACER THERAPEUTICS INC. CONDENSED (Unaudited) March 31, December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 6,379,977 $ 2,329,218 Inventory 412,038 — Prepaid expenses 800,777 759,292 Deferred financing costs — 408,000 Other current assets 14,638 20,188 Total current assets 7,607,430 3,516,698 Property and equipment, net 202,097 214,578 Other assets: Goodwill 7,647,267 7,647,267 Other non-current assets 215,302 245,683 Total assets $ 15,672,096 $ 11,624,226 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 1,602,316 $ 3,813,280 Accrued expenses 4,316,305 3,657,394 Deferred collaboration funding, current 2,890,097 8,412,971 Other current liabilities 742,323 741,425 Convertible note payable, current, at fair value 11,392,167 — SWK Loans payable, current, at fair value 17,057,110 2,326,630 Total current liabilities 38,000,318 18,951,700 Deferred collaboration funding, non-current 3,661,868 — SWK Loans payable, non-current, at fair value — 3,240,601 Convertible note payable, at fair value — 6,047,532 Other non-current liabilities 123,509 145,665 Total liabilities 41,785,695 28,385,498 Commitments and Contingencies (Note 8) Stockholders’ deficit: Preferred stock, $0.0001 par value; authorized 10,000,000 shares; — — Common stock, $0.0001 par value; authorized 150,000,000 shares; 2,342 1,962 Additional paid-in capital 130,912,034 123,984,035 Accumulated deficit (157,027,975 ) (140,747,269 ) Total stockholders’ deficit (26,113,599 ) (16,761,272 ) Total liabilities and stockholders’ deficit $ 15,672,096 $ 11,624,226 The accompanying notes 3 ACER THERAPEUTICS INC. CONDENSED FOR THE THREE (Unaudited) Three Months Ended March 31, 2023 2022 Operating expenses: Research and development (net of collaboration funding $ 2,421,120 $ 3,171,639 General and administrative (net of collaboration funding 2,568,181 3,875,601 Total operating expenses 4,989,301 7,047,240 Loss from operations (4,989,301 ) (7,047,240 ) Other income (expense), net: Costs of debt issuance (577,225 ) (1,168,065 ) Loss on extinguishment of debt (8,191,494 ) — Changes in fair value of debt instruments gain (loss) (2,211,685 ) (962,400 ) Interest and other income (expense), net (286,537 ) (2,838 ) Foreign currency transaction (loss) gain (24,464 ) 1,539 Total other income (expense), net (11,291,405 ) (2,131,764 ) Net loss $ (16,280,706 ) $ (9,179,004 ) Net loss per share - basic $ (0.77 ) $ (0.64 ) Weighted average common shares outstanding - basic 21,113,166 14,310,244 Net loss per share - diluted $ (0.77 ) $ (0.64 ) Weighted average common shares outstanding - diluted 21,113,166 14,310,244 The accompanying notes 4 ACER THERAPEUTICS INC. CONDENSED FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (Unaudited) Three Months Ended March 31, 2023 Common Stock Additional Accumulated Total Shares Amount Balance, December 31, 2022 19,624,280 $ 1,962 $ 123,984,035 $ (140,747,269 ) $ (16,761,272 ) Stock-based compensation — — 285,509 — 285,509 Issuance of common stock and warrants, net of issuance costs 3,797,254 380 6,169,990 — 6,170,370 Proceeds allocated to Third SWK Warrant — — 472,500 — 472,500 Net loss — — — (16,280,706 ) (16,280,706 ) Balance, March 31, 2023 23,421,534 $ 2,342 $ 130,912,034 $ (157,027,975 ) $ (26,113,599 ) Three Months Ended March 31, 2022 Common stock Additional Accumulated Total Shares Amount Balance, December 31, 2021 14,310,244 $ 1,431 $ 112,784,918 $ (114,509,954 ) $ (1,723,605 ) Stock-based compensation — — 474,097 — 474,097 Proceeds allocated to First SWK Warrant — — 327,031 — 327,031 Net loss — — — (9,179,004 ) (9,179,004 ) Balance, March 31, 2022 14,310,244 $ 1,431 $ 113,586,046 $ (123,688,958 ) $ (10,101,481 ) The accompanying notes are an integral part of these unaudited condensed financial statements. 5 ACER THERAPEUTICS INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE (Unaudited) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net loss $ (16,280,706 ) $ (9,179,004 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 285,509 474,097 Depreciation 15,547 20,606 Non-cash changes in fair value of debt, (gain) loss 2,211,685 962,400 Loss on extinguishment of debt 8,191,494 — Debt issuance costs recognized as expense 169,225 1,168,065 Amortization of debt issuance costs 408,000 Changes in operating assets and liabilities Collaboration receivable — 5,000,000 Inventory (412,038 ) — Prepaid expenses (41,485 ) (430,787 ) Other current and non-current assets 14,673 8,455,326 Accounts payable (2,210,964 ) 613,919 Accrued expenses 492,176 3,707,133 Deferred collaboration funding (1,861,006 ) (5,371,546 ) Other current liabilities — (8,433,464 ) Net cash used in operating activities (9,017,890 ) (3,013,255 ) Cash flows from investing activities: Purchase of property and equipment (3,066 ) (28,930 ) Net cash used in investing activities (3,066 ) (28,930 ) Cash flows from financing activities: Proceeds from issuance of common stock and warrants, net of issuance costs 6,170,370 — Proceeds from Original Term Loan, net of warrant allocation and lender fees — 6,013,148 Proceeds from Marathon Convertible Notes, net of lender fees — 5,516,556 Proceeds from SWK Second Term Loan, net of warrant allocation and lender fees 6,527,500 — Proceeds allocated to First SWK Warrant based on valuation — 327,031 Proceeds allocated to Third SWK Warrant based on valuation 472,500 — Payment of debt and convertible debt issuance costs (98,655 ) (724,928 ) Net cash provided by financing activities 13,071,715 11,131,807 Net increase in cash and cash equivalents 4,050,759 8,089,622 Cash and cash equivalents, beginning of period 2,329,218 12,710,762 Cash and cash equivalents, end of period $ 6,379,977 $ 20,800,384 Supplemental cash flow information: Cash paid for interest $ 322,306 $ — The accompanying notes 6 ACER THERAPEUTICS INC. NOTES TO CONDENSED (Unaudited)Financial Statements. CONSOLIDATED BALANCE SHEETS September 30, December 31, 2017 2016 Assets (unaudited) Current assets: Cash and cash equivalents $8,404,332 $1,834,018 Prepaid expenses 836,756 540,053 Total current assets 9,241,088 2,374,071 Property and equipment, net 5,062 6,217 Other assets: Goodwill 7,647,266 272,315 In-process research and development 118,600 118,600 Deferred financing costs — 1,901 Total assets $17,012,016 $2,773,104 Liabilities, Redeemable Preferred Stock and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $539,440 $383,411 Accrued expenses 1,711,300 438,028 Total liabilities 2,250,740
821,439 Commitments Series B Convertible Redeemable Preferred stock, $0.0001 par value; none and 970,238 shares authorized, issued and outstanding at September 30, 2017 and December 31, 2016, respectively — 8,022,219 Series A Convertible Redeemable Preferred stock, $0.0001 par value; none and 638,416 shares authorized, issued and outstanding at September 30, 2017 and December 31, 2016, respectively — 4,114,221 Convertible Redeemable Preferred stock —
12,136,440
Stockholders’ equity (deficit): Preferred stock, no par value; authorized 10,000,000 shares; none issued and outstanding — — Common stock, $0.01 par value; authorized 150,000,000 shares; 6,450,766 and 2,450,000 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively 645 246 Additional paid-in capital 36,098,222 1,172,200 Accumulated deficit (21,337,591) (11,357,221)Total stockholders’ equity (deficit) 14,761,276 (10,184,775)Total liabilities, redeemable preferred stock and stockholders’ equity (deficit) $17,012,016 $2,773,104 See
none issued and outstanding
23,421,534 and 19,624,280 shares issued and outstanding at
March 31, 2023 and December 31, 2022, respectivelytoare an integral part of these unaudited condensed consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONSAND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016MARCH 31, 2023 and 2022 Three Months Ended September 30, Nine MonthsEnded September 30, 2017 2016 2017 2016 Operating expenses: Research and development $2,057,421 $1,610,822 $6,948,816 $3,510,118 General and administrative 1,302,401 274,512 2,792,424 1,054,479 Loss from operations 3,359,822 1,885,334 9,741,240 4,564,597 Other income (expense): Interest income 2,993 136 4,819 174 Interest expense (120,229) — (242,982) — Loss on disposal of asset (967) — (967) — Total other income (expense), net (118,203) 136 (239,130) 174 Net loss $(3,478,025) $(1,885,198) $(9,980,370) $(4,564,423) Net loss per share - basic and diluted $(1.09) $(0.77) $(3.69) $(1.86) Weighted average common shares outstanding - basic and diluted 3,199,796 2,450,000 2,702,678 2,450,000 See
of $718,410 and $2,999,371 in the three months ended March 31, 2023
and 2022 respectively)
of $1,142,596 and $2,372,175 in the three months ended March 31, 2023
and 2022 respectively)toare an integral part of these unaudited condensed consolidated financial statements.CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
Paid-in
Capital
Deficit
Stockholders’
Deficit
Paid-in
Capital
Deficit
Stockholders’
DeficitNINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2023 AND 20162022 Nine Months Ended September 30, 2017 2016 Cash flows from operating activities: Net loss. $(9,980,370) $(4,564,423)Adjustments to reconcile net loss to net cash used in operating activities: Non-cash interest expense 242,982 — Share-based compensation 136,617 39,031 Depreciation 2,711 2,627 Loss on disposal of asset 967 — Write-off of deferred financing costs 1,901 69,896 Changes in operating assets and liabilities Prepaid expenses (291,703) (36,902)Accounts payable 156,029 (60,803)Accrued expenses (157,890) (23,591)Net cash used in operating activities (9,888,756) (4,574,165) Cash flows from investing activities: Cash acquired in Merger, net of payment in lieu of fractional shares 1,030,123 — Purchase of property and equipment (2,523) (1,582)Net cash provided by (used in) investing activities 1,027,600 (1,582) Cash flows from financing activities: Proceeds from issuance of common stock 10,000,000 — Proceeds from issues of Preferred Series B, net — 7,994,834 Deferred financing costs (68,530) — Proceeds from convertible notes payable 5,500,000 — Net cash provided by financing activities 15,431,470 7,994,834 Net increase in cash and cash equivalents 6,570,314 3,419,087 Cash and cash equivalents, beginning of period 1,834,018 798,545 Cash and cash equivalents, end of period $8,404,332 $4,217,632 Supplemental non-cash financing transactions: Accretion of issuance costs on Series A Convertible Redeemable Preferred stock $51,943 $11,130Accretion of issuance costs on Series B Convertible Redeemable Preferred stock $127,780 — Conversion of Series A Convertible Redeemable Preferred stock to common stock $4,166,164 — Conversion of Series B Convertible Redeemable Preferred stock to common stock $8,149,995 — Conversion of convertible notes payable and accrued interest to common stock $5,674,452 — Issuance of common stock in Merger (Note 1) $6,978,916 — Seetoare an integral part of these unaudited condensed consolidated financial statements.CONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
Business
Acer Therapeutics Inc. (“Acer”, a Delaware corporation (the “Company”), is a pharmaceutical company focused on the acquisition, development, and commercialization of therapies for patients with serious rare and ultra-rarelife-threatening diseases with criticalsignificant unmet medical need. Acer’s late-stage clinical pipeline includes two candidatesneeds. The Company identifies and develops treatments where science can be applied in new ways for severe genetic disordersuse in diseases with high unmet need.
In the U.S., OLPRUVA™ (sodium phenylbutyrate) for which there are few or no FDA-approved treatments: EDSIVO™ (celiprolol)oral suspension is approved for vascular Ehlers-Danlos Syndrome (“vEDS”), and ACER-001 (a fully taste-masked, immediate release formulationthe treatment of sodium phenylbutyrate) for urea cycle disorders (“UCD”UCDs”) and Maple Syrup Urine Diseaseinvolving deficiencies of carbamylphosphate synthetase (“MSUD”CPS”), ornithine transcarbamylase (“OTC”), or argininosuccinic acid synthetase (“AS”). There are no FDA-approved drugsThe Company also has a pipeline of investigational product candidates, including EDSIVO™ (celiprolol) for vEDSthe treatment of vascular Ehlers-Danlos syndrome (“vEDS”) in patients with a confirmed type III collagen (COL3A1) mutation, and MSUDACER-801 (osanetant) for the treatment of vasomotor symptoms (“VMS”), post-traumatic stress disorder (“PTSD”), and limited options for UCD, which collectively impact more than 4,000 patientsprostate cancer, although the ACER-801 program is currently on pause while the Company conducts a thorough review of the full data set of results from its Phase 2a proof of concept clinical trial (where topline results showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in the United States. Acer’s products have clinical proof-of-concept and mechanistic differentiation, and Acerpostmenopausal women). The Company also intends to seek approvalexplore additional lifecycle opportunities for themOLPRUVA™ (sodium phenylbutyrate) in the U.S. by using the regulatory pathway established under section 505(b)(2)various disorders where proof of the Federal Food, Drug, and Cosmetic Act, or FFDCA, that allows an applicantconcept data exists, subject to rely for approval at least in part on third-party data, which is expected to expedite the preparation, submission, and approval of a marketing application.
Since its inception, Acerthe Company has devoted substantially all of its efforts to business planning, research and development, precommercial activities, recruiting management and technical staff, acquiring operating assets, and raising capital.
Liquidity
The Company had an accumulated deficit of $157.0 million and cash and cash equivalents of $6.4 million as of March 31, 2023. Net cash used in operating activities was $9.0 million and $3.0 million for periods priorthe quarters ended March 31, 2023 and 2022, respectively.
On November 9, 2018, the Company entered into a sales agreement with Roth Capital Partners, LLC, and on March 18, 2020, an amended and restated sales agreement was entered into with JonesTrading Institutional Services LLC and Roth Capital Partners, LLC. The agreement provides a facility for the offer and sale of shares of common stock from time to August 2016 includetime having an aggregate offering price of up to $50.0 million depending upon market demand, in transactions deemed to be an at-the-market (“ATM”) offering. The Company has no obligation to sell any shares of common stock pursuant to the accountsagreement and may at any time suspend sales pursuant to the agreement. Each party may terminate the agreement at any time without liability. During the three months ended March 31, 2023, the Company sold 1,462,254 shares of common stock through its ATM facility at a gross sale price of $2.8095 per share, for proceeds of $4.1 million. Proceeds, net of $0.1 million of fees and offering costs, were $4.0 million. As of March 31, 2023, $29.4 million remained available under the Company’s ATM facility, subject to various limitations. In connection with the March 2023 Offering (defined below), the Company suspended the ATM facility and entered into a related restriction (see Note 9), prohibiting the Company from entering into any agreement to issue or announcing the issuance or proposed issuance of any shares of common stock or securities convertible or exercisable into common stock, subject to certain exceptions, until April 24, 2023.
Subsequent to March 31, 2023 and after the expiration of the suspension of the ATM facility on April 24, 2023, the Company sold an aggregate of 456,886 shares of common stock under its ATM facility at an average gross sale price of $0.7912 per share, resulting in gross proceeds of $0.4 million. Proceeds, net of $14 thousand in fees and offering costs, were $0.3 million.
On April 30, 2020, the Company entered into an equity line purchase agreement and registration rights agreement pursuant to which Lincoln Park committed to purchase up to $15.0 million of the Company’s common stock. During the year ended December 31, 2022, the Company sold 772,057 shares of common stock under its purchase agreement with Lincoln Park at a
7
weighted average gross sale price of $1.42 per share, resulting in proceeds of $1.1 million. The Lincoln Park facility was completed on December 30, 2022 and is now terminated.
On January 25, 2021, the Company entered into an option agreement (the “Option Agreement”) with Relief, pursuant to which the Company granted Relief an exclusive option (the “Exclusivity Option”) to pursue a potential collaboration and license arrangement with the Company, and then on March 19, 2021, the Company entered into the Collaboration Agreement with Relief providing for the development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and MSUD. The Company received a $10.0 million cash payment from Relief (consisting of a $14.0 million “Reimbursement Payment” from Relief to the Company offset by payment of a $4.0 million Promissory Note drawn in connection with the Option Agreement, plus interest earned through the date of the Collaboration Agreement) and Relief released its security interest in all of the Company’s assets, pursuant to the Promissory Note. Additionally, under the terms of the Collaboration Agreement, the Company received an additional $20.0 million for U.S. development and commercial launch costs for the UCDs and MSUD indications (the “Development Payments”). Further, the Company retained development and commercialization rights in the U.S., Canada, Brazil, Turkey, and Japan (“Acer Territory”). The companies will split net profits from the Acer Territory 60%:40% in favor of Relief. Relief licensed the rights for the rest of the world (“Relief Territory”), where the Company will receive from Relief a 15% royalty on all net sales received in the Relief Territory. The Company could also receive a total of $6.0 million in milestone payments based on the first European marketing approvals of OLPRUVATM for a UCD and its wholly-owned subsidiaries, Acer Therapeutics Inc.,MSUD. The terms of the Collaboration Agreement and Option Agreement are further described below in the Revenue Recognition and Accounting for Collaboration Agreements section of Note 2, Significant Accounting Policies.
On March 4, 2022, the Company entered into a Delaware corporation,Credit Agreement (the “SWK Credit Agreement”) with the lenders party thereto and Anchor Therapeutics, Inc.SWK Funding LLC (“Anchor”SWK”) (collectively referred to, as the “Company”agent, sole lead arranger and sole bookrunner, which provided for a senior secured term loan facility in an aggregate amount of $6.5 million in a single borrowing (the “Original Term Loan”). All intercompany balancesThe Original Term Loan funding closed on March 14, 2022. The proceeds of the Original Term Loan were used to pay fees, costs and transactionsexpenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement (as defined and described below) and the Marathon Credit Agreement (as defined and described below) and for other working capital and general corporate purposes. On August 19, 2022, the Company entered into an amendment (the “First Amendment”) to the SWK Credit Agreement, which among other provisions revised the Company’s required minimum amount of unencumbered liquid assets under the Original Term Loan. On January 30, 2023, the Company entered into a Second Amendment (the “Second Amendment”) to the SWK Credit Agreement. In addition to other provisions, the Second Amendment provided for an additional senior secured term loan to be made to the Company in an aggregate amount of $7.0 million in a single borrowing which funded on January 31, 2023 (the “Second Term Loan”, and together with the Original Term Loan, the “SWK Loans”). On May 12, 2023, the Company entered into a Third Amendment (the “Third Amendment”) to the SWK Credit Agreement. In addition to other provisions, the Third Amendment provides for (i) a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by the Company (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million (or, if less, the outstanding principal amount of the SWK Loans) until the SWK Loans are eliminated. See Mergerrepaid), (ii) the ability for the Company to forego a $0.6 million amortization payment otherwise due on May 15, 2023, and Reverse Stock Split section below.
The Company isSWK Loans made under the SWK Credit Agreement as amended through the Third Amendment (the “Current SWK Credit Agreement”) bear interest at an annual rate of the sum of (i) 3-month SOFR, subject to a number1% floor, plus (ii) a margin of risks similar11%, with such interest payable quarterly in arrears. In the event of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. Due to topline results announced in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, the principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows the Company to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. The Company has the option to prepay the SWK Loans in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other companiesfees paid to SWK under the Current SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so
8
that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the Current SWK Credit Agreement with respect to the Second Term Loan) equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, the Company is required to maintain for purposes of the SWK Loans unencumbered liquid assets of not less than the lesser of (x) the outstanding principal amount of the SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the announcement of such topline results), although the Third Amendment provides for a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by the Company under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million).
The SWK Loans are secured by a first priority lien on all assets of the Company and any of its industry including rapid technological change, uncertaintyfuture subsidiaries pursuant to a Guarantee and Collateral Agreement entered into on March 4, 2022, between the Company and SWK, as agent (the “SWK Security Agreement”). The Current SWK Credit Agreement contains customary representations and warranties and affirmative and negative covenants. The Company paid to SWK $0.1 million in origination fees on the date on which the Original Term Loan was funded.
In connection with the execution of market acceptancethe SWK Credit Agreement, the Company issued a warrant (the “First SWK Warrant”) to purchase 150,000 shares of products, competition from larger companiesthe Company’s common stock at an exercise price of $2.46 per share. In connection with substitute products, availabilitythe execution of future financingthe First Amendment, the Company issued to SWK an additional warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.51 per share (such warrant, the "Second SWK Warrant"). In connection with the execution of the Second Amendment, the Company issued to SWK an additional warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $2.39 per share (such warrant, the “Third SWK Warrant” and, dependence on key personnel.
On March 4, 2022, the Company also entered into a Marathon Convertible Note Purchase Agreement and Plan of Merger and Reorganization, dated as of June 30, 2017, by and among the Registrant, Opexa Merger Sub, Inc.with MAM Aardvark, LLC (“Merger Sub”Marathon”) and Private AcerMarathon Healthcare Finance Fund, L.P. (“Marathon Fund” and together with “Marathon” each a “Holder” and collectively the “Holders”) (the “Merger“Marathon Convertible Note Purchase Agreement”), pursuant to which Merger Sub merged withthe Company issued and into Private Acer, with Private Acer surviving as a wholly-owned subsidiarysold to the Holders secured convertible notes (the “Marathon Convertible Notes”) in an aggregate amount of up to $6.0 million (the “Convertible Note Financing”). The Convertible Note Financing closed on March 14, 2022. The proceeds of the RegistrantConvertible Note Financing were used to pay fees, costs and expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement and the Marathon Credit Agreement and for other working capital and general corporate purposes. On January 30, 2023, the Company entered into an Amendment Agreement (the “Merger”“Marathon Amendment Agreement”). This transaction was approved with Marathon and Marathon Fund with respect to the Marathon Convertible Notes.
The Marathon Convertible Notes bear interest at an annual rate of 6.5%, with such interest payable quarterly; provided, however, that each of the Holders have agreed to defer payment by the Registrant’s shareholdersCompany of accrued and unpaid interest on their respective Marathon Convertible Note existing on the date of the Marathon Amendment Agreement through March 31, 2023, with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred after March 31, 2023, to be due and payable in cash by the Company on April 15, 2023. Subject to the restrictions set forth in a subordination agreement among each of the Holders and SWK, as agent and lender, the Company is required to repurchase each Marathon Convertible Note, on or before the fifth (5th) business day (but with five (5) business days’ notice) following the earlier of June 15, 2023 or the Company’s receipt of gross proceeds of at least $40.0 million from the issuance or sale of equity, debt and/or hybrid securities, loans or other financing on a cumulative basis since January 1, 2023 (excluding the Second Term Loan), at a special meetingprice equal to 200% (the “Buy-Out Percentage”) of its shareholders on September 19, 2017 (the “Special Meeting”). Also on September 19, 2017, in connection with, and priorthe outstanding principal amount of such Marathon Convertible Note, plus any accrued but unpaid interest thereon to the completiondate of such repurchase, plus 2500 basis points for each 90-day period after April 15, 2023, pro-rated for the actual number of days elapsed in the 90-day period before repurchase actually occurs (for example, if the repurchase occurs on May 30, 2023, the Buy-Out Percentage shall be increased to 212.5%); provided, that if the Company is prohibited from effectuating such repurchases pursuant to a subordination agreement with SWK, the Company shall cause the repurchase to occur on or before the fifth (5th) business day following the earlier of such prohibition being no longer applicable or the payment in full of all senior indebtedness described in such subordination agreement, but with five (5) business days’ notice. Each of the Merger,Holders also has the Registrant effected a 1-for-10.355527 reverse stock split of its then outstanding common stock (the “Reverse Split”) and immediately following the Merger, the Registrant changed its nameright to “Acer Therapeutics Inc.”, pursuant to amendments to its certificate of formation filed with the Texas Secretary of State on September 19, 2017. All share numbers in this report have been adjusted to reflect the Reverse Split.
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Each Holder has certain rights with respect to the Reverse Split andregistration by the conversion of Private Acer’s Series A and Series B preferred stock and convertible debt) in exchangeCompany for each share of Private Acer common stock outstanding immediately prior to the Merger. The exchange rate was determined through arm’s length negotiations between the Registrant and Private Acer. The Registrant also assumed all issued and outstanding stock options under the Acer Therapeutics Inc. 2013 Stock Incentive Plan, with such stock options henceforth representing the right to purchase a number of shares of the Registrant’s common stock equal to the number of shares of Private Acer’s common stock previously represented by such stock options.
Pursuant to the former stockholdersMarathon Convertible Note Purchase Agreement, the Marathon Convertible Notes are secured by a lien on collateral representing substantially all assets of Private Acer was registeredthe Company, although such security interest is subordinated to the Company’s obligations under the Current SWK Credit Agreement.
On March 4, 2022, the Company also entered into a Credit Agreement (the “Marathon Credit Agreement”) with the U.S. Securitieslenders party thereto and Exchange CommissionMarathon, as the agent, sole lead arranger and sole bookrunner, which provided for a senior secured term loan facility in an aggregate amount of up to $42.5 million in a single borrowing (the “SEC”“Term Loan”). The Term Loan was available to be borrowed only following full FDA approval for marketing of OLPRUVATM and until December 31, 2022. The Company received approval for its NDA for OLPRUVATM on a Registration Statement on Form S-4 (Reg. No. 333-219358) (the “Registration Statement”). Immediately priorDecember 22, 2022, and the Company and Marathon agreed to an Extension Agreement with respect to the Merger, Private Acer issuedTerm Loan on December 30, 2022, which extended the commitment date for funding the Term Loan to January 16, 2023.
The Company elected to terminate the Marathon Credit Agreement by entering into a Termination Agreement on January 30, 2023, which terminated the Credit Agreement and sold an aggregate of approximately $15.7 million (inclusivethe associated Royalty Agreement. See Note 6, Debt for further discussion of the conversionstatus of approximately $5.7 million of principalthe Marathon Convertible Notes, and accrued interest on outstanding convertible promissory notes issued by Private Acer) of shares of Private Acer’sthe Marathon Credit Agreement.
The Nasdaq Capital Market’s continued listing standards for the Company’s common stock (the “Concurrent Financing”require, among other things, that the Company maintain either (i) stockholders’ equity of $2.5 million, (ii) market value of listed securities ("MVLS") of $35 million or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. On May 3, 2023, the Company received a letter from the listing qualifications department staff of Nasdaq indicating that for the last 30 consecutive business days, the Company’s minimum MVLS was below the minimum of $35 million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq listing rule 5550(b)(2). In accordance with Nasdaq listing rules, the Company has 180 calendar days, or until October 30, 2023, to regain compliance. In addition, pursuant to Nasdaq Listing Rules, the Company is required to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq. Following the announcement of topline results in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, the Company’s stock has traded below the required minimum bid price for continued listing on Nasdaq. There can be no assurance that the Company will be able to maintain compliance with Nasdaq listing standards. The Company’s failure to meet or to continue to meet these requirements could result in the Company’s common stock being delisted from the Nasdaq Capital Market. If the Company’s common stock were delisted from the Nasdaq Capital Market, among other things, this could result in a number of negative implications, including reduced market price and liquidity of the Company’s common stock as a result of the loss of market efficiencies associated with the Nasdaq, the loss of federal preemption of state securities laws, as well as the potential loss of confidence by suppliers, partners, employees and institutional investor interest, fewer business development opportunities, greater difficulty in obtaining financing and breaches of or events of default under certain contractual obligations (including an event of default under the loan agreement for the Marathon Convertible Notes).
Management expects to continue to finance operations through the issuance of additional equity or debt securities, non-dilutive funding, and/or through strategic collaborations. Any transactions which occur may contain covenants that restrict the ability of management to operate the business and any securities issued may have rights, preferences, or privileges senior to the Company’s common stock and may dilute the ownership of current stockholders of Private Acerthe Company. The Company believes that its existing cash and certain new investorscash equivalents at a perMarch 31, 2023, together with the net proceeds from its ATM facility subsequent to March 31, 2023 totaling $0.3 million from the sale of 456,886 shares at an average net share price of $9.47.$0.7635 million, will be sufficient to fund its anticipated operating and capital requirements into late in the second quarter of 2023.
Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States requireU.S. (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has suffered recurring losses from operations, negative cash flows from operations, has a net working capital deficiency, has a net capital deficiency, and has minimum unencumbered liquid assets requirements under its Current SWK Credit Agreement. While the Company has received approval for its OLPRUVATM product, it has yet to launch the product and establish a source of commercial product revenues and,
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as such, has been dependent on funding operations through the sale of equity securities, through a collaboration agreement, and through debt instruments. Since inception, the Company has experienced significant losses and incurred negative cash flows from operations. The Company has spent, and expects to continue to spend, a substantial amount of funds in connection with implementing its business strategy, including its planned product development efforts and potential precommercial activities.
As of March 31, 2023, the Company had cash and cash equivalents of $6.4 million and current liabilities of $38.0 million, which include $2.9 million associated with deferred collaboration funding (see Revenue Recognition and Accounting for Collaboration Agreements below in Note 2, Significant Accounting Policies). The Company believes that a company whose security holders retainits existing cash and cash equivalents at March 31, 2023, together with the majority voting interestnet proceeds from its ATM facility subsequent to March 31, 2023 totaling $0.3 million from the sale of 456,886 shares at an average net per share price of $0.7635, will be sufficient to fund its anticipated operating and capital requirements into late in the combinedsecond quarter of 2023.
The Company will need to raise additional capital to fund continued operations beyond late in the second quarter of 2023. The Company may not be successful in its efforts to raise additional funds or achieve profitable operations. The Company continues to explore potential opportunities and alternatives to obtain the additional resources that will be necessary to support its ongoing operations beyond late in the second quarter of 2023, including raising additional capital through either private or public equity or debt financing, or additional program collaborations or non-dilutive funding, as well as using its ATM facility which had $29.4 million available as of March 31, 2023. Due to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period, the Company is only able to issue a limited number of shares under its ATM facility. From May 19, 2020 through March 31, 2023, the Company has raised gross proceeds of $20.6 million from the ATM facility and gross proceeds of $4.0 million from the agreement with Lincoln Park, which equity line facility was completed on December 30, 2022 and is now terminated.
If the Company is unable to obtain additional funding to support its current or proposed activities and operations, it may not be able to continue its operations as currently anticipated, which may require it to suspend or terminate any ongoing development activities, modify its business be treated asplan, curtail various aspects of its operations, cease operations, or seek relief under applicable bankruptcy laws. In such event, the acquirer for financial reporting purposes. Accordingly,Company’s stockholders may lose a substantial portion or even all of their investment.
These factors individually and collectively raise substantial doubt about the Merger was accounted forCompany’s ability to continue as a reverse acquisition whereby Private Acer was treated asgoing concern for at least 12 months from the acquirer for accounting anddate these financial reporting purposes. As such, references tostatements are available, or May 15, 2024. The accompanying financial statements do not include any adjustments or classifications that may result from the results of operations for the nine months ended September 30, 2017 include the historical results of Private Acer from January 1, 2017 through September 18, 2017 and include the consolidated resultspossible inability of the combined company from September 19, 2017 through September 30, 2017.
Basis of business on Wednesday, September 20, 2017 on The NASDAQ Capital Market under the ticker symbol “OPXA.” Commencing with the open of trading on Thursday, September 21, 2017, the post-split shares began trading on The NASDAQ Capital Market under the ticker symbol “ACER.” On September 21, 2017, the Registrant’s Series M Warrants, previously trading through the close of business on Wednesday, September 20, 2017 under the ticker symbol “OPXAW,” commenced trading on The NASDAQ Capital Market, under the ticker symbol “ACERW.” The Registrant’s common stock and Series M Warrants have new CUSIP numbers of 00444P 108 and 00444P 116, respectively.
The accompanying condensed consolidated financial statements include the activities of Private Acer as of and for the respective periods presented.
Any reference in these notes to applicable guidance is meant to refer to the realization of assets and the satisfaction of liabilitiesauthoritative GAAP as found in the normal course of business. The Company has experienced recurring losses since inception. The Company has relied on raising capital to finance its operations.
The Company’s significant accounting policies followed byare described in Note 2, “Significant Accounting Policies,” in its Annual Report on Form 10-K for the Company in the preparation of the accompanying condensed consolidated financial statements follows:
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Use of Estimates
The Company’s accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. EstimatesFrom time to time, estimates having relatively higher significance include the accountingdetermination of stand-alone selling price and variable consideration estimates for acquisitions,purposes of measuring collaboration funding, revenue recognition, deferred collaboration funding, stock-based compensation, inputs to fair value for debt, contract manufacturing and clinical trial accruals, and income taxes. Actual results could differ from those estimates and changes in estimates may occur.
Revenue Recognition and Diluted Net Loss per Common Share
The Company’s revenue and diluted net loss per commoncollaboration funding are generated from a single collaboration agreement which included the sale of a license of intellectual property. The Company analyzes its collaboration agreements to assess whether they are within the scope of ASC Topic 808, Collaborative Arrangements, (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. To the extent the arrangement is within the scope of ASC 808, the Company assesses whether aspects of the arrangement between the Company and the collaboration partner are within the scope of other accounting literature. If the Company concludes that some or all aspects of the arrangement represent a transaction with a customer, the Company accounts for those aspects of the arrangement within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). If the Company concludes that some or all aspects of the arrangement are within the scope of ASC 808 and do not represent a transaction with a customer, the Company recognizes the Company’s share of the allocation of the shared costs incurred with respect to the jointly conducted activities as a component of the related expense in the period incurred. Pursuant to ASC 606, a customer is computeda party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. If the Company concludes a counter-party to a transaction is not a customer or otherwise not within the scope of ASC 606 or ASC 808, the Company considers the guidance in other accounting literature as applicable or by dividing net lossanalogy to account for such transaction.
The Company determines the units of account within the collaborative arrangement utilizing the guidance in ASC 606 to determine which promised goods or services are distinct. In order for a promised good or service to be considered “distinct” under ASC 606, the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
For any units of account that fall within the scope of ASC 606, where the other party is a customer, the Company evaluates the separate performance obligation(s) under each periodcontract, determines the transaction price, allocates the transaction price to each performance obligation considering the estimated stand-alone selling prices of the services and recognizes revenue upon the satisfaction of such obligations at a point in time or over time dependent on the satisfaction of one of the following criteria: (1) the customer simultaneously receives and consumes the economic benefits provided by the weighted average number of shares of common stock outstanding during such period. Forvendor’s performance; (2) the periods presented, common stock equivalents, consisting of options, convertible redeemable preferred stock, warrantsvendor creates or enhances an asset controlled by the customer; and convertible notes payable, were(3) the vendor’s performance does not create an asset for which the vendor has an alternative use and the vendor has an enforceable right to payment for performance completed to date.
Variable consideration is included in the calculationtransaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property is recognized only when (or as) the later of the diluted loss per share because they were anti-dilutive.
On January 25, 2021, the Company entered into the Option Agreement with Relief pursuant to which the Company granted Relief the Exclusivity Option to pursue a potential collaboration and license arrangement with the Company, and then on March 19, 2021, the Company entered into the Collaboration Agreement with Relief providing for share-basedthe development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and MSUD. The Company received a $10.0 million cash payment transactions,from Relief (consisting of a $14.0 million “Reimbursement Payment” from Relief
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to the Company, offset by repayment of a $4.0 million Promissory Note drawn in connection with the Option Agreement, plus interest earned through the date of the Collaboration Agreement), and Relief released its security interest in all of the Company’s assets pursuant to the Promissory Note. Under the terms of the Collaboration Agreement, Relief committed to pay the Company up to an additional $20.0 million for U.S. development and commercial launch costs for the UCDs and MSUD indications. During the year ended December 31, 2021, the Company received from Relief the $10.0 million First Development Payment and the additional $10.0 million Second Development Payment conditioned upon the FDA’s acceptance of an NDA for OLPRUVATM in a UCD for filing and review, which acceptance was received on October 4, 2021. On October 6, 2021, the Company entered into a Waiver and Agreement with Relief to amend the timing for the Second Development Payment. The Company received the Second Development Payment in two $5.0 million tranches on each of October 12, 2021 and January 14, 2022. Further, the Company retained development and commercialization rights in the U.S., Canada, Brazil, Turkey and Japan (“Acer Territory”). The companies will split net profits from the Acer Territory 60%:40% in favor of Relief. Relief licensed the rights for the rest of the world (“Relief Territory”), where the Company will receive from Relief a 15% royalty on all net sales received in the Relief Territory. The Company could also receive a total of $6.0 million in milestone payments based on the first European (EU) marketing approvals for a UCD and MSUD.
The Company assessed these agreements in accordance with the authoritative literature and concluded that they meet the definition of a collaborative arrangement per ASC 808. For certain parts of the Collaboration Agreement, the Company concluded that Relief represented a customer while, for other parts of the Collaboration Agreement, Relief did not represent a customer. The units of account of the Collaboration Agreement where Relief does not represent a customer are outside of the scope of ASC 606. The Company also determined that the development and commercialization services and Relief’s right to 60% profit in the Acer Territory is within the scope of ASC Topic 730, Research and Development(“ASC 730”), with regard to funded research and development arrangements.
The Company concluded the promised goods and services contained in the Collaboration Agreement, represented two distinct units of account consisting of a license in the Relief Territory, and a combined promise for the development and commercialization of OLPRUVATM in the Acer Territory and the payment of 60% net profit from that territory (together, the “Services”). The stand-alone selling price was estimated for each distinct unit of account utilizing an estimate of discounted cashflows associated with each.
The Company determined that the transaction price at the outset of the Collaboration Agreement was $25.0 million, including the income tax consequences, classificationOption Fee of awards as either equity or liabilities$1.0 million, the Reimbursement Payment of $14.0 million, and classificationthe First Development Payment of cash flows.$10.0 million. The Company adopted ASU No. 2016-09concluded that consistent with the evaluation of variable consideration, using the most likely amount approach, the Second Development Payment as well as the milestone payments for EU marketing approvals, should be fully constrained until the contingency associated with each payment has been resolved and the Company’s NDA is accepted for review by the FDA, and Relief receives EU marketing approval, respectively. The contingency associated with the Second Development Payment was resolved in the fourth quarter of January 1, 2017. Under2021.
Since ASC 808 does not provide recognition and measurement guidance for collaborative arrangements, the new standard, all excess tax benefitsCompany applied the principles of ASC 606 for those units of account where Relief is a customer and tax deficiencies areASC 730-20 for the funded research and development activities. The license revenue was recognized at the point where the Company determined control was transferred to the customer. The combined unit of account for the Services associated with the allocation of the initial transaction price will be recognized over the service period through the anticipated date of first commercial sale of the OLPRUVATM approved product in the U.S. The Company also determined that the Services associated with the allocation of the initial transaction price would be satisfied over time as measured using actual costs as incurred by the Company toward the identified development and commercialization services agreed to between the parties up to the point of first commercial sale of the OLPRUVATM product. Research and development expenses and general and administrative expenses, as they relate to activities governed by the Collaboration Agreement, incurred in satisfying the Services unit-of-account will be recognized as income tax expensecontra-expense within their respective categories, consistent with the presentation guidance in ASC Topic 730. Any amounts recorded as deferred collaboration funding liability which are not recognized as contra-expense at the date of first commercial sale will be classified as contra-royalty and recognized against amounts of net-profit royalty payments recognized by the Company over the term of the agreement between the parties, estimated to be approximately thirteen years beginning in 2023.
The Company recognizes a receivable under the Collaboration Agreement when the consideration to be received is deemed unconditional, or benefit inwhen only the statementpassage of operations.time is required before payment of that consideration is due. Amounts receivable under the Collaboration Agreement plus payments received from Relief, net of the amounts recorded as license revenue and as offsets to research and development expenses and to general and administrative expenses, are reported as deferred collaboration funding.
At March 31, 2023, the amount of deferred collaboration funding associated with unsatisfied promises under the Collaboration Agreement amounted to $6.6 million. The tax effectsCompany has recorded $2.9 million as a current liability, which equates to
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the Company’s estimate of exercised or vested awards are treated asdiscrete items inremaining spending under the reporting period inCollaboration Agreement and which the Company estimates will be recognized within the next 12 months up to the point of the first commercial sale of OLPRUVATM. The remaining balance of $3.7 million is recorded as a non-current liability and represents the estimated amount that would be taken against future net profit payments made to Relief should they occur. The Company applied the modified retrospective adoption approach upon adoption of the standard, and prior periods have not been adjusted. The Company electedexpects to recognize forfeitures relatedthis deferred collaboration funding as it incurs expenses associated with performing the Services up to employee share-based payments as they occur. There was no material impact on the Company’s financial statements as a resultdate of first commercial sale in the adoptionAcer Territory and through the end of this guidance.
Cash and Cash Equivalents
The Company considers all highly liquid investments with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance and illustrations in ASU 2014-09; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies identifying performance obligations and licensing implementation guidance and illustrations in ASU 2014-09; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses implementation issues and is intended to reduce the cost and complexityoriginal maturities of applying the new revenue standard in ASU 2014-09; and ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update), which codifies recent announcements by the SEC staff,three months or collectively, the Revenue ASUs.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the modified retrospective method. The Company has allocated internal resources toCompany’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the implementationasset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions about the inputs that market participants would use in pricing the asset or liability and isare developed based on the best information available in the processcircumstances.
Financial instruments consist of determining the impact of the Revenue ASUs on itscash equivalents, collaboration receivable, accounts payable, accrued expenses, and debt instruments. These financial statements; however, the adoption of the Revenue ASUs may have a material impact on revenue recognition, its notes to consolidated financial statements and its internal controls over financial reporting. Currently, the Company does not have sources of revenue but future arrangements may be impacted by the adoption of the Revenue ASUs noted above.
The Company elected the fair value option for both its Original Term Loan and its Marathon Convertible Notes dated March 14, 2022. The Company also elected the fair value option for the Second Term Loan (see Note 7). The Company adjusts both the Original Term Loan and the Marathon Convertible Notes to fair value through the change in fair value of debt in the accompanying statements of operations. Subsequent unrealized gains and losses on items for which the fair value option is elected are reported in the accompanying statements of operations.
Clinical Trial and Preclinical Study Expenses
No material changes in estimates of clinical trial or preclinical study expenses were recognized in either of the accounting acquiree (the Registrant). Further, underthree months ended March 31, 2023 and 2022. Accounts payable and accrued expenses include costs associated with preclinical or clinical studies of $0.8 million and $0.9 million at March 31, 2023 and December 31, 2022, respectively.
Stock-Based Compensation
The Company records stock-based payments at fair value. The measurement date for compensation expense related to awards is generally the purchase method,date of the purchase price is allocated to the assets acquired, liabilities assumed, and identifiable intangible assets based on their estimated fair values, with the remaining excess purchase price over net assets acquired allocated to goodwill.
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The following assumptions were used to estimate the fair value of stock options granted during the three months ended March 31, 2023 and 2022 using the Black-Scholes option pricing model:
| 2023 |
| 2022 | ||
Risk-free interest rate | 4.00% |
| 1.18% |
|
|
Expected life (years) | 6.25 |
| 6.25 | ||
Expected volatility | 113.0% |
| 115.0% | ||
Dividend rate | 0% |
| 0% |
|
Due to its limited operating history and a limited trading history of its common stock in relation to the life of its standard option grants, the Company estimates the volatility of its stock in consideration of a number of factors including the Company’s available stock price history and the stock price volatility of comparable public companies. The expected term of a stock option granted to employees and directors (including non-employee directors) is based on the average of the contractual term (generally ten years) and the vesting period. The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. The Company recognizes forfeitures related to employee stock-based awards as they occur. The risk-free rate for periods within the expected life of the option is based upon the U.S. Treasury yield curve in effect at the time of grant. Option awards are granted at an exercise price equal to the closing market price of the Company’s common stock on the acquisition date. The estimated fair value of Private Acer’s common stock was basedNasdaq Capital Market on the offering price of the common stock sold in the private placement which was both completed concurrently with and conditioned upon the closing of the Merger. This price was determined to be the best indication of fair value on that date since the price was based on an arm’s length negotiation with a group consisting of both new and existing investors of Private Acer that had been advised of the pending Merger and assumed similar liquidity risk as those investors holding the majority of shares being valued as purchase consideration.
Inventory
The Company determinedvalues its inventories at the lower-of-cost or net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. The Company classifies its inventory costs as long term, in other assets in its balance sheets, when it expects to utilize the inventory beyond their normal operating cycle.
Prior to the regulatory approval of a product candidate, the Company incurs expenses for the manufacture of material that could potentially be available to support the acquired legacy technologycommercial launch of its products upon approval. Until the first reporting period when regulatory approval has been received or is otherwise considered probable and the future economic benefit is expected to be realized, the Company records all such costs as research and development expense. Inventory used in clinical trials is also expensed as research and development expense, when selected for such use. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in a clinical manufacturing campaign.
The Company performs an assessment of the Registrant had norecoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventory to its net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of product sales in the datestatements of operations and comprehensive loss. The determination of whether inventory costs will be realizable requires the acquisition.use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required. Additionally, the Company’s product is subject to strict quality control and monitoring that it performs throughout the manufacturing process. In the event that certain batches or units of product do not meet quality specifications, the Company will record a charge to cost of product sales, to write-down any unmarketable inventory to its estimated net realizable value.
The components of inventory are summarized as follows:
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||
Raw materials |
| $ | — |
|
| $ | — |
|
Work in process |
|
| 412,038 |
|
|
| — |
|
Finished goods |
|
| — |
|
|
| — |
|
Total inventory |
| $ | 412,038 |
|
| $ | — |
|
Goodwill
Goodwill represents the excess of the purchase price (consideration paid plus net liabilities assumed) of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill includesThe Company’s goodwill is allocated to the value of the Registrant’s standing as a public entity. None of the goodwill associated with the Merger is deductible for income tax purposes.
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whether goodwill is impaired. If the Company were to determine based on a qualitative assessment that it was more likely than not that the fair value of the reporting unit was less than its carrying value, a quantitative impairment test would then be performed. The quantitative impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit is less than its carrying amount, a goodwill impairment would be recognized for the difference. The Company performed a qualitative analysis of goodwill as of June 21, 2022 as it considered the Complete Response Letter received from the FDA in June 2022 with respect to the Company’s NDA in respect of OLPRUVATM (sodium phenylbutyrate) for oral suspension for the treatment of patients with UCDs to be a triggering event requiring it to perform that analysis. Management concluded that it was more likely than not that the fair value of the reporting unit was greater than its carrying amount. As of March 31, 2023 and December 31, 2022, the Company's liabilities were in excess of its assets, including goodwill. ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test and accordingly the Company was not required to perform an evaluation.
Foreign Currency Transaction Gain/(Loss)
Gains and losses arising from transactions and revaluation of balances denominated in currencies other than U.S. dollars are recorded in foreign currency transaction gain/(loss) on the statements of operations.
Income Taxes
The Company recorded no income tax expense or benefit during the three months ended March 31, 2023 and 2022, due to a full valuation allowance recognized against its net deferred tax assets.The Company is primarily subject to U.S. federal and Massachusetts state income taxes. The Company’s tax returns for years 2015 through present are open to tax examinations by U.S. federal and state tax authorities; however, carryforward attributes that were generated prior to January 1, 2015 remain subject to adjustment upon examination if they either have been utilized or will be utilized in a future period. For federal and state income taxes, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and the tax basis of assets and liabilities. Deferred income taxes are based upon prescribed rates and enacted laws applicable to periods in which differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, the Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are realizable. Utilization of net operating losses may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, and similar state provisions. The annual limitations may result in the expiration of net operating losses before utilization.
The tax positions taken or expected to be taken in the course of preparing the Company’s tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. There were no uncertain tax positions that require accrual or disclosure in the financial statements as of March 31, 2023 and 2022. The Company’s policy is to recognize interest and penalties related to income tax, if any, in income tax expense. As of March 31, 2023 and 2022, the Company had no accruals for interest or penalties related to income tax matters.
Basic and Diluted Net Loss per Common Share
Basic and diluted net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, in those instances where it would be dilutive, the weighted average number of potential shares of common stock including the assumed exercise of stock options and warrants, the impact of unvested restricted stock, and the potential shares assuming conversion of convertible debt. Basic and diluted shares outstanding are the same for each period presented when all common stock equivalents, including potential shares from convertible debt and warrants, would be antidilutive due to the net losses incurred, except in certain instances as noted below. In certain circumstances the Company includes in both the calculation of basic and diluted net loss per share, the weighted average number of shares associated with a pre-funded warrant because the exercise of such a warrant is virtually assured since the exercise price is nonsubstantive.
The two-class method is an earnings allocation formula that treats a participating security, such as a warrant, as having rights to earnings that otherwise would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company has been in a net loss position and while our warrants are considered a participating security, the terms of the warrant agreement does not obligate them to participate in losses. Diluted net income per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted method or treasury stock method, as
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applicable, to the potentially dilutive instruments. A contract that may be settled in shares and is reported as an asset or liability for accounting purposes may notrequire an adjustment to the numerator for any changes in income or loss that would result if the contract had been reported as an equity instrument for accounting purposes during the period, and doing so is dilutive to the net loss per share calculation (including as a result of the inclusion of underlying shares in the net loss per share calculation).
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13. Financial Instruments-Credit Losses (Topic 326), which requires a financial asset to be recoverable.
Three Months Ended | Nine Months Ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Net loss | $(3,478,025) | $(1,885,198) | $(9,980,370) | $(4,564,423) |
| Net loss per share - basic and diluted | $(1.09) | $(0.77) | $(3.69) | $(1.86) |
Property and equipment consisted of the following at September 30, 2017March 31, 2023 and December 31, 2016:2022:
|
| March 31, |
|
| December 31, 2022 |
| ||
Computer hardware and software |
| $ | 145,936 |
|
| $ | 142,870 |
|
Leasehold improvements |
|
| 52,887 |
|
|
| 52,887 |
|
Furniture and fixtures |
|
| 111,603 |
|
|
| 111,603 |
|
Manufacturing equipment |
|
| 135,330 |
|
|
| 135,330 |
|
Subtotal property and equipment, gross |
|
| 445,756 |
|
|
| 442,690 |
|
Less accumulated depreciation |
|
| (243,659 | ) |
|
| (228,112 | ) |
Property and equipment, net |
| $ | 202,097 |
|
| $ | 214,578 |
|
September 30, 2017 | December 31, 2016 | |
| Computer hardware and software | $10,706 | $10,862 |
| Less accumulated depreciation | (5,645) | (4,645) |
$5,062 | $6,217 |
Accrued expenses consisted of the following at September 30, 2017March 31, 2023 and December 31, 2016:2022:
|
| March 31, |
|
| December 31, 2022 |
| ||
Accrued employee bonus and vacation |
| $ | 2,600,113 |
|
| $ | 2,624,910 |
|
Accrued interest |
|
| 409,233 |
|
|
| 313,068 |
|
Accrued contract manufacturing |
|
| 276,954 |
|
|
| 42,679 |
|
Accrued accounting, audit, and tax fees |
|
| 218,946 |
|
|
| 82,779 |
|
Accrued precommercial costs |
|
| 215,007 |
|
|
| 203,016 |
|
Accrued legal fees |
|
| 180,922 |
|
|
| 172,945 |
|
Accrued consulting |
|
| 156,188 |
|
|
| 3,000 |
|
Accrued contract research and regulatory consulting |
|
| 133,735 |
|
|
| 68,432 |
|
Accrued license fees |
|
| 82,053 |
|
|
| 80,526 |
|
Accrued miscellaneous expenses |
|
| 43,154 |
|
|
| 66,039 |
|
Total accrued expenses |
| $ | 4,316,305 |
|
| $ | 3,657,394 |
|
September 30, 2017 | December 31, 2016 | |
| Accrued legal | $248,710 | $21,477 |
| Accrued pre-commercial costs | 317,567 | — |
Accrued consulting | 94,169 | 13,105 |
| Accrued audit and tax | 92,437 | 39,820 |
| Accrued license fees | 893,949 | 205,444 |
| Accrued contract manufacturing | — | 126,700 |
| Accrued contract research | 35,657 | 16,800 |
| Accrued miscellaneous expenses | 28,811 | 14,682 |
$1,711,300 | $438,028 |
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The Company leases office space in Newton, Massachusetts and Bend, Oregon. The Newton lease was classified as an operating lease until it expired on December 31, 2022, and the Company is currently renting space on month-to-month basis for this facility. The Bend lease is classified as an operating lease and contains immaterial provisions for rent holidays and rent escalations over the term of the leases, which have been included in the Company’s right of use asset and lease liabilities. The Company’s lease liability as of March 31, 2023 and December 31, 2022 represents the net present value of future lease payments utilizing discount rates of 8% to 10%, which correspond to the Company’s incremental borrowing rates as of the effective dates of the Bend, Oregon lease and a lease modification. As of March 31, 2023, the weighted average remaining lease term was 2.3 years. The Company recorded expense of $44 thousand and $0.1 million related to the leases for the three months ended March 31, 2023 and 2022, respectively. The Company made cash payments for amounts included in the measurement of lease liabilities of $31 thousand and $0.1 million during the three months ended March 31, 2023 and 2022, respectively. The Company reported a right-of-use asset of $0.2 million in Other non-current assets and lease liabilities totaling $0.2 million in Other current liabilities and Other non-current liabilities as of March 31, 2023.
The following table reconciles the undiscounted lease liabilities to the total lease liabilities recognized on the unaudited condensed balance sheet as of March 31, 2023:
|
|
|
|
|
| ||
| As of March 31, 2023 |
|
| As of December 31, 2022 |
| ||
2023 |
| 78,467 |
|
|
| 103,925 |
|
2024 |
| 107,290 |
|
|
| 107,290 |
|
2025 |
| 54,579 |
|
|
| 54,579 |
|
Total undiscounted lease liabilities |
| 240,336 |
|
|
| 265,794 |
|
Less effects of discounting |
| (12,004 | ) |
|
| (16,204 | ) |
Total lease liabilities as of March 31, 2023 | $ | 228,332 |
|
| $ | 249,590 |
|
The Company’s lease liabilities are reported on the unaudited condensed balance sheets as follows:
| March 31, 2023 |
|
| December 31, 2022 |
| ||
Other current liabilities | $ | 104,823 |
|
| $ | 103,925 |
|
Other non-current liabilities |
| 123,509 |
|
|
| 145,665 |
|
Total lease liabilities | $ | 228,332 |
|
| $ | 249,590 |
|
SWK Credit Agreement
On March 22, 2017, Private Acer issued4, 2022, the Company entered into the SWK Credit Agreement with the lenders party thereto and SWK, as the agent, sole lead arranger and sole bookrunner, which provides for a senior secured convertible notes payableterm loan facility in an aggregate amount of $6.5 million in a single borrowing (the “2017 Notes”“Original Term Loan”). The Original Term Loan closed on March 14, 2022, after consummation of the Convertible Note Financing (as defined and described below) as well as the satisfaction of other closing conditions as set forth in the SWK Credit Agreement. The proceeds of the Original Term Loan are being used to pay fees, costs and expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement (as defined and described below) and the Marathon Credit Agreement (as defined and described below) and for other working capital and general corporate purposes. On August 19, 2022, the Company entered into an amendment (the “First Amendment”) to existing investorsthe SWK Credit Agreement, which extended the date through which the Company has the option to capitalize interest on the SWK Credit Agreement and which revised the Company’s minimum cash requirement under the Original Term Loan.
The Original Term Loan bore interest at an annual rate of the sum of (i) 3-month LIBOR (or such other rate as may be agreed by the Company and SWK following the date on which 3-month LIBOR is no longer available), subject to a vendor1% floor, plus (ii) a margin of 11%, with such interest payable quarterly in arrears. In the aggregateevent of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. For the period ended March 31, 2023, the current interest rate applicable to the Original Term Loan is 15.9%. The Company had the option to capitalize such interest commencing on the date on which the Original Term Loan was funded and continuing until February 15, 2023. Commencing on February 15, 2023, the principal amount of $3,125,000. the Original Term Loan will amortize at a rate of $0.7 million payable quarterly. The 2017 Notes accruedfinal maturity date of the Original Term Loan is March 4, 2024. The
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Company is required to pay $2.1 million of principal payments in 2023, with the remainder payable in 2024. The Company has the option to prepay the Original Term Loan in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest at 10% per annum and maturedorigination and other fees paid to SWK under the SWK Credit Agreement on or prior to the earlier of (i) March 22, 2018 (the “Maturity Date”) or (ii) upon a Change in Control of Private Acer, as defined therein.
The Original Term Loan is secured by a first priority lien on all assets of the Company and any of its future subsidiaries pursuant to the SWK Security Agreement. The SWK Credit Agreement contains customary representations and warranties and affirmative and negative covenants. The Company paid to SWK $0.1 million in origination fees on the date on which the Original Term Loan was funded. The Original Term Loan contains certain provisions which could accelerate the maturity date of the outstanding loan should the Company be out of compliance with any of the stated covenants. At March 31, 2023, the Company did not deem probable any events that would give rise to such an acceleration.
In connection with the execution of the SWK Credit Agreement, the Company issued a warrant (the “First SWK Warrant”) to purchase 150,000 shares of the Company’s common stock uponat an exercise price of $2.46 per share. In connection with the execution of the First Amendment, the Company issued to SWK an additional warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.51 per share (such warrant, the "SWK Amendment Warrant" and, together with the First SWK Warrant, the "SWK Warrants"). SWK may exercise the SWK Warrants in accordance with the terms thereof for all or any part of such shares of common stock from the date on which the Original Term Loan was funded or such SWK Warrant was issued, as applicable, until and including March 4, 2029.
The Company recognized the fair value of the First SWK Warrant for $0.3 million as additional paid in capital as of the date of the closing of the transaction. Additionally, the Company recognized the fair value of the SWK Amendment Warrant in connection with the First Amendment, for $0.1 million as additional paid in capital and as non-operating cost of debt issuance, as of the date of the First Amendment.
The Company evaluated its compliance with all covenants with respect to the SWK Credit Agreement as amended and concluded that it was in compliance as of March 31, 2023.
Amendments to Borrowing Agreements
On January 30, 2023, the Company entered into a Qualified Financing (as defined therein)Second Amendment (the “Second Amendment”) to the SWK Credit Agreement. In addition to other provisions, the Second Amendment provides for an additional senior secured term loan to be made to the Company in an aggregate amount of $7.0 million in a single borrowing which was funded on January 31, 2023 (the “Second Term Loan”, and together with the Original Term Loan, the “SWK Loans”).
On May 12, 2023, the Company entered into a ChangeThird Amendment (the “Third Amendment”) to the SWK Credit Agreement. In addition to other provisions, the Third Amendment provides for (i) a temporary reduction in Control, or an optional conversionthe minimum amount of unencumbered liquid assets required to be maintained by the holder. Conversion upon a Qualified Financing was at a price per share equalCompany (from $3.0 million to the price per share paid for the shares sold in the Qualified Financing less a discount of: (i) 0%, if a Qualified Financing occurred on or before June$1.75 million through May 30, 2017; (ii) 10%, if a Qualified Financing occurred after June 30, 2017 but on or before September 1, 2017; or (iii) 20%, if a Qualified Financing occurred after September 1, 2017. Conversion upon a Change in Control was2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the holderperiod(s) of any such that Private Acer would pay each holdertemporary reduction(s) to $3.0 million (or, if less, the outstanding balanceprincipal amount of the SWK Loans) until the SWK Loans are repaid), (ii) the ability for the Company to forego a $0.6 million amortization payment otherwise due on their respective noteMay 15, 2023, and at the discretion of SWK a second $0.6 million amortization payment otherwise due on June 15, 2023, and (iii) the ability for the Company to defer until July 15, 2023 half of the $0.5 million quarterly interest payment otherwise due on May 15, 2023).
The SWK Loans made under the SWK Credit Agreement as amended by through the Third Amendment (the “Current SWK Credit Agreement”) bear interest at an annual rate of the sum of (i) 3-month SOFR, subject to a 1% floor, plus (ii) a margin of 11%, with such interest payable quarterly in arrears. In the event of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. Due to topline results announced in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was
19
safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, the note would be convertedprincipal amount of the SWK Loans amortizes at a price per sharemonthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows the Company to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. The Company has the option to prepay the SWK Loans in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK under the Current SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the Current SWK Credit Agreement with respect to the Second Term Loan equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, the Company is required to maintain for purposes of the SWK Loan unencumbered liquid assets of not less than the lesser of $16.57 and(x) the price per shareoutstanding principal amount of common stock paidthe SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the holdersannouncement of such topline results), although the common stockThird Amendment provides for a temporary reduction in such Change in Control. Conversion under an optional conversionthe minimum amount of unencumbered liquid assets required to be maintained by the holder wasCompany under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a price per sharepossible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of $16.57 based on the outstanding balance of the note.
In connection with the 2017 Notes, Private Acer incurred debtexecution of the Second Amendment, the Company issued to SWK an additional warrant (the “Third Warrant”) to purchase 250,000 shares of the Company’s common stock at an exercise price of $2.39 per share. SWK may exercise the Third Warrant in accordance with the terms thereof for all or any part of such shares of common stock from the date of issuance costsuntil and including March 4, 2029.
The Company classified the entire fair value of $68,530the SWK Original Term Loan, and Second Term Loan which are both due within twelve months from the date of this report, as current in the balance sheet as of March 31, 2023.
In connection with the Second Amendment and the origination of the SWK Second Term Loan, the Company determined that the changes in the cash flows were greater than ten percent, and thus concluded that the modification should be accounted for as an extinguishment. The Company evaluated the change in the fair value of the SWK Second Term loan pre-modification compared to post-modification and concluded that a loss on extinguishment of $2.7 million should be recorded themas of the date of the modification, January 30, 2023, which appears in the three months ended March 31, 2023, as a debt discount. Duringcomponent of “Other Non Operating Income (Expense)” in the nineStatement of Operations. Additionally, the Company also recorded during the three months ended September 30, 2017,March 31, 2023, in “Other Non Operating Income (Expense)” as “Change in fair value of debt instruments gain (loss)” a loss of $0.3 million for change in fair value of the Original Term Loan pre-modification from December 31, 2022 through the date of modification, as well as a loss of $1.5 million related to the change in fair value of the post-modification SWK Loans from the date of modification through March 31, 2023. The Company recognized the fair value of the Third SWK Warrant of $0.5 million as "Loss on extinguishment” in the Statement of Operations. The Company will continue to account for the combined Original and Second SWK Term Loans using the fair value election.
Marathon Convertible Notes
On March 4, 2022, the Company recognized $242,982also entered into the Marathon Convertible Note Purchase Agreement with MAM Aardvark, LLC (“Marathon”) and Marathon Healthcare Finance Fund, L.P. (“Marathon Fund” and together with “Marathon” each a “Holder” and collectively the “Holders”) pursuant to which the Company issued and sold to the Holders the Marathon Convertible Notes in an aggregate amount of $6.0 million (the “Convertible Note Financing”). The Convertible Note Financing closed on March 14, 2022 after satisfaction of closing conditions as set forth in the Marathon Convertible Note Purchase Agreement. The proceeds of the Convertible Note Financing are being used to pay fees, costs and expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement and the Marathon Credit Agreement and for other working capital and general corporate purposes.
The Marathon Convertible Notes bear interest expense, which includes $68,530at an annual rate of 6.5%, with such interest payable quarterly; provided, however, that until the first to occur of OLPRUVATM Approval and the repayment in amortizationfull of debt discountthe Original Term Loan, interest will
20
not be payable in cash, but will accrue and $174,452be payable in cash upon the earlier of a) the repayment of all obligations under the Original Term Loan and termination of such Original Term Loan or b) within three business days of OLPRUVATM Approval. Subject to the restrictions set forth in an agreement among each of the Holders and SWK, as agent and lender, and any other intercreditor or subordination agreement entered into in connection with the Term Loan (defined below), each of the Holders has the right, during the 30-day periods beginning 12 months, 18 months and 24 months after the closing date of the Convertible Note Financing, to require the Company to redeem the Convertible Secured Note held by such Holder at a redemption price of the outstanding principal amount plus any accrued but unpaid interest. In the event of default, interest on the 2017 Notes. TheMarathon Convertible Notes will increase to the lower of 11.5% per annum or the highest rate permitted by law. Each of the Holders also has the right to convert all or any portion of the outstanding principal of $5,500,000 andamount plus any accrued but unpaid interest of $174,452 onunder the 2017 Notes convertedMarathon Convertible Note held by such Holder into 599,201 fully-paid shares of common stock at a conversion price of $2.50 per share, subject to adjustment, for an aggregate of 2.4 million shares upon conversion of the original principal amount. The nature of the adjustment to conversion price is limited to instances such as stock splits and reverse stock splits. Each Holder has certain rights with respect to the registration by the Company for resale of the shares of common stock issuable upon conversion of the Marathon Convertible Note held by such Holder which are forth in the Marathon Convertible Note Purchase Agreement. Any outstanding principal, together with all accrued and unpaid interest, will be payable on the earlier of the third anniversary of the date of issuance, or upon a change of control of the Company.
Pursuant to the Marathon Convertible Note Purchase Agreement, the Marathon Convertible Notes are secured by a lien on collateral representing substantially all assets of the Company, although such security interest is subordinated to the Company’s obligations under the SWK Credit Agreement and may also be subordinated to the Company’s obligations under the Marathon Credit Agreement.
On January 30, 2023, the Company entered into an Amendment Agreement (the “Marathon Amendment Agreement”) with Marathon and Marathon Fund (i.e., the Holders) with respect to the Marathon Convertible Notes.
Pursuant to the terms of the Marathon Amendment Agreement, each holder agrees to defer payment by the Company of accrued and unpaid interest on their respective Marathon Convertible Note existing on the date of the Marathon Amendment Agreement through March 31, 2023, with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred after March 31, 2023, to be due and payable in cash by the Company on April 15, 2023. Each Marathon Convertible Note is amended with retroactive effect to delete the concept of a default rate of interest. Each Marathon Convertible Note is amended to obligate the Company to repurchase such Marathon Convertible Note, on or before the fifth (5th) business day (but with five (5) business days’ notice) following the earlier of June 15, 2023 or the Company’s receipt of gross proceeds of at least $40.0 million from the issuance or sale of equity, debt and/or hybrid securities, loans or other financing on a cumulative basis since January 1, 2023 (excluding the Second Term Loan), at a price equal to 200% (the “Buy-Out Percentage”) of the outstanding principal amount of such Marathon Convertible Note, plus any accrued but unpaid interest thereon to the date of such repurchase, plus 2500 basis points for each 90-day period after April 15, 2023, pro-rated for the actual number of days elapsed in the 90-day period before repurchase actually occurs (for example, if the repurchase occurs on May 30, 2023, the Buy-Out Percentage shall be increased to 212.5%); provided, that if the Company is prohibited from effectuating such repurchases pursuant to a subordination agreement with SWK, the Company shall cause the repurchase to occur on or before the fifth (5th) business day following the earlier of such prohibition being no longer applicable or the payment in full of all senior indebtedness described in such subordination agreement, but with five (5) business days’ notice.
The Company evaluated its compliance with all covenants with respect to the Marathon Convertible Note Purchase Agreement and concluded that it was in compliance as of March 31, 2023. The Company has classified the total fair value of the Marathon Convertible Notes which is due within twelve months from the date of this report, as current in the balance sheet as of March 31, 2023.
In connection with the above Marathon Amendment Agreement, the Company determined that the changes in the fair value of the post-modification Marathon Convertible Note compared to the original Marathon Convertible Note were greater than ten percent, and thus concluded that the modification should be accounted for as an extinguishment. The Company evaluated the change in the fair value of the Marathon Convertible Note pre-modification compared to post-modification and concluded that a loss on extinguishment of $5.0 million should be recorded as of the date of modification of January 30, 2023, which appears in the three months ended March 31, 2023, as a component of “Other Non Operating Income (Expense)” in the Statement of Operations. Additionally, the Company also recorded in the three months ended March 31, 2023, in “Other Non Operating Income (Expense)” as “Change in fair value of debt instruments gain (loss)” a gain of $0.5 million for changes in the fair value of the pre-modification Marathon Convertible Note from December 31, 2022 through the date of modification, as well as a loss of $0.9 million for changes in fair value of the Marathon Convertible Note from the date of modification through March 31, 2023. The Company will continue to account for the combined Original and Second SWK Term Loans using the fair value election.
21
Marathon Credit Agreement
On March 4, 2022, the Company also entered into the Marathon Credit Agreement with the lenders party thereto and Marathon, as the agent, sole lead arranger and sole bookrunner, which provides for a senior secured term loan facility in an aggregate amount of up to $42.5 million in a single borrowing (the “Term Loan”). The Term Loan will be available to be borrowed only following OLPRUVATM Approval and until December 31, 2022 (i.e., if OLPRUVATM Approval does not occur on or before December 31, 2022, then the Term Loan will not be available unless the Company is able to obtain an extension for the time period beyond December 31, 2022, to the actual PDUFA target action date), and funding of the Merger describedTerm Loan is also subject to the satisfaction of conditions as set forth in Note 1,the Marathon Credit Agreement. Although the Company’s resubmitted NDA in respect of OLPRUVATM (sodium phenylbutyrate) for oral suspension for the treatment of patients with no discountUCDs has been accepted for substantive review by the FDA, the PDUFA target action date is January 15, 2023. The Term Loan, if it became available, would be used to refinance certain other indebtedness of the Company (including the Original Term Loan), to pay fees, costs and expenses related to the Marathon Credit Agreement and for other working capital and general corporate purposes. Had the Term Loan become available, the Company would pay Marathon a commitment fee equal to 1.5% of the term loan amount. The Marathon Credit Agreement also includes an accordion feature pursuant to which the Company, Marathon and the lenders under the Marathon Credit Agreement may agree to increase the Term Loan commitments by up to an additional $50.0 million dollars for a total commitment of $92.5 million; provided, however, that any such increase is within the sole discretion of each party (i.e., the Company cannot unilaterally trigger such an increase).
The Term Loan would bear interest at an annual rate of 13.5% and would be payable quarterly in arrears. The Company would have the option to capitalize up to 4% of such interest commencing on the Term Loan Funding Date and continuing until the third anniversary of the Term Loan Funding Date. Commencing on the third anniversary of the Term Loan Funding Date, the principal outstanding amount of the Term Loan would amortize at a rate of 2.78%, payable monthly. The final maturity date of the Term Loan would be the earlier of six years after the Term Loan Funding Date or December 31, 2028. The Company would have the option to prepay the Term Loan in whole or in part at any time, subject to a prepayment fee equal to (a) if the prepayment is made prior to March 4, 2025, then the greater of 5% or the amount of interest that would have accrued from the date of prepayment until March 4, 2025, (b) if the prepayment is made on or after March 4, 2025, but prior to March 4, 2026, then 3%, (c) if the prepayment is made on or after March 4, 2026, but prior to March 4, 2027, then 2%, or (d) if the prepayment is made on or after March 4, 2027, then 1%.
The Term Loan would be secured by a first priority lien on all assets of the Company and any of its future subsidiaries pursuant to a Guarantee and Collateral Agreement to be entered into on the Term Loan Funding Date between the Company and Marathon, as agent (the “Marathon Security Agreement”). The Marathon Credit Agreement contains customary representations and warranties and affirmative and negative covenants. The Company paid $0.2 million in commitment fees to Marathon in connection with obtaining the commitments in respect of the Term Loan and will pay $0.6 million in additional commitment fees to Marathon following OLPRUVATM Approval or any change of control of the Company or sale or transfer of the OLPRUVATM product.
In connection with the Marathon Credit Agreement, on March 4, 2022, the Company, Marathon and the Marathon Fund also entered into the Royalty Agreement pursuant to which, in the event of the funding of the Term Loan, the Company will pay Marathon and the Marathon Fund, on a quarterly basis, 2% of certain aggregate commercial revenue from sales of OLPRUVATM during that quarter (i.e., 2% of the net sales and of the amount of certain other payments), subject to a cap on the aggregate amount of such payments of $15.0 million. Upon a change of control of the Company or the sale of the OLPRUVATM business to a third party, the Company would pay Marathon and the Marathon Fund the difference between $15.0 million and the aggregate amount of the payments previously made by the Company to Marathon and the Marathon Fund pursuant to the Royalty Agreement.
As of December 31, 2022, the Company had not requested funding of the Term Loan, and as such had not triggered the associated Royalty Agreement. On December 30, 2022, the Company and Marathon entered into an Extension Agreement which extended the Term Loan Commitment Date to January 16, 2023. See Note 11, Subsequent Events for further discussion of the status of the Marathon Convertible Notes and the Marathon Credit Agreement.
With respect to the Credit Agreement, dated as of March 4, 2022, as amended by the Extension Agreement dated as of December 30, 2022 (as so amended, the “Marathon Term Credit Agreement”), among the Company, the Lenders party thereto (the “Lenders”) and Marathon, not individually, but solely in its capacity as administrative and collateral agent for the Lenders (the “Administrative Agent”), which provided for a senior secured term loan facility in an aggregate amount of up to $42.5 million in a single borrowing, the parties have entered into a Termination Agreement dated as of January 30, 2023 (the “Termination Agreement”). Pursuant to the Termination Agreement, the lending commitments of the Lenders are terminated without having been drawn upon, the Marathon Term Credit Agreement and all other loan documents entered into in connection therewith are terminated, and the Company agrees to pay the Administrative Agent a commitment fee of $0.6 million (which was earned as a result of the recent approval by the FDA of OLPRUVA™ for oral suspension in the U.S. for the treatment of certain patients living
22
with urea cycle disorders involving deficiencies of carbamylphosphate synthetase, ornithine transcarbamylase, or argininosuccinic acid synthetase) and certain legal costs on the date on which the repurchase of the Marathon Convertible Notes occurs pursuant to the Marathon Amendment Agreement.
Accounting for SWK Original and Second Term Loan and Marathon Convertible Notes
The Company is eligible to elect the fair value option under ASC 815 and bypass analysis of potential embedded derivatives and further analysis of bifurcation of any such financial instruments and has elected such option. The Company recognized the First SWK Warrant at fair value as of the date of the close of the transaction and recorded it in equity. The Original Term Loan and Marathon Convertible Notes met the definition of a “recognized financial liability” which is an acceptable financial instrument eligible for the fair value option under ASC 825-10-15-4 and do not meet the definition of any of the financial instruments found within ASC 825-10-15-5 that are not eligible for the fair value option. Additionally, as noted above in connection with the amendments, the Company performed the same evaluation on the Original Term Loan as amended, the Second Term Loan, and Marathon Convertible Notes, as amended, and concluded that the fair value option was still appropriate. Therefore, the Original Term Loan, Second Term Loan, and Marathon Convertible Notes are recorded at their fair value upon issuance and subsequently re-measured at each reporting period until their maturity, prepayment or conversion.
The Company incurred $1.2 million of debt issuance costs, which were expensed as incurred due to the election of the fair value option and were included in interest expense in the accompanying statement of operations for the year ended December 31, 2022. Debt issuance costs were comprised of $0.5 million that related to the costs and expense paid directly to SWK and the Holders, $0.7 million of costs and expenses paid to the Company’s financial advisor, and other legal and accounting costs. The fee of $0.2 million paid in connection with obtaining the commitments in respect of the Term Loan was paid to Marathon through gross proceeds received from the Marathon Convertible Notes. The Company recorded this fee as expense during the year ended December 31, 2022. As a result of the approval of OLPRUVATM, the Company will pay $0.6 million for the Term Loan commitment fee and has recognized a liability for $0.6 million and a current asset for deferred financing costs of $0.4 million as of December 31, 2022. The Company recognized expense $0.2 million during the year ended December 31, 2022, and $0.4 million during the three months ended March 31, 2023, related to this fee.
The Company engaged an exclusive financial advisor with respect to the financings contemplated by the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement and the Marathon Credit Agreement. In connection with the funding of the Original Term Loan and the Convertible Note Financing, the Company paid its financial advisor a fee of $0.5 million for its services.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3. The valuation methodologies used for the Company’s financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below.
23
The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 2023.
|
| As of March 31, 2023 |
|
| Fair Value Measurements |
| ||||||||||||||
|
| Carrying Amount |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Money Market Funds in Cash Equivalents |
| $ | 5,879,977 |
|
| $ | 5,879,977 |
|
| $ | 5,879,977 |
|
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Secured Convertible Notes |
|
| 11,392,167 |
|
|
| 11,392,167 |
|
|
| — |
|
|
| — |
|
|
| 11,392,167 |
|
SWK Loans |
|
| 17,057,110 |
|
|
| 17,057,110 |
|
|
| — |
|
|
| — |
|
|
| 17,057,110 |
|
|
| $ | 28,449,277 |
|
| $ | 28,449,277 |
|
| $ | — |
|
| $ | — |
|
| $ | 28,449,277 |
|
|
| As of December 31, 2022 |
|
| Fair Value Measurements |
| ||||||||||||||
|
| Carrying Amount |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Money Market Funds in Cash Equivalents |
| $ | 1,829,218 |
|
| $ | 1,829,218 |
|
| $ | 1,829,218 |
|
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Secured Convertible Notes |
|
| 6,360,600 |
|
|
| 6,360,600 |
|
|
| — |
|
|
| — |
|
|
| 6,360,600 |
|
SWK Loans |
|
| 5,567,231 |
|
|
| 5,567,231 |
|
|
| — |
|
|
| — |
|
|
| 5,567,231 |
|
|
| $ | 11,927,831 |
|
| $ | 11,927,831 |
|
| $ | — |
|
| $ | — |
|
| $ | 11,927,831 |
|
A lattice-based model was used to estimate the fair value of the Marathon Convertible Notes at March 31, 2023. The lattice model utilizes a “decision tree,” whereby future movement in the Company’s common stock price is estimated based on a volatility factor. Additionally, the Company included in its decision tree, when relevant, a probability assessment of the approval of ACER-001 and the resulting impact of such an event. The Company classified the fair value of the Marathon Convertible Notes as a Level 3 measurement due to the lack of observable market data. The lattice model requires the development and use of assumptions, including the Company’s stock price volatility returns, an appropriate risk-free interest rate, and derived credit spread, default probability rate, and expected recovery rate given default.
The Company updated its estimate of fair value of the SWK Loans based on the probability-weighted net present value of future cash flows at March 31, 2023.
The significant unobservable inputs used in calculating the fair value of the Marathon Convertible Notes and SWK Loans represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Any significant changes in the inputs described herein may result in significantly higher or lower fair value measurements.
The Company recorded in the three months ended March 31, 2023, in “Other Non Operating Income (Expense)” as “Changes in fair value of debt instruments gain (loss)” a loss of $0.3 million for change in fair value of the Original Term Loan pre-modification from December 31, 2022 through the date of modification, as well as a loss of $1.5 million related to the change in fair value of the post-modification SWK Loans from the date of modification through March 31, 2023. For the three months ended March 31, 2023, the Company evaluated the inputs that would be required to estimate the fair value of the Original Term Loan at March 31, 2022. The Company concluded that, given the short time period between the issuance date of March 14, 2022 and March 31, 2022 and the fact that no identified inputs would have changed between March 14, 2022 and March 31, 2022, there would be no underlying change in fair value recognized during the period.
The Company recorded in the three months ended March 31, 2023, in “Other Non Operating Income (Expense)” as “Changes in fair value of debt instruments gain (loss)” a gain of $0.5 million for changes in the fair value of the pre-modification Marathon Convertible Note from December 31, 2022 through the date of modification, as well as a loss of $0.9 million for changes in fair value of the Marathon Convertible Note from the date of modification through March 31, 2023. The Company recognized $0.4 million of accrued interest in connection with the Marathon Convertible Notes as of March 31, 2023 for the interest accrued on the notes since the date of issuance and payable as of this date in cash, now that it is allowable under the subordination agreement with the receipt of approval of OLPRUVATM.
24
|
| December 31, 2022 |
|
| Loan Received |
|
| Payments |
|
| Accretion/ Interest Accrued |
|
| Adjustment to Fair Value Mark to Market |
|
| March 31, 2023 |
| ||||||
Marathon Convertible Notes (1) |
| $ | 6,360,600 |
|
| $ | — |
|
| $ | — |
|
| $ | 96,165 |
|
| $ | 5,344,635 |
| (2) | $ | 11,801,400 |
|
SWK Loans |
|
| 5,567,231 |
|
|
| 7,000,000 |
|
|
| (322,306 | ) |
|
| — |
|
|
| 4,812,185 |
| (3) |
| 17,057,110 |
|
|
| $ | 11,927,831 |
|
| $ | 7,000,000 |
|
| $ | (322,306 | ) |
| $ | 96,165 |
|
| $ | 10,156,820 |
|
| $ | 28,858,510 |
|
(1) Marathon Convertible Notes were recorded as $0.4 million in accrued interest expenses and $11.4 million in convertible note payable, at fair value in the Company’s balance sheet at March 31, 2023.
(2) The Adjustment to Fair Value for the Marathon Convertible Notes during the three months ended March 31, 2023, includes $5.0 million of increase in the post-modification cash flows of the instrument, which was recognized as a loss on extinguishment during the period.
(3) The Adjustment to Fair Value for the SWK Loans during the three months ended March 31, 2023, includes $2.7 million of increase in the post-modification cash flows of the instrument, which was recognized as a loss on extinguishment during the period.
|
| December 31, 2021 |
|
| Loan Received |
|
| Payments |
|
| Accretion/ Interest Accrued |
|
| Adjustment to Fair Value Mark to Market |
|
| March 31, 2022 |
| ||||||
Marathon Convertible Notes |
| $ | — |
|
| $ | 6,000,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 962,400 |
|
| $ | 6,962,400 |
|
SWK Loans |
|
| — |
|
|
| 6,172,969 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,172,969 |
|
|
| $ | — |
|
| $ | 12,172,969 |
|
| $ | — |
|
| $ | — |
|
| $ | 962,400 |
|
| $ | 13,135,369 |
|
License Agreements
In April 2014, the Company obtained exclusive rights to intellectual property relating to OLPRUVATM for the treatment of inborn errors of branched-chain amino acid metabolism, including MSUD, and preclinical and clinical data, through a license agreement with Baylor College of Medicine (“BCM”). Under the terms of the agreement, as amended, the Company has worldwide exclusive rights to develop, manufacture, use, sell and import licensed products as defined in the agreement. The license agreement requires the Company to make certain upfront and annual payments to BCM, as well as reimburse certain legal costs, make payments upon achievement of defined milestones, and pay royalties in the low single-digit percent range on net sales of any developed product over the royalty term.
In August 2016 Private Acer, the Company signed an agreement with the GreaterAssistance Publique—Hôpitaux de Paris, University Hospitals AP-HPHôpital Européen Georges Pompidou (“AP-HP”) (via its Department of Clinical Research and Development) granting Private Acerthe Company the exclusive worldwide rights to access and use data from a randomized, controlled clinical study of celiprolol. The Company will useused this pivotal clinical data to support a New Drug Application (“NDA”)an NDA regulatory filing for its lead product, celiprolol,EDSIVOTM for the treatment of vEDS. The agreement requires Private Acerthe Company to make certain upfront payments to AP-HP, as well as reimburse certain costs and make payments upon achievement of defined milestones and payment of royalties in the low single-digit percent range on net sales of celiprolol over the royalty term.
In April 2014, Private Acer obtainedSeptember 2018, the Company entered into a License Agreement for Development and Exploitation with AP-HP to acquire the exclusive worldwide intellectual property rights to intellectual propertythree European patent applications relating to ACER-001certain uses of celiprolol including (i) the optimal dose of celiprolol in treating vEDS patients, (ii) the use of celiprolol during pregnancy and preclinical(iii) the use of celiprolol to treat kyphoscoliotic Ehlers-Danlos syndrome (type VI). Pursuant to the agreement, the Company will reimburse AP-HP for certain costs and will pay annual maintenance fee payments. Subject to a minimum royalty amount, the Company will also pay royalty payments on annual net sales of celiprolol during the royalty term in the low single digit percent range, depending upon whether there is a valid claim of a licensed patent. Under the agreement, the Company will control and pay the costs of ongoing patent prosecution and maintenance for the licensed applications. The Company may terminate the agreement in its sole discretion upon written notice to AP-HP, and AP-HP may terminate the agreement in the event the Company fails to make the required payments after notice and opportunity to cure. Additionally, the agreement will terminate if the Company terminates clinical data, throughdevelopment, marketing approval is withdrawn by the health or regulatory authorities in all countries, the Company ceases to do business or there is a procedure of winding-up by court decision against the Company. The Company subsequently filed three U.S. patent applications on this subject matter in October 2018.
In December 2018, the Company entered into an exclusive license agreement with Baylor College of Medicine (“BCM”). UnderSanofi granting the terms of the agreement, as amended, Private Acer hasCompany worldwide exclusive rights to develop, manufacture, use, sell and import Licensed Products as defined inACER-801, a clinical-stage, selective, non-peptide tachykinin NK3 receptor antagonist. The agreement required the agreement. The license agreement requires Private AcerCompany to make a certain upfront and annual paymentspayment to BCM, as well as reimburse certain legal costs, andSanofi, make payments upon achievement of defined development and sales milestones and payment ofpay royalties on net sales of any developed productACER-801 over the royalty term.
25
In May 2021, the Company entered into an agreement with Emory University to acquire the exclusive worldwide intellectual property rights to a family of patents and patent applications related to the use of neurokinin receptor antagonists in managing conditioned fear and treating anxiety disorders including post-traumatic stress disorder. The Company has obtained issued claims in both Europe and the United States and continues to pursue additional claim scope in both jurisdictions. Pursuant to the agreement, the Company reimburses Emory for certain patent prosecution costs and annual maintenance fees. Should the Company obtain approval for a treatment method within the scope of a valid claim of a licensed patent, the Company will be obligated to make royalty payments on annual net sales of osanetant either in the low single digit percent range, or alternatively, that meet an agreed minimum royalty.
Collaboration Agreement
On March 19, 2021, the Company entered into the Collaboration Agreement with Relief providing for the development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and MSUD. The Collaboration Agreement is the culmination of the Option Agreement previously entered into between the Company and Relief on January 25, 2021, which provided Relief with an exclusive period of time up to June 30, 2021 for the parties to enter into a mutually acceptable definitive agreement with respect to the potential collaboration and license arrangements. In consideration for the grant of the exclusivity option, (i) the Company received from Relief an upfront non-refundable payment of $1.0 million, (ii) Relief provided to the Company a 12-month secured loan in the principal amount of $4.0 million with interest at a rate equal to 6% per annum, as evidenced by a promissory note the Company issued to Relief, and (iii) the Company granted Relief a security interest in all of its assets to secure performance of the promissory note, as evidenced by a security agreement. Upon signing the Collaboration Agreement, the Company received a $10.0 million cash payment from Relief (the $14.0 million (“Reimbursement Payment”) from Relief to the Company, offset by repayment of the $4.0 million outstanding balance of the prior loan, plus interest), and Relief released its security interest in the Company’s assets pursuant to the Promissory Note. Under the terms of the Collaboration Agreement, Relief committed to pay the Company Development Payments of up to an additional $20.0 million for U.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months ended June 30, 2021, the Company received from Relief the $10.0 million First Development Payment. The Company was contractually entitled to receive from Relief an additional $10.0 million Second Development Payment conditioned upon the FDA’s acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received on October 4, 2021. On October 6, 2021, the Company entered into a Waiver and Agreement with Relief to amend the timing for the Second Development Payment. The Company received the Second Development Payment in two $5.0 million tranches on each of October 12, 2021 and January 14, 2022. Further, the Company retained development and commercialization rights in the U.S., Canada, Brazil, Turkey and Japan (“Acer Territory”). The companies will split net profits from the Acer Territory 60%:40% in favor of Relief. Relief licensed the rights for the rest of the world (“Relief Territory”), where the Company will receive from Relief a 15% royalty on all net sales received in the Relief Territory. The Company could also receive a total of $6.0 million in milestone payments based on the first European (EU) marketing approvals of OLPRUVATM for a UCD and MSUD.
Litigation
From time to time, the Company or its subsidiaries may become involved in litigation or proceedings relating to claims arising fromout of its operations. To the ordinary course of business.
The Securities Class Action and Stockholder Derivative Actions
On September 27, 2017, Piper Jaffray & Co.July 1, 2019, plaintiff Tyler Sell filed a putative class action lawsuit, against Private Acer, Piper Jaffray & Co.Sell v. Acer Therapeutics Inc. et al., Index No. 656055/2017,1:19-cv-06137GHW, against the Company, Chris Schelling and Harry Palmin, in the SupremeU.S. District Court offor the State of New York, CountySouthern District of New York. The complaint allegesComplaint alleged that Privatethe Company violated federal securities laws by allegedly making material false and misleading statements regarding the likelihood of FDA approval for the EDSIVOTM NDA. With the selection of a lead plaintiff, the case was later captioned Skiadas v. Acer breachedTherapeutics Inc. et al. The parties reached an agreement in principle to settle this action for a payment of $8.4 million, which was approved by the Court on January 7, 2022. As of December 31, 2021, the Company had recognized liabilities of $8.4 million for the proposed settlement and of $0.9 million for costs related to both the derivative and class action cases in other current liabilities and had also recognized an asset of an equal amount in other current assets representing the recovery from its obligations to Piper Jaffray & Co. pursuant toinsurance carriers of an equal amount. Both the liabilities and the asset were derecognized during the year ending December 31, 2022 as payment of the settlement was made by the Company’s insurance carriers.
On August 30, 2016 engagement letter between12, 2019, a stockholder derivative action, Gress v. Aselage et al., No. 1:19-cv-01505-MN, was filed in the U.S. District Court for the District of Delaware against certain of the Company’s present and former officers and directors, asserting damages resulting from the alleged breach of their fiduciary duties, based on the same facts at issue in the Skiadas case. On March 17, 2020, a second stockholder derivative action, Giroux v. Amello et al., No. 1:20-cv-10537-GAO, was filed in the U.S. District
26
Court for the District of Massachusetts against certain of the Company’s present and former officers and directors, asserting claims based on the same facts at issue in the Skiadas and Gress cases. On June 23, 2020, a third stockholder derivative action, King v. Schelling, et al., No. 1:20-cv-04779-GHW, was filed in the U.S. District Court for the Southern District of New York against certain of the Company’s present and former officers and directors that arises from the same facts underlying the Skiadas, Gress, and Giroux cases. On July 6, 2020, a fourth stockholder derivative action, Diaz v. Amello et al., No. 1:20-cv-00909-MN, was filed in the U.S. District Court for the District of Delaware. By Stipulation and Order dated August 7, 2020, the Gress and Diaz cases were consolidated under the caption In re Acer Therapeutics Inc. Derivative Litigation, Lead Case No. 1:19-cv-01505-MN. As disclosed previously, the parties reached an agreement to settle all of the derivative cases. At a hearing held on May 12, 2021 in the District Court of Massachusetts, the Court administering the matter, the settlement was approved. Payment of the settlement amount of $0.5 million, plus legal fees and an April 28, 2017 addendum theretocosts in excess of the retention (deductible) amount, has been made by failing to pay Piper Jaffray & Co. (i) a fee of $1,097,207the Company’s insurance carriers.
Commitments Under Clinical Trial Agreements
The Company has entered into agreements with two CROs in connection with the financingconduct of two separate clinical trials for ACER-801 and EDSIVOTM. As a part of those agreements, the Company has agreed to pay any third-party costs or subcontracts associated with those agreements which closedare unpaid by the CRO. Such reimbursement would apply only to costs approved in advance by the Company. Those CRO agreements are subject to termination at any time, with or without cause, by the Company, in which case only costs earned or non-cancellable to date of termination would remain subject to reimbursement.
At-the-Market Facility
On November 9, 2018, the Company entered into a sales agreement with Roth Capital Partners, LLC, and on September 19, 2017March 18, 2020, the Company entered into an amended and restated sales agreement with JonesTrading Institutional Services LLC and Roth Capital Partners, LLC. The agreement provides a facility for the offer and sale of shares of common stock from time to time having an aggregate considerationoffering price of approximately $15.7up to $50.0 million (including the conversiondepending upon market demand, in transactions deemed to be an “at-the-market” (“ATM”) offering. The Company has no obligation to sell any shares of the 2017 Notes described in Note 6) and (ii) $67,496 in reimbursement for expenses incurred by Piper Jaffray & Co.common stock pursuant to the engagement letter. agreement and may at any time suspend sales pursuant to the agreement. Each party may terminate the agreement at any time without liability. The Company will need to keep current its shelf registration statement and the offering prospectus relating to the ATM facility, in addition to providing certain periodic deliverables under the sales agreement, in order to use such facility. Due to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period, the Company is currently only able to issue a limited number of shares which aggregate to not more than one-third of the Company’s public float. During the three months ended March 31, 2023, the Company sold an aggregate of 1,462,254 shares of common stock through the ATM facility at an average gross sale price of $2.8095 per share, for gross proceeds of $4.1 million. Proceeds, net of $0.1 million in fees and offering costs, were $4.0 million. During the three months ended March 31, 2022, the Company did not sell any shares of common stock through the ATM facility. As of March 31, 2023, $29.4 million remained available under the Company’s ATM facility, subject to certain limitations.
See Note 11, Subsequent Events for further discussion of the status of the Company’s ATM facility.
Common Stock Purchase Agreement
On April 30, 2020, the Company entered into an equity line purchase agreement and a registration rights agreement pursuant to which Lincoln Park committed to purchase up to $15.0 million of the Company’s common stock. Under the terms and subject to the conditions of the purchase agreement, the Company had the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park was obligated to purchase up to $15.0 million of the Company’s common stock. Such sales of common stock by the Company were subject to certain limitations, and occurred from time to time, at the Company’s sole discretion, over the 36-month period commencing on June 8, 2020. The number of shares the Company was able to sell to Lincoln Park on any single business day in a regular purchase was 50,000, but that amount was able to be increased up to 100,000 shares, depending upon the market price of the Company’s common stock at the time of sale and subject to a maximum limit of $1.0 million per regular purchase. The purchase price per share for each such regular purchase was based on prevailing market prices of the Company’s common stock immediately preceding the time of sale as computed under the purchase agreement. In addition to regular purchases, the Company was also able to direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases if the closing sale price of the common stock exceeded certain threshold prices as set forth in the purchase agreement.
27
Under applicable rules of the Nasdaq Capital Market, in no event may the Company have issued or sold to Lincoln Park under the purchase agreement more than 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the purchase agreement, unless (i) the Company obtained stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of common stock to Lincoln Park under the purchase agreement equaled or exceeded $2.1668, such that issuances and sales of the common stock to Lincoln Park under the purchase agreement would be exempt from the issuance limitation under applicable Nasdaq rules.
Lincoln Park had no right to require the Company to sell any shares of common stock to Lincoln Park, but Lincoln Park was obligated to make purchases as the Company directed, subject to certain conditions. In all instances, the Company may not have sold shares of its common stock to Lincoln Park under the purchase agreement if doing so would have resulted in Lincoln Park beneficially owning more than 9.99% of its common stock. The Company determined that the right to sell additional shares represented a freestanding put option under ASC 815 Derivatives and Hedging, but had a fair value of zero, and therefore no additional accounting was required.
Actual sales of shares of common stock to Lincoln Park under the purchase agreement depended on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. However, there was no assurance that the Company would have been able to receive the entire obligation amount from Lincoln Park because the purchase agreement contained limitations, restrictions, requirements, events of default and other provisions that could have limited the Company’s ability to cause Lincoln Park to buy common stock from the Company.
The proceeds under the purchase agreement to the Company depended on the frequency and prices at which the Company sold shares of its stock to Lincoln Park. The Company issued 148,148 shares of common stock to Lincoln Park as a commitment fee in connection with entering into the purchase agreement. The $0.4 million fair value of the commitment fee shares was recorded to General and administrative expenses along with other costs incurred in connection with entering into the purchase agreement.
During the three months ended March 31, 2022, the Company did not sell any shares of common stock under its purchase agreement with Lincoln Park. The Lincoln Park facility was completed on December 30, 2022 and is now terminated.
Private Placement
On November 10, 2017, Private Acer filed29, 2022, the Company entered into a securities purchase agreement for the sale and issuance of an answeraggregate of 1,229,508 shares of the Company’s common stock, for an aggregate purchase price of $1.5 million, in a private placement with the Company’s President and counterclaimChief Executive Officer and a member of the Company’s Board of Directors and with the Chairman of the Company’s Board of Directors at a price per share of $1.22. The shares of common stock issued in the lawsuit, denying Piper Jaffray & Co.’s breachprivate placement constitute “restricted securities” under the federal securities laws and are subject to a minimum six-month holding period.
Securities Purchase Agreement
On March 21, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an institutional accredited investor (the “Purchaser”) pursuant to which the Company agreed to issue and sell, (i) in a registered direct offering, an aggregate of contract allegation, asserting several defenses, and bringing several counterclaims, including claims for breach of contract and breach2,335,000 shares (the “Shares”) of the dutyCompany’s common stock, par value $0.0001 per share (“Common Stock”), and pre-funded warrants to purchase up to 585,306 shares of good faithCommon Stock (the “Pre-Funded Warrants”) at an exercise price of $0.001 per share, and fair dealing.(ii) in a concurrent private placement, warrants to purchase up to 2,920,306 shares of Common Stock (the “Common Warrants”) at an exercise price of $0.791 per share. Such registered direct offering and concurrent private placement are referred to herein as the “March 2023 Offering.” The combined purchase price for one Share and one Common Warrant was $0.916, and the combined purchase price for one Pre-Funded Warrant and one Common Warrant was $0.915. The March 2023 Offering was priced at-the-market under Nasdaq rules. The Company received aggregate gross proceeds from the Offering of approximately $2.7 million before deducting the placement agent fee (as described in greater detail below) and related offering expenses, resulting in net proceeds of approximately $2.3 million. The March 2023 Offering closed on March 24, 2023.
The Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchaser and customary indemnification rights and obligations of the parties. Pursuant to the terms of the Purchase Agreement and subject to certain exceptions, the Company has not recordedagreed to certain restrictions on the issuance and sale of its Common Stock or Common Stock Equivalents (as defined in the Purchase Agreement) during the 30-day period following the closing of the March 2023 Offering.
The Shares, the Pre-Funded Warrants and the shares of Common Stock issuable thereunder were offered by the Company pursuant to a liabilityregistration statement on Form S-3 (File No. 333-261342), which was filed with the Securities and Exchange
28
Commission (the “Commission”) on November 24, 2021 and was declared effective by the Commission on December 7, 2021 (the “Registration Statement”), and a prospectus supplement dated as of September 30, 2017 becauseMarch 21, 2023. We suspended our ATM facility in connection with the March 2023 Offering and entered into a potential loss is not probablerelated restriction prohibiting us from entering into any agreement to issue or reasonably estimable givenannouncing the preliminary natureissuance or proposed issuance of any shares of our common stock or securities convertible or exercisable into our common stock, subject to certain exceptions, until April 24, 2023.
The Common Warrants were offered in a private placement under Section 4(a)(2) of the proceedings.
The Pre-Funded Warrants were offered, in lieu of shares of Common Stock, to any Purchaser whose purchase of shares of Common Stock and Common Warrants in the Offering would otherwise result in such Purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at such Purchaser’s option upon issuance,9.99%) of the Company’s outstanding Common Stock immediately following the consummation of the Merger describedOffering. Each Pre-Funded Warrant represents the right to purchase shares of Common Stock at an exercise price of $0.001 per share of Common Stock. The Pre-Funded Warrants are exercisable immediately and may be exercised at any time until the Pre-Funded Warrants are exercised in Note 1, (i) Private Acer’s Series A Convertible Redeemable Preferred stockfull, subject in each case to the beneficial ownership limitations set forth in the Pre-Funded Warrant.
Each Common Warrant represents the right to purchase shares of Common Stock at an exercise price of $0.791 per share of Common Stock. The Common Warrants are exercisable immediately and Series B Convertible Redeemable Preferred stock were convertedhave a term of five and one-half years from the issuance date, subject in each case to the beneficial ownership limitations set forth in the form of Common Warrant. The Company recognized the Common Warrants and Pre-Funded Warrants as classified as equity.
The Company entered into 638,416an engagement letter with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which Wainwright agreed to serve as the exclusive placement agent for the issuance and 970,238sale of securities of the Company pursuant to the Purchase Agreement. As compensation for such placement agent services, the Company has agreed to pay Wainwright a total cash fee equal to 7.5% of the aggregate gross proceeds of the Offering; a non-accountable expense allowance of $70,000 and clearing fees of $15,950. The Company has also granted Wainwright a right of first refusal for a period of six months following the closing of the Offering to act as sole book-running manager, sole underwriter or sole placement agent for any public or private placement or other capital-raising financing, subject to certain exceptions.
2018 Stock Incentive Plan
The Company’s 2018 Stock Incentive Plan (the “2018 Plan”), was adopted on May 14, 2018, and provided for the grant of shares of common stock respectively, (ii) Private Acer’s 2017 Notesas stock options, restricted stock, stock appreciation rights, restricted stock units, performance-based awards and accrued interest totaling $5,674,452 were converted into 599,201cash-based awards that may be settled in cash, stock or other property to employees, executive officers, directors, and consultants. The total number of shares of common stock, and (iii) 1,055,961 shares of common stock were soldreserved for $9.47 per share generating $10,000,000 of gross proceeds.
The 2018 Plan is administered by the Company’s Board of Directors, which may in turn delegate authority to administer the plan to a committee such as incentivethe Compensation Committee, referred to herein as the 2018 Plan administrator. Subject to the terms of the 2018 Plan, the 2018 Plan administrator will determine recipients, the number of shares or non-qualifiedamount of cash subject to awards to be granted, whether an option is to be an incentive stock options and/or restricted commonnon-incentive stock options and the terms and conditions of the
29
stock awards, including the period of their exercisability and vesting. Subject to employees, officers, directors, consultantsthe limitations set forth below, the 2018 Plan administrator will also determine the exercise price of options granted under the 2018 Plan. The 2018 Plan expressly provides that, without the approval of the stockholders, the 2018 Plan administrator does not have the authority to reduce the exercise price of any outstanding stock options or stock appreciation rights under the 2018 Plan (except in connection with certain corporate transactions, such as stock splits, certain dividends, recapitalizations, reorganizations, mergers, spin-offs and advisers. the like), or cancel any outstanding underwater stock options or stock appreciation rights in exchange for cash or new stock awards under the 2018 Plan.
Option awards are generally granted with an exercise price equal to the fair value of the common stock at the date of grant and have contractual terms of 10 years. A summaryten years. Stock options granted to executive officers and employees generally vest either 1) over a four-year period, with 25% vesting on the one-year anniversary of option activitythe grant date and the remaining 75% vesting quarterly over the remaining three years, assuming continued service, and with vesting acceleration in full immediately prior to a change in control, or 2) for certain stock options granted on September 18, 2019, 50% vest on each of January 1, 2021 and January 1, 2022, assuming continued service, and with vesting acceleration in full immediately prior to a change in control. For certain grants such as those made to members of the Company’s Board of Directors, vesting occurs 12 months after the date of the grant. Restricted stock units generally vest and are settled upon the first anniversary of the grant date. There were no grants of restricted stock units during the three months ended March 31, 2023 or 2022 and no unvested restricted stock units as of March 31, 2023 or 2022.
At March 31, 2023, 695,036 shares of common stock remained available for the grant of future awards under the 2018 Plan.
2013 Stock Incentive Plan
The Company’s 2013 Plan provided for the issuance of shares of common stock as incentive or non-qualified stock options and/or restricted common stock to employees, officers, directors, consultants and advisers. Option awards were generally granted with an exercise price equal to the fair value of the common stock at the date of grant and had contractual terms of ten years. At March 31, 2023, all shares available under the 2013 Plan for the nine months ended September 30, 2017 is as follows:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | |
| Options outstanding at December 31, 2016 | 122,000 | $2.55 | — |
| Granted | 48,625 | 7.21 | — |
| Exercised | — | — | — |
Cancelled/forfeited | (5,625) | 2.55 | — |
Options outstanding at September 30, 2017 | 165,000 | $3.92 | 7.54 |
Options exercisable at September 30, 2017 | 123,562 | $3.47 | 8.46 |
2010 Stock Incentive Plan
The Company’s 2010 Stock Incentive Plan, as amended (the “2010 Plan”), providesand restated, provided for the grantinggrant of up to 470,000 shares of common stock as incentive or non-qualified stock options, stock appreciation rights, restricted stock units and/or restricted common stock to employees, officers, directors, consultants and advisers. Option awards arewere generally granted with an exercise price equal to the fair value of the common stock at the date of grant and havehad contractual terms of 10 years. All outstanding and unexercised equity awards (representing 22,061 underlying shares)ten years. At March 31, 2023, all shares available under the 2010 Plan were cancelled in connection withsubject to outstanding equity awards, and no new awards may be granted under the Merger.
30
Stock Plan Activity
A summary of warrantoption activity under the 2018 Plan, 2013 Plan, and 2010 Plan for the three months ended September 30, 2017March 31, 2023 and 2022, is presentedas follows:
Year-to-Date Activity |
| Number |
|
| Weighted |
|
| Weighted |
|
| Aggregate |
| ||||
Options outstanding at December 31, 2022 |
|
| 2,794,850 |
|
| $ | 6.36 |
|
|
| 7.4 |
|
|
|
| |
Granted |
|
| 630,000 |
|
| $ | 1.67 |
|
|
|
|
|
|
| ||
Cancelled/forfeited |
|
| (150,752 | ) |
| $ | 3.83 |
|
|
|
|
|
|
| ||
Options outstanding at March 31, 2023 |
|
| 3,274,098 |
|
| $ | 5.58 |
|
|
| 7.5 |
|
| $ | — |
|
Options exercisable at March 31, 2023 |
|
| 1,780,877 |
|
| $ | 8.34 |
|
|
| 6.1 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Year-to-Date Activity |
| Number |
|
| Weighted |
|
| Weighted |
|
| Aggregate |
| ||||
Options outstanding at December 31, 2021 |
|
| 1,954,975 |
|
| $ | 8.16 |
|
|
| 7.8 |
|
|
|
| |
Granted |
|
| 853,000 |
|
| $ | 2.33 |
|
|
|
|
|
|
| ||
Cancelled/forfeited |
|
| (11,875 | ) |
| $ | 3.76 |
|
|
|
|
|
|
| ||
Options outstanding at March 31, 2022 |
|
| 2,796,100 |
|
| $ | 6.40 |
|
|
| 8.2 |
|
| $ | 0.6 |
|
Options exercisable at March 31, 2022 |
|
| 1,285,645 |
|
| $ | 9.72 |
|
|
| 6.8 |
|
| $ | — |
|
At March 31, 2023, there was $2.6 million of unrecognized compensation expense related to the stock-based compensation arrangements granted under all plans, which will be recognized as expense over the remaining vesting period for those options of 3.9 years. The weighted average grant date fair value of options granted during the three months ended March 31, 2023 was $1.43. The fair value of shares vested during the three months ending March 31, 2023 and 2022, was $0.8 million and $1.2 million, respectively. The amount of stock-based compensation expense recorded to research and development expenses and to general and administrative expenses is detailed in table below:
|
| Three Months Ended March 31, |
|
| |||||
|
| 2023 |
|
| 2022 |
|
| ||
Stock-based compensation |
|
|
|
|
|
|
| ||
Research and development |
| $ | 169,929 |
|
| $ | 140,440 |
|
|
General and administrative |
|
| 115,580 |
|
|
| 333,657 |
|
|
Total stock-based compensation expense |
| $ | 285,509 |
|
| $ | 474,097 |
|
|
Warrants issued to SWK
|
| For the three months ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Number |
|
| Weighted Average Exercise Price |
|
| Number |
|
| Weighted Average Exercise Price |
| ||||
Outstanding at beginning of the period |
|
| 250,000 |
|
| $ | 2.08 |
|
|
| — |
|
| $ | — |
|
Granted during the period |
|
| 250,000 |
|
|
| 2.39 |
|
|
| 150,000 |
|
|
| 2.46 |
|
Outstanding at end of the period |
|
| 500,000 |
|
| $ | 2.24 |
|
|
| 150,000 |
|
| $ | 2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Exercisable at end of the period |
|
| 500,000 |
|
| $ | 2.24 |
|
|
| 150,000 |
|
| $ | 2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average remaining life |
| 5.9 years |
|
|
|
|
| 7.0 years |
|
|
|
| ||||
31
Warrants issued in March 2023 Offering
|
| For the three months ended March 31, |
| |||||
|
| 2023 |
| |||||
|
| Number |
|
| Weighted Average Exercise Price |
| ||
Outstanding at beginning of the period |
|
| — |
|
| $ | — |
|
Granted during the period |
|
| 3,505,612 |
|
|
| 0.66 |
|
Outstanding at end of the period |
|
| 3,505,612 |
|
| $ | 0.66 |
|
|
|
|
|
|
|
| ||
Exercisable at end of the period |
|
| 3,505,612 |
|
| $ | 0.66 |
|
|
|
|
|
|
|
| ||
Weighted average remaining life |
| 5.5 years |
|
|
|
| ||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) | Intrinsic Value | |
| Assumed in the Merger at September 19, 2017 | 317,630 | $123.61 | 0.54 | — |
| Outstanding and exercisable at September 30, 2017 | 317,630 | $123.61 | 0.54 | — |
Basic net loss per share is computed by dividing the net loss in each period by the weighted-average number of common shares outstanding.outstanding during such period. Diluted net loss per share is computed similarly to basic net loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. DilutedFor the periods presented, common stock equivalents, consisting of stock-based awards and the SWK Warrants, were not included in the calculation of the diluted loss per share because to do so would be antidilutive. The exercise prices of the SWK Warrants are subject to a proportionate adjustment in the event of a stock dividend or stock split. The Company concluded that they should be deemed participating securities. However, as the Company is currently operating in a net loss position for the three month period ended March 31, 2023 and has not declared any dividends, such inclusion of the participating securities related to the SWK Warrants (as common stock equivalents) would be antidilutive and thus would be excluded from the calculation of net loss per share. When calculating diluted net loss per share, the Company includes, only if dilutive, the potential common shares associated with the Marathon Convertible Notes using the “if-converted” method, which adjusts the numerator for any impact to earnings for the period and includes in the denominator the shares assumed to be converted at the beginning of the period.
Additionally, the Company included the common shares associated with the Pre-Funded Warrants of 585,306 shares in its calculations of weighted average shares outstanding for the three months ended March 31, 2023 for basic and diluted earnings per share because the exercise of such a warrant is the same as basic net loss per common share,virtually assured since the effects of potentially dilutive securities are antidilutive.
As of September 30, 2017March 31, 2023 and 2016,2022, the number of shares of common stock underlying potentially dilutive securities include:excluded from the calculation of diluted net loss per share, because the company’s net loss meant that their inclusion would have been antidilutive for those periods, consist of:
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Options to purchase common stock |
|
| 3,274,098 |
|
|
| 2,796,100 |
|
Shares associated with Marathon Convertible Note |
|
| 2,400,000 |
|
|
| 2,400,000 |
|
March 2023 Offering warrants |
|
| 2,920,306 |
|
|
| — |
|
SWK Warrants |
|
| 500,000 |
|
|
| 150,000 |
|
Total |
|
| 9,094,404 |
|
|
| 5,346,100 |
|
September 30, | ||
2017 | 2016 | |
Convertible redeemable preferred stock | — | 638,416 |
| Warrants | 317,630 | — |
Options to purchase common stock | 165,000 | 122,000 |
Total | 482,630 | 760,416 |
The application of the “if-converted” method to the 2.4 million shares associated with the Secured Convertible Notes, as of the beginning of the period, was not applicable for the three months ended March 31, 2023 because to do so would have been antidilutive.
Subsequent to March 31, 2023, the Company’s Board of Directors granted non-qualified stock options under the 2010 Plan to purchaseCompany sold an aggregate of 456,886 shares of common stock under its ATM facility at an average gross sale price of $0.7912 per share, resulting in gross proceeds of $0.4 million. Proceeds, net of $14 thousand in fees and offering costs, were $0.3 million.
On April 12, 2023, the Company issued 585,306 shares of common stock due to the exercise of the Pre-Funded Warrants.
32
On May 12, 2023, the Company entered into the Third Amendment to the SWK Credit Agreement. In addition to other provisions, the Third Amendment provides for (i) 218,600 sharesa temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by the Company pursuant to the SWK Credit Agreement as amended through the Third Amendment (i.e., the Current SWK Credit Agreement), from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million (or, if less, the outstanding principal amount of the SWK Loans) until the SWK Loans are repaid, (ii) the Company’s ability to forego a $0.6 million amortization payment otherwise due under the Current SWK Credit Agreement on May 15, 2023, and at the discretion of SWK a second $0.6 million amortization payment otherwise due on June 15, 2023, and (iii) the Company’s ability to defer until July 15, 2023 half of the $0.5 million quarterly interest payment otherwise due under the Current SWK Credit Agreement on May 15, 2023.
The SWK Loans made under the Current SWK Credit Agreement bear interest at an annual rate of the sum of (i) 3-month SOFR, subject to a 1% floor, plus (ii) a margin of 11%, with such interest payable quarterly in arrears. In the event of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. Due to topline results announced in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, the principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows the Company to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. The Company has the option to prepay the SWK Loans in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK under the Current SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term Loan (whether voluntary or at scheduled maturity), the Company must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the Current SWK Credit Agreement with respect to the Second Term Loan) equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from the Company’s Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, the Company is required to maintain for purposes of the SWK Loans unencumbered liquid assets of not less than the lesser of (x) the outstanding principal amount of the SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the announcement of such topline results), although the Third Amendment provides for a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by the Company under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million).
The SWK Loans are secured by a first priority lien on all of the Company’s common stock to executive officersassets and employees and (ii) 30,000 sharesany of the Company’s common stock to outside non-employee directors, all at an exercise price of $15.34 per share. Stock options granted to executive officers and employees vest over a four-year period, with 25% vesting on the one-year anniversary of the grant date and the remaining 75% vesting quarterly over the remaining three years, assuming continued service, and with vesting acceleration in full immediately priorfuture subsidiaries pursuant to a change in control. Stock options granted to outside non-employee directors vest either (a) in fullGuarantee and Collateral Agreement entered into on March 4, 2022, between the one-year anniversary ofCompany and SWK, as agent (i.e., the grant date, assuming continued service, for awards to continuing directors, with vesting acceleration in full immediately prior to a change in control, or (b) quarterly over a three-year period, assuming continued service, for awards to new directors, with vesting acceleration in full immediately prior to a change in control. On November 8, 2017, the Company’s Board of Directors granted a non-qualified stock option to purchase 25,000 shares of the Company’s common stock to an employee with an exercise price of $17.51, which vests over a four-year period, with 25% vesting on the one-year anniversary of the grant dateSWK Security Agreement). The Current SWK Credit Agreement contains customary representations and the remaining 75% vesting quarterly over the remaining three years, assuming continued service,warranties and with vesting acceleration in full immediately prior to a change in control.affirmative and negative covenants.
33
Item 2.
The following discussion and analysis of our financial condition is as of September 30, 2017.March 31, 2023. Our results of operations and cash flows should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2016.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements contained in this report, other than statements of historical fact, constitute “forward-looking statements.” The words “expects,” “believes,” “hopes,” “anticipates,” “estimates,” “may,” “could,” “intends,” “exploring,” “evaluating,” “progressing,” “proceeding”“proceeding,” and similar expressions are intended to identify forward-looking statements.
These forward-looking statements do not constitute guarantees of future performance. Investors are cautioned that statements which are not strictly historical statements, including, without limitation, statements regarding revenue, expenses and other financial metrics, including expectations and trends related thereto, current or future financial payments, costs, returns, royalties, performance and position, plans and objectives for future operations, plans and objectives for product development, plans and objectives for present and future clinical trials and results of such trials, plans and objectives for regulatory approval, litigation, intellectual property, information about our product OLPRUVA™ (sodium phenylbutyrate) for oral suspension, including statements about its development and future lifecycle opportunities, manufacturing plans and performance, management’s initiatives and strategies, our ability to meet Nasdaq’s continued listing standards, and the development of our product candidates and our expectations related thereto, including EDSIVO™ (celiprolol), ACER-801 (osanetant), and ACER-001,ACER-2820 (emetine), constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could affect our ability to successfully implement our business strategy and cause actual results to differ materially from those anticipated. These
You should carefully consider all of the information in this report and, in particular, the following principal risks and uncertainties include, but are not limited to, those risksall of the other specific factors further discussed in Item 1A of this report, “Risk Factors,” as well as, without limitation, risks associated with:
Forward-looking statements speak only as of the date made. We assume no obligation or undertaking to update any forward-looking statements to reflect any changes in expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. You should, however, review additional disclosures we make in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filedthe reports we file with the SEC.
Overview
We are a pharmaceutical company focused on the acquisition, development, and commercialization of therapies for patients with serious rare and ultra-rarelife-threatening diseases with criticalsignificant unmet medical need. Our late-stage clinical pipeline includes two candidatesneeds. We identify and develop treatments where science can be applied in new ways for severe genetic disordersuse in diseases with high unmet need.
In the U.S., OLPRUVA™ (sodium phenylbutyrate) for which there are few or no FDA-approved treatments: EDSIVO™ (celiprolol)oral suspension is approved for vascular Ehlers-Danlos Syndrome (“vEDS”), and ACER-001 (a fully taste-masked, immediate release formulationthe treatment of sodium phenylbutyrate) for urea cycle disorders (“UCD”UCDs”) and Maple Syrup Urine Diseaseinvolving deficiencies of carbamylphosphate synthetase (“MSUD”CPS”), ornithine transcarbamylase (“OTC”), or argininosuccinic acid synthetase (“AS”). There are no FDA-approved drugsWe also have a pipeline of investigational product candidates, including EDSIVO™ (celiprolol) for vEDSthe treatment of vascular Ehlers-Danlos syndrome (“vEDS”) patients with a confirmed type III collagen (COL3A1) mutation, and MSUDACER-801 (osanetant) for the treatment of vasomotor symptoms (“VMS”), post-traumatic stress disorder (“PTSD”), and limited options for UCD, which collectively impact more than 4,000 patientsprostate cancer, although the ACER-801 program is currently on pause while we conduct a thorough review of the full data set of results from its Phase 2a proof of concept clinical trial (where topline results showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in the United States. Our products have clinical proof-of-concept and mechanistic differentiation, and wepostmenopausal women). We also intend to seek approvalexplore additional lifecycle opportunities for themOLPRUVA™ (sodium phenylbutyrate) in various disorders where proof of concept data exists, subject to additional capital.
Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. by(“GAAP”), which contemplate our continuation as a going concern. We have suffered recurring losses from operations, negative cash flows from operations, have a net working capital deficiency, have a net capital deficiency, and have minimum unencumbered liquid assets requirements under our SWK Credit Agreement. While we have received approval for OLPRUVATM, we have yet to launch the product and establish a source of commercial product revenues and, as such, have been dependent on
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funding operations through the sale of equity securities, through a collaboration agreement, and through debt instruments. Since inception, we have experienced significant losses and incurred negative cash flows from operations. We have an accumulated deficit of $157.0 million as of March 31, 2023 and expect to incur further losses over the foreseeable future as we develop our business. We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy, including our planned product development efforts and potential precommercial activities.
As of March 31, 2023, we had cash and cash equivalents of $6.4 million and current liabilities of $38.0 million, which include $2.9 million associated with deferred collaboration funding. Our cash and cash equivalents available at March 31, 2023, together with the subsequent proceeds from our ATM facility (defined below), are expected to be sufficient to fund our anticipated operating and capital requirements into late in the second quarter of 2023.
We will need to raise additional capital to fund continued operations beyond the second quarter of 2023. We may not be successful in our efforts to raise additional funds or achieve profitable operations. We continue to explore potential opportunities and alternatives to obtain the additional resources that will be necessary to support our ongoing operations beyond late in the second quarter of 2023, including raising additional capital through either private or public equity or debt financing, or additional program collaborations or non-dilutive funding, as well as using our ATM facility which has $29.0 million available as of May 15, 2023. (See At-the Market Facility and Common Stock Purchase Agreement in Note 9 as well as Note 11 to our financial statements.) Moreover, due to the regulatory pathway establishedSEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under section 505(b)(2)a shelf registration statement in excess of one-third of such company’s public float, we are only able to issue a limited number of shares under our ATM facility. From May 19, 2020 through March 31, 2023, we have raised gross proceeds of $20.6 million from the ATM facility and gross proceeds of $4.0 million from an equity line purchase agreement with Lincoln Park (defined below), which equity line facility was completed on December 30, 2022 and is now terminated.
On March 4, 2022, we entered into a Credit Agreement (the “SWK Credit Agreement”) with the lenders party thereto and SWK Funding LLC (“SWK”), as the agent, sole lead arranger and sole bookrunner, which provided for a senior secured term loan facility in an aggregate amount of $6.5 million in a single borrowing (the “Original Term Loan”). The Original Term Loan funding closed on March 14, 2022. The proceeds of the Federal Food, Drug,Original Term Loan were used to pay fees, costs and Cosmetic Act,expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement (as defined and described below) and the Marathon Credit Agreement (as defined and described below) and for other working capital and general corporate purposes. On August 19, 2022, we entered into an amendment (the “First Amendment”) to the SWK Credit Agreement, which among other provisions revised our required minimum amount of unencumbered liquid assets under the Original Term Loan. On January 30, 2023, we entered into a Second Amendment (the “Second Amendment”) to the SWK Credit Agreement. In addition to other provisions, the Second Amendment provided for an additional senior secured term loan to be made to us in an aggregate amount of $7.0 million in a single borrowing which funded on January 31, 2023 (the “Second Term Loan”, and together with the Original Term Loan, the “SWK Loans”). On May 12, 2023, we entered into a Third Amendment (the “Third Amendment”) to the SWK Credit Agreement. In addition to other provisions, the Third Amendment provides for (i) a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by us (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million (or, if less, the outstanding principal amount of the SWK Loans) until the SWK Loans are repaid), (ii) the ability for us to forego a $0.6 million amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second $0.6 million amortization payment otherwise due on June 15, 2023, and (iii) the ability for us to defer until July 15, 2023 half of the $0.5 million quarterly interest payment otherwise due on May 15, 2023).
The SWK Loans made under the SWK Credit Agreement, as amended through the Third Amendment (the “Current SWK Credit Agreement”) bear interest at an annual rate of the sum of (i) 3-month SOFR, subject to a 1% floor, plus (ii) a margin of 11%, with such interest payable quarterly in arrears. In the event of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. Due to topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or FFDCA,severity of hot flashes in postmenopausal women, the principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows us to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. We have the option to prepay the SWK Loans in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that allowsSWK receives an applicantaggregate amount (inclusive of all principal, interest and origination and other fees paid to relySWK under the SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term
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Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the SWK Credit Agreement with respect to the Second Term Loan) equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for approvalmoderate to severe VMS associated with menopause, we are required to maintain for purposes of the SWK Loans unencumbered liquid assets of not less than the lesser of (x) the outstanding principal amount of the SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the announcement of such topline results), although the Third Amendment provides for a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by the Company under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and at leastthe discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million).
The SWK Loans are secured by a first priority lien on all of our assets and any of our future subsidiaries pursuant to a Guarantee and Collateral Agreement entered into on March 4, 2022, between us and SWK, as agent (the “SWK Security Agreement”). The SWK Credit Agreement contains customary representations and warranties and affirmative and negative covenants. We paid to SWK $0.1 million in partorigination fees on third-party data,the date on which is expectedthe Original Term Loan was funded.
In connection with the execution of the SWK Credit Agreement, we issued a warrant (the “First SWK Warrant”) to expeditepurchase 150,000 shares of our common stock at an exercise price of $2.46 per share. In connection with the preparation, submission,execution of the First Amendment, we issued to SWK an additional warrant to purchase 100,000 shares of our common stock at an exercise price of $1.51 per share (such warrant, the "Second SWK Warrant"). In connection with the execution of the Second Amendment, we issued to SWK an additional warrant to purchase 250,000 shares of our common stock at an exercise price of $2.39 per share (such warrant, the "Third SWK Warrant" and, approval of a marketing application.
On March 4, 2022, we also entered into a Secured Convertible Note Purchase Agreement and Plan of Merger and Reorganization, dated as of June 30, 2017, by and among the Registrant, Opexa Merger Sub, Inc.with MAM Aardvark, LLC (“Merger Sub”Marathon”) and Private AcerMarathon Healthcare Finance Fund, L.P. (“Marathon Fund” and together with “Marathon” each a “Holder” and collectively the “Holders”) (the “Merger“Marathon Convertible Note Purchase Agreement”), pursuant to which Merger Sub merged withwe issued and into Private Acer, with Private Acer surviving as a wholly-owned subsidiarysold to the Holders secured convertible notes (the “Marathon Convertible Notes”) in an aggregate amount of up to $6.0 million (the “Convertible Note Financing”). The Convertible Note Financing closed on March 14, 2022. The proceeds of the RegistrantConvertible Note Financing were used to pay fees, costs and expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement and the Marathon Credit Agreement and for other working capital and general corporate purposes. On January 30, 2023, we entered into an Amendment Agreement (the “Merger”“Marathon Amendment Agreement”). This transaction was approved with Marathon and Marathon Fund with respect to the Marathon Convertible Notes.
The Marathon Convertible Notes bear interest at an annual rate of 6.5%, with such interest payable quarterly; provided, however, that each of the Holders have agreed to defer payment by us of accrued and unpaid interest on their respective Marathon Convertible Note existing on the Registrant’s shareholdersdate of the Marathon Amendment Agreement through March 31, 2023, with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred after March 31, 2023, to be due and payable in cash by us on April 15, 2023. Subject to the restrictions set forth in a subordination agreement among each of the Holders and SWK, as agent and lender, we are required to repurchase each Marathon Convertible Note, on or before the fifth (5th) business day (but with five (5) business days’ notice) following the earlier of June 15, 2023 or our receipt of gross proceeds of at least $40.0 million from the issuance or sale of equity, debt and/or hybrid securities, loans or other financing on a cumulative basis since January 1, 2023 (excluding the Second Term Loan), at a special meetingprice equal to 200% (the “Buy-Out Percentage”) of its shareholders on September 19, 2017 (the “Special Meeting”). Also on September 19, 2017, in connection with, and priorthe outstanding principal amount of such Marathon Convertible Note, plus any accrued but unpaid interest thereon to the completiondate of such repurchase, plus 2500 basis points for each 90-day period after April 15, 2023, pro-rated for the actual number of days elapsed in the 90-day period before repurchase actually occurs (for example, if the repurchase occurs on May 30, 2023, the Buy-Out Percentage shall be increased to 212.5%) provided, that if we are prohibited from effectuating such repurchases pursuant to the subordination agreement with SWK, we are required to cause the repurchase to occur on or before the fifth (5th) business day following the earlier of such prohibition being no longer applicable or the payment in full of all senior indebtedness described in such subordination agreement, but with five (5) business days’ notice. Each of the Merger,Holders also has the Registrant effected a 1-for-10.355527 reverse stock splitright to convert all or any portion of its thenthe outstanding principal amount plus any accrued but unpaid interest under the Marathon Convertible Note held by such Holder into shares of common stock at a conversion price of $2.50 per share, subject to adjustment. Each Holder has certain rights with respect to the registration by us for resale of the shares of common stock issuable upon conversion of the Marathon Convertible Note held by such Holder which are forth in the Marathon Convertible Note Purchase Agreement. Any outstanding principal, together with all accrued and unpaid interest, will be payable on the earlier of the third anniversary of the date of issuance, or upon a change of control of us.
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Pursuant to the Marathon Convertible Note Purchase Agreement, the Marathon Convertible Notes are secured by a lien on collateral representing substantially all of our assets, although such security interest is subordinated to our obligations under the SWK Credit Agreement.
On March 4, 2022, we also entered into a Credit Agreement (the “Reverse Split”“Marathon Credit Agreement”) and immediately following the Merger, the Registrant changed its name to “Acer Therapeutics Inc.” pursuant to amendments to its certificate of formation filed with the Texas Secretarylenders party thereto and Marathon, as the agent, sole lead arranger and sole bookrunner, which provided for a senior secured term loan facility in an aggregate amount of Stateup to $42.5 million in a single borrowing (the “Term Loan”). The Term Loan was available to be borrowed only followingfull FDA approval for marketing of ACER-001 and until December 31, 2022. We received approval for our NDA for ACER-001 on SeptemberDecember 22, 2022, and we and Marathon agreed to an Extension Agreement with respect to the Term Loan on December 30, 2022, which extended the commitment date for funding the Term Loan to January 16, 2023. We elected to terminate the Marathon Credit Agreement by entering into a Termination Agreement on January 30, 2023, which terminated the Credit Agreement and an associated Royalty Agreement.
On March 19, 2017.
If we are unable to obtain additional funding to support our current or proposed activities and operations, we may not be able to continue our operations as proposed, which may require us to suspend or terminate any ongoing development activities, modify our business plan, curtail various aspects of our operations, cease operations, or seek relief under applicable bankruptcy laws. In such event, our stockholders may lose a substantial portion or even all of their investment.
These factors individually and collectively raise substantial doubt about our ability to continue as a going concern for at least 12 months from the outstanding common stock of the Registrant; and (iii) the Registrant’s shareholders immediately priordate these financial statements are available, or May 15, 2024. Our financial statements do not include any adjustments or classifications that may result from our possible inability to the Merger, whose shares of the Registrant’s common stock remain outstanding after the Merger, owned approximately 11% of the outstanding common stock of the Registrant.
Revenue
We have no products approved for commercial sale and have not generated any revenue from product sales.
Our revenue and collaboration funding to date consist of activities in connection with a collaboration agreement, including a license arrangements or strategic alliances, weof intellectual property. We expect that any revenue or collaboration funding we generate will fluctuate from quarter-to-quarterquarter to quarter as a result of the timing of achievement of pre-clinical, clinical, regulatory and commercializationcontractually specified milestones, if at all,any, the timing and amount of payments relating to such milestones, as well asand the extent to which any products are approved and successfully commercialized.
If our product candidates are not developed in a timely manner, if regulatory approval is not obtained for them, or if such product candidates are not commercialized, our ability to generate future revenue, and our results of operations and financial position, would be adversely affected.
Activities Associated with Collaboration Agreements
From time to time, we will recognize collaboration funding as a reduction to research and development expenses and general and administrative expenses amounts attributed to providing services to our collaboration partner for which we have been reimbursed.
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Research and Development Expenses
Research and development expenses consist of costs associated with the development of our product candidates. Our research and development expenses include:
We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses whenas the service has been performed or whenas the goods have been received.
At any time, we are working on multiple programs, primarily within our therapeutic areas of focus.programs. Our internal resources, employees, and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not generate meaningful information regarding the costs incurred for these early stage research and drug discovery programs on a specific project basis. However, we are currently spending the vast majority of our research and development resources on our two lead development programs.
We expect our research and development expenses to increasebe substantial for the foreseeable future as we continue to conduct our ongoing regulatory activities, initiate new preclinical and clinical trials, and build upon our pipeline. The process of conducting clinical trials and pre-clinicalpreclinical studies necessary to obtain regulatory approval, preparing to seek regulatory approval, and preparing for commercialization in the event of regulatory approval, is costly and time consuming. Wetime-consuming. While we received approval for OLPRUVATM on December 22, 2022 for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, we may never succeed in achieving marketing approval for any of our other product candidates.
Successful development of product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to enter into new strategic alliances with respect to each program or potential product candidate, the scientific and clinical success of each product candidate, the timing and ability to obtain regulatory approval for our product candidates (if any), and ongoing assessments as to each product candidate’s commercial potential. We will need to raise additional capital and may seek to do so through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates, and pursue regulatory approval.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, and stock-based compensation; external precommercial costs; and professional fees for auditing, tax, legal, and business consulting, auditing, and tax services. We expect that general and administrative expenses will increasebe substantial in the future asfuture. From time to time, in connection with the Collaboration Agreement with Relief, we expand our operating activities.
Other income (expense)Income (Expense), net
Other income (expense), net consists primarily of changes in the value of liabilities measured at fair value, including losses on extinguishment related to our debt, debt issuance costs on our debt recorded at fair value, interest income and interest expense, and various income or expense items of a non-recurring nature.gains and losses resulting from the revaluation of assets and liabilities denominated in foreign currencies. We earn interest
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income from interest-bearing accounts and money market funds, forwhich we classify as cash and cash equivalents. InterestWe incur interest expense has historically been comprisedfrom loans and notes payable. We record as part of interestother income (expense), net, transaction gains and losses on foreign currency denominated assets and liabilities when they are revalued each period due to changes in underlying exchange rates. We also record gain on extinguishment of debt as part of other related non-cash charges incurred under convertible notes payable with our investors.
Critical Accounting PolicesPolicies and Estimates
This management’s discussion and analysis of financial condition and results of operations is based on our consolidatedunaudited condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).GAAP. The preparation of these unaudited condensed financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates.
Revenue Recognition and Accounting for Collaboration Agreements
Our revenue and collaboration funding are generated from a single collaboration agreement which included the sale of a business acquisitionlicense of intellectual property. We analyze our collaboration agreements to assess whether they are generallywithin the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. To the extent the arrangement is within the scope of ASC 808, we assess whether aspects of the arrangement between us and the collaboration partner are within the scope of other accounting literature. If we conclude that some or all aspects of the arrangement represent a transaction with a customer, we account for those aspects of the arrangement within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). If we conclude that some or all aspects of the arrangement are within the scope of ASC 808 and do not represent a transaction with a customer, we recognize our share of the allocation of the shared costs incurred with respect to the jointly conducted activities as a component of the related expense in the period incurred. Pursuant to ASC 606, a customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. If we conclude a counterparty to a transaction is not a customer or otherwise not within the scope of ASC 606 or ASC 808, we consider the guidance in other accounting literature as applicable or by analogy to account for such transaction.
We determine the units of account within the Collaboration Agreement utilizing the guidance in ASC 606 to determine which promised goods or services are distinct. In order for a promised good or service to be considered “distinct” under ASC 606, the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
For any units of account that fall within the scope of ASC 606, where the other party is a customer, we evaluate the separate performance obligation(s) under each contract, determine the transaction price, allocate the transaction price to each performance obligation considering the estimated stand-alone selling prices of the services and recognize revenue upon the satisfaction of such obligations at a point in time or over time dependent on the satisfaction of one of the following criteria: (1) the customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance; (2) the vendor creates or enhances an asset controlled by the customer; and (3) the vendor’s performance does not create an asset for which the vendor has an alternative use and the vendor has an enforceable right to payment for performance completed to date.
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
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Revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property is recognized only when (or as) the later of the following events occurs: (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).
On January 25, 2021, we entered into the Option Agreement with Relief pursuant to which we granted Relief an exclusive option (the “Exclusivity Option”) to pursue a potential collaboration and license arrangement with us for the development, regulatory approval and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including UCDs and MSUD. The Option Agreement provided a period of time up to June 30, 2021 for the parties to perform additional due diligence and to work toward negotiation and execution of a definitive agreement with respect to the potential collaboration for ACER‑001. In consideration for the grant of the Exclusivity Option, (i) we received from Relief an upfront nonrefundable payment of $1.0 million, (ii) Relief provided to us a 12-month secured loan in the principal amount of $4.0 million, as evidenced by a Promissory Note (the “Note”) issued by Acer to Relief, and (iii) we granted to Relief a security interest in all of its assets to secure performance of the Note, as evidenced by a Security Agreement (the “Security Agreement”). The Note was repayable in one lump sum within 12 months from issuance and bore interest at a rate equal to 6% per annum.
On March 19, 2021, we entered into the Collaboration Agreement with Relief providing for the development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and MSUD. We received a $10.0 million cash payment from Relief (i.e., a $14.0 million “Reimbursement Payment” offset by repayment of the $4.0 million outstanding balance of the Note, plus interest earned through the date of the Collaboration Agreement). Under the terms of the Collaboration Agreement, Relief committed to pay us up to an additional $20.0 million for U.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months ended June 30, 2021, we received from Relief the $10.0 million First Development Payment. We were contractually entitled to receive from Relief an additional $10.0 million Second Development Payment conditioned upon the FDA’s acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received on October 4, 2021. On October 6, 2021, we entered into a Waiver and Agreement with Relief to amend the timing for the Second Development Payment. We received the Second Development Payment in two $5.0 million tranches on each of October 12, 2021 and January 14, 2022. Further, we retained development and commercialization rights in the U.S., Canada, Brazil, Turkey and Japan (“Acer Territory”). The companies will split net profits from the Acer Territory 60%:40% in favor of Relief. Relief licensed the rights for the rest of the world (“Relief Territory”), where we will receive from Relief a 15% royalty on all net sales received in the Relief Territory. We could also receive a total of $6.0 million in milestone payments based on the first European (EU) marketing approvals of OLPRUVATM for a UCD and MSUD.
We assessed these agreements in accordance with the authoritative literature and concluded that they meet the definition of a collaborative arrangement per ASC 808. For certain parts of the Collaboration Agreement, we concluded that Relief represented a customer while for other parts of the Collaboration Agreement Relief did not represent a customer. The units of account of the Collaboration Agreement where Relief does not represent a customer are outside of the scope of ASC 606. We also determined that the development and commercialization services and Relief’s right to 60% profit in Acer Territory is within the scope of ASC 730, Research and Development (“ASC 730”), with regard to funded research and development arrangements.
We concluded the promised goods and services contained in the Collaboration Agreement represented two distinct units of account consisting of a license in Relief Territory, and a combined promise for the development and commercialization of OLPRUVATM in Acer Territory and the payment of 60% net profit from that territory (together, the “Services”). The stand-alone selling price was estimated for each distinct unit of account.
We determined that the transaction price at the outset of the Collaboration Agreement would amount to $25.0 million, including the Option Fee of $1.0 million, the Reimbursement Payment of $14.0 million, and the First Development Payment of $10.0 million. We concluded that, consistent with the evaluation of variable consideration, using the most likely amount approach, the Second Development Payment as well as the milestone payments for EU marketing approvals should be fully constrained until the contingency associated with each payment has been resolved and our NDA is accepted for review by the FDA, and Relief receives EU marketing approval, respectively. The contingency associated with the Second Development Payment was resolved in the fourth quarter of 2021.
Since ASC 808 does not provide recognition and measurement guidance for collaborative arrangements, we applied the principles of ASC 606 for those units of account where Relief is a customer and ASC 730-20 for the funded research and development activities. The license revenue was recognized at the point where we determined control was transferred to the customer. The combined unit of account for the Services will be recognized over the service period through the anticipated date of first commercial sale of the OLPRUVATM approved product in the U.S. We also determined that the Services would be satisfied over time as measured using actual costs incurred by us toward the identified development and commercialization services agreed to between the parties up to the point of first commercial sale of the OLPRUVATM product. Research and development expenses and general and administrative expenses, as they relate to activities governed by the Collaboration Agreement, incurred in satisfying the
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Services unit-of-account will be recognized as contra-expense within their respective categories, consistent with the presentation guidance in ASC 730. Any amounts recorded at their fair valueas deferred collaboration funding liability which are not recognized as contra-expense at the date of acquisition.first commercial sale, will be classified as contra-royalty and recognized against amounts of net-profit royalty payments recognized by the Company over the term of the agreement between the parties, estimated to be approximately thirteen years beginning in 2023.
We recognize as a receivable under the Collaboration Agreement consideration, which is deemed unconditional, or when only the passage of time is required before payment of that consideration is due. Amounts receivable under the Collaboration Agreement plus payments received from Relief, net of the amount recorded as license revenue and as offsets to research and development expenses and to general and administrative expenses, are reported as deferred collaboration funding.
At March 31, 2023, the amount of deferred collaboration funding associated with unsatisfied promises under the Collaboration Agreement amounted to $6.6 million. We have recorded $2.9 million as a current liability, which equates to our estimate of remaining spending under the Collaboration Agreement which we estimate will be recognized within the next 12 months up to the point of the first commercial sale of OLPRUVATM. The remaining balance of $3.7 million is recorded as a non-current liability and represents the estimated amount that would be taken against future net profit payments made to Relief should they occur. At March 31, 2023, deferred collaboration funding was composed of $35.0 million received from Relief, offset by $1.3 million recognized as license revenue during the year ended December 31, 2021 and by $14.6 million recorded as an offset to research and development expenses, and $12.6 million recorded as an offset to general and administrative expenses subsequent to signing the Collaboration Agreement and through the date of this report.
Goodwill
Goodwill represents the excess of the purchase price (consideration paid plus net liabilities assumed) of an acquired business over the fair value of assets acquiredthe underlying net tangible and liabilities assumed is recorded as goodwill. Determining fairintangible assets. We evaluate the recoverability of goodwill according to ASC Topic 350, Intangibles – Goodwill and Other annually, or more frequently if events or changes in circumstances indicate that the carrying value of identifiable assets, particularly intangibles, and liabilities acquired also requires managementgoodwill might be impaired. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might be impaired include declines in our stock price, market capitalization, or cash flows. We may opt to make estimates, which areperform a qualitative assessment or a quantitative impairment test to determine whether goodwill is impaired. Our goodwill is allocated to a single reporting unit. If we were to determine based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. Accounting for business acquisitions may require management to make judgments and estimates as to fair value of consideration transferred. This judgment and determination may affect the amount of consideration paida qualitative assessment that is allocable to assets and liabilities acquired in the business purchase transaction.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes among the following.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value
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is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Financial instruments consist of cash equivalents, collaboration receivable, accounts payable, accrued expenses, and debt instruments. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature, except for cash equivalents and debt instruments, which were marked to market at the end of each stockreporting period. See Note 7 to our financial statements for additional information on the fair value of the debt liabilities.
We elected the fair value option or awardfor both our Original Term Loan and our Marathon Convertible Notes dated March 14, 2022 (see Note 7 to our financial statements). We also applied the fair value option to the Second Term Loan and to the amended Original Term Loan and amended Marathon Convertible Notes, amended on January 30, 2023.We adjust both the Original Term Loan and the Marathon Convertible Notes to fair value through the change in fair value of debt in the accompanying statements of operations. Subsequent unrealized gains and losses on items for which the fair value option is elected are reported in earnings.
Debt
Convertible notes are regarded as compound instruments, consisting of a liability component and an equity component. We determined that we are eligible for the fair value option election in connection with the Original Term Loan as amended, Second Term Loan, and Marathon Convertible Notes as amended, as each instrument met the definition of a “recognized financial liability” which is an acceptable financial instrument eligible for the fair value option under ASC 825-10-15-4 and do not meet the definition of any of the financial instruments found within ASC 825-10-15-5 that are not eligible for the fair value option. At the date of grant usingissuance, the Black-Scholes model. We recognize stock-based compensation expense on a straight-line basis over the vesting term.
Research and Development
Research and development costs are expensed as incurred and include compensation and related benefits, license fees and outside contracted research and manufacturing consultants. We oftensometimes make nonrefundable advance payments for goods and services that will be used in future research and development activities. These payments are capitalized and recorded as an expense in the period that we receive the goods or whenas the services are performed.
Clinical Trial and Pre-ClinicalPreclinical Study Accruals
We make estimates of prepaid and/or accrued expenses as of each balance sheet date in our consolidated financial statements based on certain facts and circumstances at that time. Our accrued expenses for pre-clinicalpreclinical studies and clinical trials are based on estimates of costs incurred for services provided by contract research organizations (“CRO”),CROs, manufacturing organizations, and for other trial-relatedtrial- and study-related activities. Payments under our agreements with external service providers depend on a number of factors such as site initiation, patient screening, enrollment, delivery of reports, and other events. In accruing for these activities, we obtain information from various sources and estimate the level of effort or expense allocated to each period. Adjustments to our research and development expenses may be necessary in future periods as our estimates change. As these activities are generally material to our overall financial statements, subsequent changes in estimates may result in a material change in our accruals.
Results of Operations
Comparison of the three months ended September 30, 2017March 31, 2023 and 2016
The following table summarizes our results of operations for the three months ended September 30, 2017March 31, 2023 and 2016:
Three Months Ended September 30, | ||||
2017 | 2016 | $ Change | % Change | |
| Research and development | $2,057,421 | $1,610,822 | $446,599 | 28% |
| General and administrative | 1,302,401 | 274,512 | 1,027,889 | 374% |
| Other income (expense), net | (118,203) | 136 | (118,339) | (87014)% |
| Net loss | (3,478,025) | (1,885,198) | (1,592,827) | 84% |
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|
| Three Months Ended March 31, |
|
|
|
|
|
|
| |||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Research and development (net of collaboration funding |
| $ | 2,421,120 |
|
| $ | 3,171,639 |
|
| $ | (750,519 | ) |
|
| (24 | )% |
General and administrative (net of collaboration funding |
|
| 2,568,181 |
|
|
| 3,875,601 |
|
|
| (1,307,420 | ) |
|
| (34 | )% |
Loss from operations |
|
| (4,989,301 | ) |
|
| (7,047,240 | ) |
|
| 2,057,939 |
|
|
| (29 | )% |
Total other income (expense), net |
|
| (11,291,405 | ) |
|
| (2,131,764 | ) |
|
| (9,159,641 | ) |
|
| 430 | % |
Net loss |
| $ | (16,280,706 | ) |
| $ | (9,179,004 | ) |
| $ | (7,101,702 | ) |
|
| 77 | % |
Research and Development Expenses
Research and development expense was approximately $2.1expenses were $2.4 million, during the three months ended September 30, 2017, as compared to $1.6 million during the three months ended September 30, 2016. This increasenet of approximately $447,000 was principally due to an increase in spending for clinical development and manufacturing services relating to EDSIVO. Research and development expense for the three months ended September 30, 2017 was comprisedcollaboration funding of approximately $1.9 million directly related to EDSIVO and approximately $133,000 directly related to ACER-001. Research and development expense for the three months ended September 30, 2016 was comprised of approximately $862,000 directly related to EDSIVO and approximately $748,000 directly related to ACER-001. Other research and development costs such as legal and travel costs have not been identified as directly attributable to a specific research and development project.
Nine Months Ended September 30, | ||||
2017 | 2016 | $ Change | % Change | |
| Research and development | $6,948,816 | $3,510,118 | $3,438,698 | 98% |
General and administrative | 2,792,424 | 1,054,479 | 1,737,945 | 165% |
Other income (expense), net | (239,130) | 174 | (239,304) | (137531)% |
| Net loss | (9,980,370) | (4,564,423) | (5,415,947) | 119% |
General and Administrative Expenses
General and administrative expense was approximately $2.8expenses were $2.6 million, for the nine months ended September 30, 2017 as compared to approximatelynet of collaboration funding of $1.1 million, for the ninethree months ended September 30, 2016.March 31, 2023, as compared to $3.9 million, net of collaboration funding of $2.4 million, for the three months ended March 31, 2022. This increasedecrease of approximately $1.7$1.3 million was primarily due to an increasedecreases in legalemployee-related expenses, precommercial expenses, and pre-commercial launch costs.
Other Income (Expense), Net
Other expense,income (expense), net of approximately $239,000 duringfor the ninethree months ended September 30, 2017March 31, 2023 was primarily attributable to interest expense relatedfrom extinguishment of debt, changes in the fair value of debt instruments, and costs of debt issuance. The loss on extinguishment of debt totaling $8.2 million recognized in the three months ended March 31, 2023 was comprised of $5.0 million and $2.7 million of increases in the post-modification cashflows of the Marathon Convertible Notes and SWK Loans, respectively, as well as the fair value of the SWK Third Warrant of $0.5 million. Other income (expense), net for the three months ended March 31, 2022 was primarily attributable to costs of debt issuance and to changes in the outstanding convertible promissory notes prior to conversion.
Liquidity and Capital Resources
We have never been profitable and have incurred operating losses in each year since inception. From inception to September 30, 2017,March 31, 2023, we have raised net cash proceeds of approximately $27.5$122.1 million, primarily from common stock offerings, private placements of convertible preferred stock, common stockdebt instruments, and convertible debt financings.instruments. In addition, from inception to March 31, 2023, we have raised cash proceeds of $35.0 million from collaboration agreements. As of September 30, 2017,March 31, 2023, we had approximately $8.4$6.4 million in cash and cash equivalents.equivalents, and current liabilities aggregating to $38.0 million, which include $2.9 million associated with deferred collaboration funding. Our net loss was approximately $10.0 million for the ninethree months ended September 30, 2017,March 31, 2023 and approximately $6.72022 was $16.3 million for the year ended December 31, 2016.and $9.2 million, respectively. As of September 30, 2017,March 31, 2023, we had an accumulated deficit of approximately $21.3$157.0 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
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The following table shows a summary ofsummarizes our cash flows for the ninethree months ended September 30, 2017March 31, 2023 and 2016:
Nine Months Ended September 30, | ||
| Net cash (used in) provided by: | 2017 | 2016 |
| Operating activities | $(9,888,756) | $(4,574,165) |
| Investing activities | 1,027,600 | (1,582) |
| Financing activities | 15,431,470 | 7,994,834 |
| Net increase in cash and cash equivalents | 6,570,314 | 3,419,087 |
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net cash (used in) provided by: |
|
|
|
|
|
| ||
Operating activities |
| $ | (9,017,890 | ) |
| $ | (3,013,255 | ) |
Investing activities |
|
| (3,066 | ) |
|
| (28,930 | ) |
Financing activities |
|
| 13,071,715 |
|
|
| 11,131,807 |
|
Net increase in cash and cash equivalents |
| $ | 4,050,759 |
|
| $ | 8,089,622 |
|
Operating Activities
Net cash used in operating activities was approximately $9.9$9.0 million for the ninethree months ended September 30, 2017March 31, 2023, as compared to approximately $4.6$3.0 million for the ninethree months ended September 30, 2016. TheMarch 31, 2022.The increase of approximately $5.3$6.0 million was principallyprimarily the result of an increasedecreases in deferred collaboration funding in the three months ended March 31, 2023 as compared to the same period in the prior year, and the receipt in the prior year three month period of the $5.0 million receivable from Relief, as well as the decrease in net loss adjusted for non-cash items. Additionally, decreases in accounts payable and accruals during the three months ended March 31, 2023, whereas, in the prior year during that same period accounts payable and accrual increased due to increased researchtiming of payments.
Investing Activities
Net cash used in investing activities during each of the three months ended March 31, 2023 and development activities in advancing our product candidates2022 was related to the purchase of property and increased general and administrative activities.
Financing Activities
Net cash provided by investingfinancing activities duringwas $13.1 million for the ninethree months ended September 30, 2017 relatesMarch 31, 2023, as compared to cash acquired$11.1 million for the three months ended March 31, 2022. Financing activities in the Merger.
Future Capital Requirements
We have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we successfully commercialize OLPRUVATM and/or unless and until we obtain regulatory approval for and commercialize any of our other product candidates. At the same time, we expect ourto continue to incur significant expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for, our product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates and thereafter successfully commercializecommercializing any such product candidates, we anticipate that we will need substantial additional funding in connection with our continuing operations.
As of September 30, 2017,March 31, 2023, we had approximately $8.4$6.4 million in cash and cash equivalents.equivalents and current liabilities of $38.0 million, which include $2.9 million associated with deferred collaboration funding. Our cash and cash equivalents available at March 31, 2023, together with the net proceeds from our ATM facility subsequent to March 31, 2023 totaling $0.3 million from the sale of 456,886 shares at an average net per share price of $0.7635 are expected to be sufficient to fund our anticipated operating and capital requirements into late in the second quarter of 2023. There is substantial doubt about our ability to continue as a going concern. Please refer to the discussion above titled “Going Concern”.
On March 4, 2022, we entered into the SWK Credit Agreement with the lenders party thereto and SWK, as the agent, sole lead arranger and sole bookrunner, which provided for a senior secured term loan facility in an aggregate amount of $6.5 million in a single borrowing (i.e., the Original Term Loan). The Original Term Loan funding closed on March 14, 2022. The proceeds of the Original Term Loan were used to pay fees, costs and expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement and the Marathon Credit Agreement and for other working capital and general corporate purposes. On August 19, 2022, we entered into the First Amendment to the SWK Credit Agreement, which among other provisions revised our
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required minimum amount of unencumbered liquid assets under the Original Term Loan. On January 30, 2023, we entered into the Second Amendment to the SWK Credit Agreement. In addition to other provisions, the Second Amendment provided for an additional senior secured term loan (i.e., the Second Term Loan) to be made to us in an aggregate amount of $7.0 million in a single borrowing which funded on January 31, 2023. On May 12, 2023, we entered into the Third Amendment to the SWK Credit Agreement. In addition to other provisions, the Third Amendment provides for (i) a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by us (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million (or, if less, the outstanding principal amount of the SWK Loans) until the SWK Loans are repaid), (ii) our ability to forego a $0.6 million amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second $0.6 million amortization payment otherwise due on June 15, 2023, and (iii) our ability to defer until July 15, 2023 half of the $0.5 million quarterly interest payment otherwise due on May 15, 2023).
The SWK Loans made under the SWK Credit Agreement as amended through the Third Amendment (i.e., the Current SWK Credit Agreement) bear interest at an annual rate of the sum of (i) 3-month SOFR, subject to a 1% floor, plus (ii) a margin of 11%, with such interest payable quarterly in arrears. In the event of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. Due to topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, the principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows us to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. We expecthave the option to prepay the SWK Loans in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK under the Current SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the Current SWK Credit Agreement with respect to the Second Term Loan) equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from our researchPhase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, we are required to maintain for purposes of the SWK Loans unencumbered liquid assets of not less than the lesser of (x) the outstanding principal amount of the SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the announcement of such topline results), although the Third Amendment provides for a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by us under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and development expensesat the discretion of SWK a possible further temporary reduction to substantially increase$1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million).
The SWK Loans are secured by a first priority lien on all of our assets and any of our future subsidiaries pursuant to a Guarantee and Collateral Agreement entered into on March 4, 2022, between us and SWK, as agent (i.e., the SWK Security Agreement). The SWK Credit Agreement contains customary representations and warranties and affirmative and negative covenants. We paid to SWK $0.1 million in origination fees on the date on which the Original Term Loan was funded.
In connection with the execution of the SWK Credit Agreement, we issued the First SWK Warrant to purchase 150,000 shares of our ongoing activities, particularlycommon stock at an exercise price of $2.46 per share. In connection with the execution of the First Amendment, we issued to the Second SWK Warrant to purchase 100,000 shares of our common stock at an exercise price of $1.51 per share. In connection with the execution of the Second Amendment, we issued to SWK the Third SWK Warrant to purchase 250,000 shares of our common stock at an exercise price of $2.39 per share. SWK may exercise the SWK Warrants in accordance with the terms thereof for all or any part of such shares of common stock from the date on which the Original Term Loan was funded or such SWK Warrant was issued, as applicable, until and including March 4, 2029.
On March 4, 2022, we advancealso entered into the Marathon Convertible Note Purchase Agreement with the Holders pursuant to which we issued and sold to the Holders the Marathon Convertible Notes in an aggregate amount of $6.0 million. The Convertible Note Financing closed on March 14, 2022. The proceeds of the Convertible Note Financing were used to pay fees, costs and expenses related to the SWK Credit Agreement, the Marathon Convertible Note Purchase Agreement and the Marathon Credit
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Agreement and for other working capital and general corporate purposes. On January 30, 2023, we entered into the Marathon Amendment Agreement with Marathon and Marathon Fund with respect to the Marathon Convertible Notes.
The Marathon Convertible Notes bear interest at an annual rate of 6.5%, with such interest payable quarterly; provided, however, that each of the Holders have agreed to defer payment by us of accrued and unpaid interest on their respective Marathon Convertible Note existing on the date of the Marathon Amendment Agreement through March 31, 2023, with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred after March 31, 2023, to be due and payable in cash by us on April 15, 2023. Subject to the restrictions set forth in a subordination agreement among each of the Holders and SWK, as agent and lender, we are required to repurchase each Marathon Convertible Note, on or before the fifth (5th) business day (but with five (5) business days’ notice) following the earlier of June 15, 2023 or our product candidatesreceipt of gross proceeds of at least $40.0 million from the issuance or sale of equity, debt and/or hybrid securities, loans or other financing on a cumulative basis since January 1, 2023 (excluding the Second Term Loan), at a price equal to 200% (i.e., the Buy-Out Percentage) of the outstanding principal amount of such Marathon Convertible Note, plus any accrued but unpaid interest thereon to the date of such repurchase plus 2500 basis points for each 90-day period after April 15, 2023, pro-rated for the actual number of days elapsed in the 90-day period before repurchase actually occurs (for example, if the repurchase occurs on May 30, 2023, the Buy-Out Percentage shall be increased to 212.5%); provided, that if we are prohibited from effectuating such repurchases pursuant to the subordination agreement with SWK, we are required to cause the repurchase to occur on or towards clinicalbefore the fifth (5th) business day following the earlier of such prohibition being no longer applicable or the payment in full of all senior indebtedness described in such subordination agreement, but with five (5) business days’ notice. Each of the Holders also has the right to convert all or any portion of the outstanding principal amount plus any accrued but unpaid interest under the Marathon Convertible Note held by such Holder into shares of common stock at a conversion price of $2.50 per share, subject to adjustment. Each Holder has certain rights with respect to the registration by us for resale of the shares of common stock issuable upon conversion of the Marathon Convertible Note held by such Holder which are forth in the Marathon Convertible Note Purchase Agreement. Any outstanding principal, together with all accrued and unpaid interest, will be payable on the earlier of the third anniversary of the date of issuance, or upon a change of control of us.
Pursuant to the Marathon Convertible Note Purchase Agreement, the Marathon Convertible Notes are secured by a lien on collateral representing substantially all of our assets, although such security interest is subordinated to our obligations under the SWK Credit Agreement.
On March 4, 2022, we also entered into the Marathon Credit Agreement with the lenders party thereto and Marathon, as the agent, sole lead arranger and sole bookrunner, which provided for a senior secured term loan facility in an aggregate amount of up to $42.5 million in a single borrowing (i.e., the Term Loan). The Term Loan was available to be borrowed only following full FDA approval for marketing of ACER-001 and until December 31, 2022. We received approval for our NDA for ACER-001 on December 22, 2022, and we and Marathon agreed to an Extension Agreement with respect to the Term Loan on December 30, 2022, which extended the commitment date for funding the Term Loan to January 16, 2023. We elected to terminate the Marathon Credit Agreement by entering into a Termination Agreement on January 30, 2023, which terminated the Credit Agreement and an associated Royalty Agreement.
On March 19, 2021, we entered into the Collaboration Agreement with Relief providing for the development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and MSUD. We received a $10.0 million cash payment from Relief (i.e., a $14.0 million “Reimbursement Payment,” offset by repayment of the $4.0 million outstanding balance of the Note plus interest earned through the date of the Collaboration Agreement). Under the terms of the Collaboration Agreement, Relief committed to pay us up to an additional $20.0 million for U.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months ended June 30, 2021, we received from Relief the $10.0 million First Development Payment. We were contractually entitled to receive from Relief an additional $10.0 million Second Development Payment conditioned upon the FDA’s acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received on October 4, 2021. On October 6, 2021, we entered into a Waiver and Agreement with Relief to amend the timing for the Second Development Payment. We received the Second Development Payment in two $5.0 million tranches on each of October 12, 2021 and January 14, 2022. Further, we retained development and commercialization rights in the U.S., Canada, Brazil, Turkey and Japan (“Acer Territory”). The companies will split net profits from the Acer Territory 60%:40% in favor of Relief. Relief licensed the rights for the rest of the world (“Relief Territory”), where we will receive from Relief a 15% royalty on all net sales received in the Relief Territory. We could also receive a total of $6.0 million in milestone payments based on the first European marketing approvals of OLPRUVATM for a UCD and MSUD. In connection with the cancellation of the $4.0 million promissory note (the “Note”) executed by us in favor of Relief on January 25, 2021, Relief released its security interest in all of our assets pursuant to the Note.
On March 18, 2020, we entered into an amended and restated sales agreement with JonesTrading Institutional Services LLC (“JonesTrading”) and Roth Capital Partners, LLC (“Roth Capital”). This agreement provides a facility for the offer and sale of
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shares of common stock from time to time depending upon market demand, in transactions deemed to be an “at-the-market” (“ATM”) offering. We will need to keep current our shelf registration statement and the offering prospectus relating to the ATM facility, in addition to providing certain periodic deliverables under the sales agreement, in order to use such facility. Due to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period, we are currently only able to issue a limited number of shares which aggregate no more than one-third of our public float using our shelf registration statement. From May 19, 2020 through December 31, 2022, we sold an aggregate of 6,028,535 shares of common stock at an average gross sale price of $2.7429 per share, for gross proceeds of $16.5 million. Proceeds, net of $0.7 million of fees and offering costs were $15.8 million. During the three months ended March 31, 2023, we sold 1,462,254 additional shares of common stock through our ATM facility at an average gross sale price of $2.8095 per share, for gross proceeds of $4.1 million. Proceeds, net of $0.1 million in fees and offering costs for the three months ended March 31, 2023, were $4.0 million. As of March 31, 2023, $29.4 million remained available under our ATM facility, subject to various limitations. In connection with the March 2023 Offering, we suspended our ATM facility and entered into a related restriction prohibiting us from entering into any agreement to issue or potential regulatory approval.
Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
We will continue to require substantial additional capital to continue our clinical development and pursuit of regulatory approval activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development, regulatory conditions and requirements, and commercialization efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop We expect to incur significant expenses and Until we can generate a sufficient amount of product sales revenue to finance our cash requirements, which would require us to obtain regulatory approval for and successfully commercialize one or more of our product candidates, we expect to finance our future cash needs primarily through the issuance of additional equity and potentially through borrowing, non-dilutive funding, and strategic 47 We continue to explore potential opportunities and alternatives to obtain the additional resources that will be necessary to support our ongoing operations beyond the second quarter of 2023, including raising additional capital through either private or public equity or debt financing, or additional program collaborations or non-dilutive funding, as well as using our ATM facility. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our The Nasdaq Capital Market’s continued listing standards for our common stock require, among other things, that we maintain either (i) stockholders’ equity of $2.5 million, (ii) market value of listed securities (“MVLS”) of $35 million or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. On May 3, 2023, the Company received a letter from the listing qualifications department staff of Nasdaq indicating that for the last 30 consecutive business days, the Company’s minimum MVLS was below the minimum of $35 million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq listing rule 5550(b)(2). In accordance with Nasdaq listing rules, the Company has 180 calendar days, or until October 30, 2023, to regain compliance. In addition, pursuant to Nasdaq Listing Rules, we are required to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq. Following the announcement of topline results in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, our stock has traded below the required minimum bid price for continued listing on Nasdaq. If we are unable to regain and maintain compliance with the continued listing requirements of the Nasdaq Capital Market, our common stock could be delisted, which could affect our common stock’s market price and liquidity and reduce our ability to raise capital. There can be no assurance that we will be able to maintain compliance with Nasdaq listing standards. Our failure to meet or to continue to meet these requirements could result in the Company’s common stock being delisted from the Nasdaq Capital Market. If our common stock were delisted from the Nasdaq Capital Market, among other things, this could result in a number of negative implications, including reduced market price and liquidity of our common stock as a result of the loss of market efficiencies associated with the Nasdaq, the loss of federal preemption of state securities laws, as well as the potential loss of confidence by suppliers, partners, employees and institutional investor interest, fewer business development opportunities, greater difficulty in obtaining financing and breaches of or events of default under certain contractual obligations (including an event of default under the loan agreement for the Marathon Convertible Notes). If we are unable to raise additional funds through public or private equity or debt financings or other sources, such as non-dilutive funding or strategic collaborations, when needed, we may be required to delay, limit, reduce or terminate our product development or pursuit of regulatory approval efforts or Contractual Commitments License Agreements In April 2014, In June 2016, we entered into an agreement with Aventis Pharma SA (now Sanofi) granting us the exclusive access and exclusive right to use the data included in the marketing authorization application dossier filed with and approved by the MHRA in 1986 for the treatment of mild to moderate hypertension pursuant to the UK regulatory approval procedure, for the sole purpose of 48 allowing us to further develop, manufacture, register and commercialize celiprolol in the U.S. and Brazil for the treatment of EDS, Marfan syndrome and Loeys-Dietz syndrome. We have In August 2016, we entered into In September 2018, we entered into an additional agreement with AP-HP to acquire the exclusive worldwide intellectual property rights to three European patent applications relating to certain uses of celiprolol including (i) the optimal dose of celiprolol in treating vascular Ehlers-Danlos syndrome (“vEDS”) patients, (ii) the use of celiprolol during pregnancy, and (iii) the use of celiprolol to treat kyphoscoliotic Ehlers-Danlos syndrome (type VI). Pursuant to the agreement, we will reimburse AP-HP for certain costs and will pay annual maintenance fee payments. Subject to a minimum royalty amount, we will also pay royalty payments on annual net sales of celiprolol during the royalty term in the low single digit percent range, depending upon whether there is a valid claim of a licensed patent. Under the agreement, we will control and pay the costs of ongoing patent prosecution and maintenance for the licensed applications. We subsequently filed three U.S. patent applications on this subject matter in October 2018. We may choose to limit our pursuit of patent applications to specific territories, in which case AP-HP would have In December 2018, we entered into an exclusive license agreement with Sanofi granting us worldwide rights to ACER-801, a clinical-stage, selective, non-peptide tachykinin NK3 receptor antagonist. The agreement requires us to make certain upfront payments to Sanofi, make payments upon achievement of defined development and sales milestones and pay royalties on net sales of ACER-801 over the royalty term. Collaboration Agreement On March 19, 2021, we entered into the Collaboration Agreement with Relief providing for the development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and MSUD. The Collaboration Agreement is the culmination of the Option Agreement previously entered into between us and Relief on January 25, 2021, which provided Relief with an exclusive period of time up to June 30, 2021 for the parties to enter into a mutually acceptable definitive agreement with respect to the potential collaboration and license arrangements. In consideration for the grant of the exclusivity option, (i) we received from Relief an upfront non-refundable payment of $1.0 million, (ii) Relief provided to us a 12-month secured loan in 49 Item 3. Not Item 4. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Our management, Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Certifying Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework in Internal Control – Integrated Framework issued by COSO, our management concluded that our internal control over financial reporting was effective as of March 31, 2023 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Remediation of Previously Identified Material Weakness As previously described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company identified a material weakness in its internal controls over financial reporting as of December 31, 2022, in that it did not design or maintain procedures or controls to accurately apply ASC 260, Earnings Per Share. We have implemented additional controls, review procedures, and training to enhance our accounting for earnings per share calculations, specifically: These actions resulted in an improved internal control environment that was in place for a period of time to allow for our management to conclude, based on evidence obtained in validating the design and operating effectiveness of these controls, that we have fully remediated the material weakness related to Earnings Per Share as of March 31, 2023. Changes in Internal Control over Financial Reporting In addition to implementing the remediation plan as referenced above, we have also implemented controls around accounting for inventory to support the new activities as a result of the FDA approval of OLPRUVATM. Other than these areas, there were no other changes in our internal control over financial reporting 50 PART II - OTHER INFORMATION Item 1. From time to time, See Note We are not currently a party to any other legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation Item 1A. Investing in our securities involves a high degree of risk. You should consider the following risk factors, as well as other information contained or incorporated by reference in this report, before deciding to invest in our securities. The following factors affect our business, our intellectual property, the industry in which we operate and our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we consider immaterial as of the date hereof may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected, the market price of our securities could decline and you could lose all or part of your investment in our securities. Risks Related to Our Business and Financial Condition Our existing cash and cash equivalents at March 31, 2023, together with the net proceeds from our ATM facility subsequent to March 31, 2023, totaling $0.3 million from the sale of 456,886 shares at an average net per share price of $0.7635, are expected to be sufficient to fund our anticipated operating and capital requirements into late in the second quarter of 2023. We will require additional financing to commercialize OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as to complete development and seek to obtain marketing approval of our product candidates and, if approved, to commercialize our product candidates. A failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts, or to suspend or restructure our business. Since our inception, substantially all of our resources have been dedicated to the clinical development of our product candidates. As of March 31, 2023, we had an accumulated deficit of $157.0 million, cash and cash equivalents of $6.4 million and current liabilities of $38.0 million, which include $2.9 million associated with deferred collaboration funding. We will need to raise additional capital within the second quarter of 2023 in order to continue to finance our operations, including with respect to the commercialization of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as to pursue further clinical development and regulatory preparedness of our product candidates, preparations for a commercial launch of our product candidates, if approved, and development of any other current or future product candidates. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, obtaining marketing approvals, and manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any drug development process is highly uncertain and our activities with respect to the commercialization of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS are at a very early stage, we cannot reasonably estimate the actual amounts of additional financing that will be necessary to commercialize OLPRUVATM or to complete the development and, if approved, commercialization of any of our current product candidates or future product candidates, if any. Our operating plan may change as a result of factors currently unknown to us, and we may need to seek substantial additional funds, through public or private equity or debt financings or other sources, such as non-dilutive funding or strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, which recently have been extremely challenging. For example, the volatility associated with the ongoing COVID-19 51 pandemic, the global supply chain issues and Russia’s invasion of Ukraine has caused significant instability and disruptions in the capital and credit markets, which may continue to be adversely affected, including by the possibility of a wider European or global conflict and global sanctions imposed in response to Russia’s invasion. The continued increases and fluctuations in interest rates and inflation have exacerbated negative economic and financial conditions. A severe or prolonged economic downturn, such as a global financial crisis, could result in a variety of risks to our business, including our ability to raise additional capital when needed on acceptable terms, if at all. The recent turmoil in the banking sector initiated by the failure of Silicon Valley Bank (“SVB”) has added to the volatility in that sector. While we have no direct relationship or business with SVB or other banks that have failed thus far in 2023, this situation has added to the difficulties in raising capital on a timely basis and on favorable terms. We cannot anticipate all of the ways in which the foregoing, and the current economic climate and financial market conditions generally, could adversely impact our business. Our future capital requirements depend on many factors, including: 52 Substantial doubt exists as to our ability to continue as a going concern. As noted above, (i) since our inception, substantially all of our resources have been dedicated to the clinical development of our product candidates, (ii) as of March 31, 2023, we had an accumulated deficit of $157.0 million, cash and cash equivalents of $6.4 million, and current liabilities of $38.0 million, which include $2.9 million associated with deferred collaboration funding, (iii) we will need to raise additional capital within the second quarter of 2023 in order to continue to finance our operations, including with respect to the commercialization of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as to pursue further clinical development and regulatory preparedness of our product candidates, preparations for a commercial launch of our product candidates, if approved, and development of any other current or future product candidates. Although OLPRUVATM for oral suspension in the U.S. has been approved by the FDA for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, we have not yet achieved revenue from product sales and we expect to continue to incur losses for the foreseeable future as we continue our commercialization efforts for OLPRUVATM as well as development of, and seeking marketing approvals for, our product candidates. These factors individually and collectively raise substantial doubt about our ability to continue as a going concern and therefore it may be more difficult for us to attract investors. Unless we are able to raise additional capital within the second quarter of 2023, to continue to finance our operations, our long-term business plan may not be accomplished, and we may be forced to cease, restructure, reduce, or delay operations, including reduction of employees which support our efforts toward the commercialization of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS. Our efforts to raise additional funds could be affected by negative conditions in the capital markets generally, which in recent months have been especially challenging, and there are numerous companies in the pharmaceutical and biotech sectors seeking additional capital from many of the same sources, which may also limit the amount of capital, if any, available to us. The recent turmoil in the banking sector initiated by the failure of SVB has added to the volatility in that sector. While we have no direct relationship or business with SVB, this situation has added to the difficulties in raising capital on a timely basis and on favorable terms. We entered into the Collaboration Agreement with Relief which allows them to control the development and commercialization of OLPRUVATM in UCDs and MSUD in territories other than the U.S., Canada, Brazil, Turkey, and Japan, which may impact our ability to generate revenues and achieve or sustain profitability. In addition, we are required to provide assistance to Relief in the performance of their contractual obligations, which may distract us from achieving our objectives. On March 19, 2021, we entered into the Collaboration Agreement, with Relief, providing for the development and commercialization of OLPRUVATM for the treatment of various inborn errors of metabolism, including for the treatment of UCDs and Maple Syrup Urine Disease (“MSUD”). Pursuant to the Collaboration Agreement, we retain development and commercialization rights in the U.S., Canada, Brazil, Turkey, and Japan, we split net profits from such territories 60%:40% in favor of Relief, Relief licenses rights for the rest of the world, and we receive a 15% royalty on net sales in Relief’s licensed territories. In addition, we are required to provide assistance to Relief in the performance of its contractual obligations, which may distract us from achieving our objectives. Aside from OLPRUVATM for oral suspension in the U.S. which has been approved by the FDA for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, there is no guarantee that OLPRUVATM will receive regulatory authority approval in any territory or become commercially available for the indications under investigation. The rights we have transferred to our product candidate OLPRUVATM in the applicable territories, including development and commercialization rights, may impact our ability to generate revenues and achieve or sustain profitability. We are reliant on Relief’s resources and efforts with respect to OLPRUVATM in UCDs and MSUD in their applicable territories, including the pace at which Relief moves forward with development and commercialization. Relief may fail to develop or successfully commercialize OLPRUVATM for a variety of reasons, including that Relief: 53 In addition, we are required by our agreements with Relief to provide certain assistance in the performance of their obligations. Doing so may cause us to delay or defer achievement of our own objectives regarding OLPRUVATM or our other programs. If Relief does not pursue development and successfully commercialize OLPRUVATM in the applicable territories, our ability to generate revenues and achieve or sustain profitability could be significantly hindered and may have a material adverse impact on our financial condition and results of operations. If we are unable to maintain effective disclosure controls and internal control over financial reporting, investors could lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be materially and adversely affected. Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company identified a material weakness in its internal controls over financial reporting, in that it did not design or maintain procedures or controls to accurately apply ASC 260, Earnings Per Share. As a result of this material weaknesses, our management concluded that our internal control over financial reporting was not effective as of June 30, 2022, September 30, 2022, and December 31, 2022. The Company has, from time to time, identified other material weaknesses in its internal control over financial reporting. While we believe we have fully remediated the material weakness related to Earnings Per Share as of March 31, 2023, any failure to maintain effective internal control over financial reporting in the future, or failure to remediate any future material weakness, could adversely impact our ability to report our financial position and results of operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations and may lose confidence in our financial reporting and our business, reputation, results of operations, liquidity, financial condition, stock price and ability to access the capital markets could be adversely affected. In addition, we may be unable to maintain or regain compliance with applicable securities laws, stock market listing requirements and covenants regarding the timely filing of periodic reports, we may be subject to regulatory investigations and penalties, and we may face claims invoking the federal and state securities laws. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition. We can provide no assurance that additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future these controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements. Funding from our ATM facility with JonesTrading and Roth Capital may be limited or may be insufficient to fund our operations or to implement our strategy. We will need to keep current our shelf registration statement and an offering prospectus relating to our ATM facility with JonesTrading and Roth Capital in order to use the program to sell shares of our common stock, as well as provide certain periodic deliverables required by the amended and restated sales agreement with JonesTrading and Roth Capital for the ATM facility. Due to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period, we are currently only able to issue a limited number of shares which aggregate to no more than one-third of our public float using our shelf registration statement. Subsequent to March 31, 2023, we have sold an aggregate of 456,886 shares of common stock under our ATM facility for gross proceeds of $0.4 million. These sales of common stock are counted toward the maximum of one-third of our public float that can be sold in a 12-month period and reduce the remaining shares available to sell under our ATM facility during that 12-month period. 54 The number of shares and price at which we may be able to sell shares under the ATM facility may be limited due to market conditions and other factors beyond our control. We have a limited operating history and have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future and may never achieve or maintain profitability. The absence of any commercial sales and our limited operating history make it difficult to assess our future viability. We are a development-stage pharmaceutical company with a limited operating We have devoted substantially all of our financial resources to identify, acquire, and develop our product candidates, including providing general and administrative support for our operations. To date, we have financed our operations primarily through the sale of equity The market for OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS is limited, as we believe the prevalence is no more than approximately 2,100 individuals in the U.S. with a diagnosed patient population in the U.S. of only approximately 1,100. Thus, our potential future revenue from this market is limited. If we obtain regulatory approval to market We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, and our expenses will increase substantially if and as we: 55 Further, the net losses we incur We currently have no source of commercial product sales revenue and may never be profitable. While we have generated revenue related to the Collaboration Agreement with Relief, we have not generated any revenues from commercial sales of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, or from any of our current product andour product candidates, pursue regulatory approvals, potentially commercialize (if approved) our product candidates. Based on available resources, we believe thatcandidates, and operate our cash and cash equivalents currently on hand are sufficient to fund our anticipated operating and capital requirements through the first half of 2018.business as planned.increasing operating losses for at least the next two yearsforeseeable future as we initiate and continue the clinical development of, seek regulatory approval for, and potentially commercialize (if approved) our product candidates and add personnel necessary to operate as a public company with an advanced clinical pipeline of product candidates. In addition, operating as a publicly-traded company involves the hiring of additional financial and other personnel, upgrading financial information systems and incurring costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to the timing of clinical development programs, efforts to achieve regulatory approval, and planning for potential commercialization (if approved) of our product candidates.alliances with partner companies.alliances. As of March 31, 2023, we did not maintain any lines of credit or have any sources of debt or equity capital committed for funding other than our ATM facility.shareholdersstockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing shareholders.stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.grantprovide rights to develop and market product candidates to third parties that we would otherwise prefer to develop and, if applicable, market ourselves.License AgreementsIn August 2016, Private Acer entered into an agreement with the AP-HP granting Private Acer the exclusive worldwide rights Further, if we are unable to access and use data from a multicenter, prospective, randomized, open trial related to the use of celiprolol for the treatment of vEDS. We intend to use this pivotal clinical dataobtain additional funding to support an NDA filing for EDSIVO for the treatmentour current or proposed activities and operations, we may not be able to continue our operations as currently anticipated, which may require us to suspend or terminate any ongoing development activities, modify our business plan, curtail various aspects of vEDS. The agreement requires Private Acer to make certain upfront payments to AP-HP, reimburse certainour operations, cease operations, or seek relief under applicable bankruptcy laws. In such event, our stockholders may lose a substantial portion or even all of AP-HP’s costs, make payments upon achievement of defined milestones and pay royalties on net sales of celiprolol over the royalty term.their investment.Private Acerwe obtained exclusive rights to patents and certain other intellectual property relating to ACER-001OLPRUVATM for the treatment of inborn errors of branched-chain amino acid metabolism, including MSUD, and preclinical and clinical data, through an exclusive license agreement with Baylor College of Medicine or BCM.(“BCM”). Under the terms of the agreement, as amended, Private Acer haswe have worldwide exclusive rights to develop, manufacture, use, sell and import products incorporating the licensed intellectual property. The license agreement requires us to make upfront and annual payments to BCM, reimburse certain of BCM’s legal costs, make payments upon achievement of defined milestones, and pay low single-digit percent royalties on net sales of any developed product over the royalty term.Off-Balance Sheet Arrangementsnotpaid in full for the exclusive access and right to use the data. Subsequently we amended our agreement with Sanofi to provide the same rights to data access and use for potential marketing approval in all of North and South America.any off-balance sheet arrangementsan agreement with AP-HP granting us the exclusive worldwide rights to access and do notuse data from a multicenter, prospective, randomized, open trial related to the use of celiprolol for the treatment of vEDS. We utilized this clinical data to support an NDA filing for EDSIVOTM for the treatment of vEDS. The agreement requires us to make certain upfront payments to AP-HP, reimburse certain of AP-HP’s costs, make payments upon achievement of defined milestones and pay low single-digit percent royalties on net sales of celiprolol over the royalty term.any holdingsthe right to revise our territorial license rights accordingly.variablethe principal amount of $4.0 million with interest entities.at a rate equal to 6% per annum, as evidenced by a promissory note we issued to Relief, and (iii) we granted Relief a security interest in all of our assets to secure performance of the promissory note, as evidenced by a security agreement. Upon signing the Collaboration Agreement, we received a $10.0 million cash payment from Relief (i.e., a $14.0 million “Reimbursement Payment,” offset by repayment of the $4.0 million outstanding balance of the Note plus interest earned through the date of the Collaboration Agreement). Under the terms of the Collaboration Agreement, Relief committed to pay us Development Payments of up to an additional $20.0 million for U.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months ended June 30, 2021, we received from Relief the $10.0 million First Development Payment. We were contractually entitled to receive from Relief an additional $10.0 million Second Development Payment conditioned upon the FDA’s acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received on October 4, 2021. On October 6, 2021, we entered into a Waiver and Agreement with Relief to amend the timing for the Second Development Payment. We received the Second Development Payment in two $5.0 million tranches on each of October 12, 2021 and January 14, 2022. Further, we retained development and commercialization rights in the U.S., Canada, Brazil, Turkey and Japan (“Acer Territory”). The companies will split net profits from the Acer Territory 60%:40% in favor of Relief. Relief licensed the rights for the rest of the world (“Relief Territory”), where we will receive from Relief a 15% royalty on all net sales received in the Relief Territory. We could also receive a total of $6.0 million in milestone payments based on the first European marketing approvals of OLPRUVATM for a UCD and MSUD. In connection with cancellation of the $4.0 million promissory note executed by us in favor of Relief on January 25, 2021, Relief released its security interest in all of our assets pursuant to the Promissory Note.Quantitative and Qualitative Disclosures About Market Risk.Applicable.applicable.Controls and Procedures.Securities and Exchange CommissionSEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’sSEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive officerPrincipal Executive Officer and principal financial officer (whomPrincipal Financial Officer (to whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. evaluated, with the participation of our Certifying Officers, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017,March 31, 2023, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that as of September 30, 2017, our disclosure controls and procedures were effective.Changes ineffective as of March 31, 2023.•Clarified our internal documentation and revised our accounting position to appropriately consider the impact of diluted earnings per share calculations related to an instrument recorded as an asset or liability at fair value with changes in fair value recorded through earnings.•Designed discrete controls over the calculation and presentation of earnings per share into a separate set of control activities with proper review, to ensure the appropriate level of accuracy and precision is applied to every potential common share appropriately.Therethat occurred during our most recently completed fiscalthe quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Legal Proceedings.the Company or its subsidiarieswe may become involved in litigation or proceedings relating to claims arising from the ordinary courseout of business.our operations.78 to our unaudited condensed consolidated financial statements included in this report for a description of a putative securities class action and stockholder derivative suit complaints filed against us, all of which have now been dismissed.with Piper Jaffray & Co.could have an adverse impact on our business because of defense and settlement costs, diversion of management resources and other factors.Risk Factors.•the cost of commercialization activities for OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, or for any of our current product candidates and future product candidates, if any, if approved for sale, including marketing, sales and distribution costs, and preparedness of our corporate infrastructure;•the scope, progress, results, and costs of researching and developing our current product candidates, and future product candidates, if any, including conducting preclinical and clinical trials•the cost of seeking regulatory and marketing approvals and reimbursement for our product candidates and future product candidates, if any•the cost of manufacturing OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as our current product candidates and future product candidates, if any, that we obtain approval for and successfully commercialize•the terms and conditions of the Marathon Convertible Notes and the SWK Loans, including those which require us to repurchase the Marathon Convertible Notes, to repay the SWK Loans, to maintain minimum unencumbered liquid assets, and to otherwise meet certain additional operating and financial covenants, and those which place restrictions on our operating and financial flexibility•the timing, receipt, and amount of payments we may receive from Relief under the Collaboration Agreement•our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements•the number and characteristics of any additional product candidates we may develop or acquire•any product liability or other lawsuits related to our product candidates or commenced against us•the expenses needed to attract and retain skilled personnel•the costs associated with being a public company•the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property rights, including litigation costs and the outcome of such litigation•the timing, receipt and amount of sales of, or royalties on, future approved product candidates, if any; and•the amount of our market capitalization as reflected from time to time in the open market•Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to:•delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for our current product candidates or future product candidates, if any•delay, limit, reduce or terminate our research and development activities•delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, or any future approved product candidates, if any; or•otherwise delay, limit, reduce, restructure or terminate our operations•does not have sufficient resources or decides not to devote the necessary resources due to internal constraints such as limited cash or human resources•decides to pursue a competitive potential product•cannot obtain the necessary regulatory approvals•determines that the market opportunity is not attractive, or•cannot manufacture or obtain the necessary materials in sufficient quantities from multiple sources or at a reasonable costhistory. On September 19, 2017, we completed the reverse merger, or the Merger, with Acer Therapeutics Inc.,history and a Delaware corporation, or Private Acer, in accordance with the termshistory of the Agreement and Plan of Merger and Reorganization, dated as of June 30, 2017, by and among Private Acer, ourselves and Opexa Merger Sub, Inc. Also on September 19, 2017, in connection with, and prior to the completion of, the Merger, we effected a 1-for-10.355527 reverse stock split of our common stock and changed our name to “Acer Therapeutics Inc.”losses. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We are focused principally on repurposing and/or reformulating existing drugs for (ultra) orphanserious rare and life-threatening diseases with significant unmet medical need.needs. We are not profitable and Private Acer hadhave incurred losses in each year since its inception in 2013.inception. We have only a limited operating history upon which you can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the specialty pharmaceutical industry. We have not generated any product sales revenue to date. We continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the yearthree months ended DecemberMarch 31, 2016 as a private company2023 was $6.7$16.3 million. As of September 30, 2017,March 31, 2023, we had an accumulated deficit of $21.3$157.0 million. We expect to continue to incur losses for the foreseeable future as we continue OLPRUVATM commercialization and our development of, and seek marketing approvals for, our product candidates.securities and convertible promissory notes.securities. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through public or private equity or debt financings, strategic collaborations, or grants. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk.non-dilutive funding. We expect losses to increase as we conduct clinical trials and continue to develop our lead product candidates. We expect to invest significant funds into the research and development of our current product candidates to determine the potential to advance these product candidates to regulatory approval. We may also invest in acquiring or in-licensing additional product candidates to expand our pipeline.aother product candidate,candidates, our potential future revenue from any such product will depend upon the size of any marketsmarket in which oursuch product candidatescandidate may receive approval and, as with OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, our ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for our product candidates in those markets.cannot be assured. Even if we obtain adequate market share, because the market for our product candidates, becauseOLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS is limited and the potential markets in which our other product candidates may ultimately receive regulatory approval could be very small, we may never become profitable despite obtaining such market share and acceptance of our products.•●certain patients with UCDs involving deficiencies of CPS, OTC, or AScontinueseek to establish a sales, marketing and distribution infrastructure to commercialize OLPRUVATM for oral suspension in the clinical developmentU.S. for the treatment of our product candidates;●continue efforts to discover new product candidates;●undertake the manufacturing of our product candidates or increase volumes manufactured by third parties;●advance our programs into larger, more expensive clinical trials;●initiate additional pre-clinical, clinical, or other trials or studies for our product candidates;•●seek regulatory and marketing approvals and reimbursement for our product candidatescandidates;•continue the clinical development of our product candidates•continue efforts to discover new product candidates●•undertake the manufacturing of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, or our product candidates or increase volumes manufactured by third parties•advance our programs into larger, more expensive clinical trials•initiate additional preclinical, clinical, or other trials or studies for our product candidates•establish a sales, marketing and distribution infrastructure to commercialize any productsproduct candidates for which we may obtain marketing approval and market for ourselves;ourselves•●seek to identify, assess, acquire and/or develop other product candidatescandidates;•●make milestone, royalty or other payments under third-party license agreementsagreements;•●seek to maintain, protect and expand our intellectual property portfolioportfolio;•●seek to attract and retain skilled personnel;personnel, and•●experience any delays or encounter issues with the development and potential for regulatory approval of our clinical candidates such as safety issues, clinical trial accrualenrollment delays, longer follow-up for planned studies, additional major studies or supportive studies necessary to support marketing approval.approvalmaywill fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.Wecandidates, EDSIVO (for Vascular Ehlers-Danlos Syndrome, or vEDS) and ACER-001 (for Urea Cycle Disorder, or UCD, and Maple Syrup Urine Disease, or MSUD).candidates. Our ability to generate product revenue depends upon our ability to successfully commercialize theseOLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, and to identify, develop and commercialize our product candidates or other product candidates that we may develop, in-license or acquire in the future. Our ability to generate product revenue from OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as future product revenue from our current or future product candidates also depends on a number of additional factors, including our ability to:
In addition, because of the numerous risks and uncertainties associated with clinical product development, including that our product candidates may not successfully advance through development or achieve regulatory approval, we are unable to predict the timing or amount of any potential future product sales revenues. Our expenses also could increase beyond expectations if we decide to or are required by the United Stated Food and Drug Administration, or FDA, or comparable foreign regulatory authorities, to perform studies or trials to satisfy additional unexpected activities in addition to those that we currently anticipate.
Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing these products.
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We have incurred, and expect to continue to incur, increased costs and risks as a result of being a public company.
As a public company, we are required to comply with the Sarbanes-Oxley Act of 2002 or SOX,(“SOX”), as well as rules and regulations implemented by the Securities and Exchange Commission or SEC,(“SEC”) and The NASDAQ Stockthe Nasdaq Capital Market or NASDAQ.(“Nasdaq”). Changes in the laws and regulations affecting public companies, including the provisions of SOX and rules adopted by the SEC and by NASDAQ,Nasdaq, have resulted in, and will continue to result in, increased costs as we respond to their requirements. Given the risks inherent in the design and operation of internal controls over financial reporting, the effectiveness of our internal controls over financial reporting is uncertain. If our internal controls are not designed or operating effectively, we may not be able to conclude an evaluation of our internal control over financial reporting as required or we or our independent registered public accounting firm may determine that our internal control over financial reporting was not effective. We currently have a very limited workforce, and it may be difficult to adhere to appropriate internal controls over financial reporting or disclosure controls with such limited staffing. In addition,We are not yet subject to the provisions of section 404(b) of SOX, which would require our independent registered public accounting firm may either disclaim an opinion as it relates tofirm’s attestation on management’s assessment of the effectiveness of our internal controls or may issue an adverse opinion on the effectiveness of our internal controls over financial reporting, especially in light of the fact that we currently have a very limited workforce.reporting. Investors may lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and which could affect our ability to run our business as we otherwise would like to. New ruleseffectively. As a public company, it could also make itbe more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the coverage that is the same or similar to our current coverage.insurance. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our boardBoard of directors,Directors, our boardBoard committees, and as executive officers. We cannot predict or estimate the total amount of the costs we may incur or the timing of such costs to comply with these rules and regulations.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.
We are subject to the reporting requirements of the Exchange Act, SOX and NASDAQNasdaq rules and regulations. SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal controlcontrols over financial reporting. We must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K filing for that year, as required by Section 404 of SOX. We rely on third-party accounting professionals to assist with
As previously reported, we have identified material weaknesses in our internal control over financial accounting and compliance obligations. As a private company, Private Acer had never been required to test its internal controls within a specified period. This will require that we incur substantial professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. We may experience difficulty in meeting these reporting requirements in a timely manner.
If we are not able to comply with the requirements of Section 404 of SOX, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our common stock could decline and we could be subject to sanctionspenalties or investigations by NASDAQ,Nasdaq or the SEC,SEC.
We face risks related to health epidemics including but not limited to the COVID-19 pandemic which could adversely affect our business.
Our business could be materially adversely affected by the effects of a widespread outbreak of contagious disease, including the recent pandemic of COVID-19, a respiratory illness caused by a novel coronavirus. While our employees work remotely a large part of the time, these effects could include disruptions or restrictions on our employees’ ability to travel, as well as disruptions at or closures of our facilities or the facilities of our manufacturers and suppliers, which could adversely impact our development activities and other operations. Health professionals may reduce staffing and reduce or postpone meetings with clients, colleagues, and others in response to the spread of an infectious disease. Such events may result in a period of business disruption, and in reduced operations, any of which could materially affect our business, financial condition, and results of operations. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn or volatility that could adversely affect our manufacturers and suppliers and otherwise adversely impact our development activities and other operations. Current estimates of the possible impact of global issues on the drug supply chain and its application to our potential products may also be affected by the manufacturing steps required to be undertaken to produce finished product, including manufacture of active pharmaceutical ingredient, excipients, packaging, and labeling.
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The extent to which the COVID-19 pandemic will continue to affect our business, results of operations, and financial condition is difficult to predict. The outbreak has affected, and could potentially continue to affect, the business of the FDA, EMA or other regulatory authorities.
Any acquisitions that we make could disrupt our business and harm our financial condition.
We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies on a global geographic footprint.worldwide. We may also consider joint ventures, licensing and other collaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate acquisitions of any businesses, products or technologies. Furthermore, the integration of any acquisition and management of any collaborative project may divert our management’s time and resources from our core business and disrupt our operations. We do notAs a company, we have anylimited experience with acquiring other companies, or with acquiring products outside of the United States.U.S. Any cash acquisition we pursue would potentially divert the cash we have on our balance sheet from our present clinical development programs. Any stock acquisitions would dilute our shareholders’stockholders’ ownership. While
Risks Related to the Marathon Convertible Notes and SWK Loans
The requirement that we repay in cash the outstanding principal balance and accrued interest on the SWK Loans plus interest and fees (including a repayment premium) and the Marathon Convertible Notes which we are committed to repurchase at a premium (which is subject to escalation), and certain operating and financial covenants and restrictions on our operating and financial flexibility under the SWK Loans and the Marathon Convertible Notes, could materially adversely affect our business plans, liquidity, financial condition, results of operations and viability, including but not limited to a loss of control over our cash and other assets, in which the lenders have a security interest, and prevent us from taking actions that we would otherwise consider to be in our best interests.
The secured convertible notes issued to MAM Aardvark, LLC and Marathon Healthcare Finance Fund, L.P., (the “Holders”), in an aggregate principal amount of $6.0 million (the “Marathon Convertible Notes”), bear interest at an annual rate of 6.5%, with such interest payable quarterly; provided, however, that accrued and unpaid interest through March 31, 2023 was deferred and became due and payable in cash, together with any accrued and unpaid interest on each Marathon Convertible Note after March 31, 2023, on April 15, 2023. Additionally, subject to the restrictions set forth in a subordination agreement among SWK Funding LLC (”SWK”), as agent and lender, and each of the Holders (the “Subordination Agreement”), we are required to repurchase the Marathon Convertible Notes, on or before the fifth business day following the earlier of June 15, 2023 and our receipt of gross proceeds of at least $40.0 million from the issuance or sale of debt, equity or hybrid securities, loans or other financing on a cumulative basis since January 1, 2023 (excluding the Second SWK Loan, defined below) at a price equal to 200% (the “Buy-Out Percentage”) of the outstanding principal amount of the Marathon Convertible Notes, plus any accrued but unpaid interest thereon to the date of such repurchase plus 2500 basis points for each 90-day period after April 15, 2023, pro-rated for the actual number of days elapsed in the 90-day period before the repurchase actually occurs (i.e., the Buy-Out Percentage would be 212.5% 45 days after April 15, 2023); provided, that if we are prohibited from effectuating such repurchases pursuant to the Subordination Agreement, the repurchase is to occur on or before the fifth business day after such prohibition is no longer applicable.
Our senior secured term loan facility with SWK as the agent (the “SWK Loans”), in a principal amount of $13.9 million, bears interest at an annual rate equal to the three-month term rate based on the Secured Overnight Financing Rate (“Term SOFR”) (or such other rate as may be agreed between SWK and us following the date on which three-month Term SOFR is no longer available), subject to a 1.0% Term SOFR floor, plus a margin of 11.0%, and is therefore sensitive to changes in interest rates. If three-month Term SOFR can no longer be determined or if the applicable governmental authority ceases to supervise or sanction such rates, then we will endeavor to agree with SWK on an alternate rate of interest that gives due consideration to the then prevailing market convention for determining interest for comparable loans in the U.S. We cannot predict what the impact of any such alternative rate would be to our interest expense. However, the discontinuation, reform, or replacement of Term SOFR or any
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other benchmark rates may result in fluctuating interest rates that may have a negative impact on our interest expense and cash flows. Furthermore, we cannot predict or quantify the time, effort and cost required to time evaluate potential collaborative projects and acquisitionstransition to the use of businesses, products and technologies, and anticipate continuing to make these evaluations, we have no present agreementsnew benchmark rates, including with respect to negotiating and implementing any necessary changes to the SWK Loans, and implementing changes to our systems and processes.
Due to topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, the principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows us to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK under the Current SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the Current SWK Credit Agreement with respect to the Second Term Loan) equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, we are required to maintain for purposes of the SWK Loans unencumbered liquid assets of not less than the lesser of (x) the outstanding principal amount of the SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the announcement of such topline results), although the Third Amendment provides for a temporary reduction in the minimum amount of unencumbered liquid assets required to be maintained by us under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and at the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such temporary reduction(s) to $3.0 million).
The Marathon Convertible Notes and the SWK Loans are secured by a first and second priority lien on all of our assets (including our intellectual property). Our failure to repurchase the Marathon Convertible Notes when required, or to pay any cash for principal reduction or accrued interest on the Marathon Convertible Notes or the SWK Loans, would constitute a default under the relevant indebtedness. In such event, or if a default otherwise occurs, including as a result of our failure to comply with the restrictive covenants contained therein, the interest rate on the outstanding principal balance of the SWK Loans will increase by 3% from the occurrence and during the continuance of an event of default. If not timely cured, the lenders could take such actions as may be available to senior secured creditors generally, and specifically under the loan agreements governing the SWK Loans and the Marathon Convertible Notes, including assertion of control over some or all of our assets.
The Marathon Convertible Notes and the SWK Loans restrict our ability to incur new indebtedness, sell assets, and pursue certain mergers, acquisitions, or collaborative projects.consolidations that we may believe to be in our best interest. In addition, the SWK Loans contain financial covenants that require us to maintain a minimum amount of unencumbered liquid assets (as noted above) as well as other covenants and restrictions that could materially adversely affect our business plans, liquidity, financial condition, results of operations and viability and prevent us from taking actions that we would otherwise consider to be in our best interests. If we default under the SWK Loans, the lenders will be able to declare all obligations immediately due and payable, including certain fees and other obligations. The lenders could declare an event of default upon the occurrence of any event that they interpret as a material adverse change or material adverse effect. Any declaration by the lenders of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline.
The obligations, security interests and covenants of the Marathon Convertible Notes and the SWK Loans could have important consequences on our business. In particular, they could:
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The debt service requirements of the Marathon Convertible Notes and the SWK Loans could intensify these risks. Our ability to make scheduled payments of interest or principal or to repurchase or refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. No assurances can be given that we will be successful in making the required payments under our indebtedness, or in refinancing our obligations on favorable terms, or at all. Should we determine to refinance, it could be further dilutive to our stockholders. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
The number of shares registered for resale on behalf of the holders of the Marathon Convertible Notes is significant in relation to our trading volume.
All of the shares of common stock underlying the Marathon Convertible Notes that we registered for resale on behalf of holders are “restricted securities” as that term is defined in Rule 144 under the Securities Act. We registered the offer and resale by the holders of the shares underlying the Marathon Convertible Notes to satisfy certain registration rights we granted to the holders, and so that the shares may be offered for resale into the public market by the holders. If all such shares were sold into the market all at once or at about the same time, it could depress the market price of our stock during the period the registration statement covering the resale of the shares remains effective and also could affect our ability to raise equity capital.
A substantial number of shares of our common stock may be issued pursuant to the terms of the Marathon Convertible Notes, which could cause the price of our common stock to decline.
The Marathon Convertible Notes are convertible into shares of our common stock immediately after issuance at a conversion price of $2.50, for an aggregate of 2,400,000 shares upon conversion of the original principal amount (without taking into account the limitations on the conversion of the Marathon Convertible Notes). Furthermore, the number of shares of common stock to be issued upon conversion of the Marathon Convertible Notes may be substantially greater if accrued but unpaid interest on the Marathon Convertible Notes is converted into shares of common stock at the same time as the principal is converted. We are unable to predict if and when the holders will convert their Marathon Convertible Notes, and whether or not any accrued but unpaid interest will also be converted. While accrued interest on the Marathon Convertible Notes is payable in cash according to their terms, any accrued but unpaid interest is also convertible into shares of common stock at the same time as the holder otherwise converts principal on the Marathon Convertible Notes.
We registered 2,478,000 shares of our common stock for resale by the holders in the event that up to six months of accrued but unpaid interest is included in the conversion. The actual number of shares issued upon conversion of the Marathon Convertible Notes may be more or less than this amount depending upon the outstanding principal balance and the amount of any accrued but unpaid interest at the time. We may need to register more shares if the accrued but unpaid interest at the time of conversion represents more than 78,000 shares of our common stock. The foregoing amount of shares registered does not take into account the limitations on conversion of the Marathon Convertible Notes.
Risks Related to the Clinical Development and Marketing Approval of Our Product Candidates
The marketing approval processes of the FDA and comparable foreign authorities are lengthy, time consumingtime-consuming and inherently unpredictable, and if we are ultimately unable to obtain marketing approval for our product candidates, our business will be substantially harmed.
Other than OLPRUVATM for oral suspension in the U.S. which has been approved by the FDA for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, none of our current product candidates havehas gained marketing approval for sale in the United StatesU.S. or any other country, and we cannot guarantee that we will ever have any other marketable products. Our business is substantially dependent on our ability to complete the development of, obtain marketing approval for, and successfully commercialize our product candidates in a timely manner. We cannot commercialize our product candidates in the United StatesU.S. without first obtaining approval from the FDA to market each product candidate. Similarly, we cannot commercialize our product
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candidates outside of the United StatesU.S. without obtaining regulatory approval from comparable foreign regulatory authorities. Our product candidates could fail to receive marketing approval for many reasons, including the following:
Before obtaining marketing approval for the commercial sale of any drug product for a target indication, we must demonstrate in preclinical studies and well-controlled clinical trials and, with respect to approval in the United States, to the satisfaction of the FDA,applicable regulatory authorities, that the product is safe and effective for its intended use and that the manufacturing facilities, processes, and controls are adequate to preserve the drug’s identity, strength, quality and purity. In the United States,U.S., it is necessary to submit and obtain approval of a New Drug Application, oran NDA from the FDA. An NDA must include extensive preclinical and clinical data and supporting information to establish the product safety and efficacy for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing, and controls for the product. After the submission of an NDA, but before approval of the NDA, the manufacturing facilities used to manufacture a product candidate must be inspected by the FDA to ensure compliance with the applicable Current Good Manufacturing Practice or cGMP,(“cGMP”) requirements. The FDA and the Competent Authorities of the Member States of the European Economic Area or EEA,(“EEA”) and comparable foreign regulatory authorities, may also inspect our clinical trial sites and audit clinical study data to ensure that our studies are properly conducted in accordance with the IND regulations, human subject protection regulations, and current good clinical practice or cGCP.
Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval may not be obtained. Upon submission of an NDA, the FDA must make an initial determination that the application is sufficiently complete to accept the submission for filing. We cannot be certain that any submissions, will beeven those that are or have been accepted for filing and reviewed by the FDA, orwill ultimately be approved. If the application is not accepted for review, or if the FDA finds after review that the NDA is not approvable as submitted, the FDA may require that we conduct additional clinical studies or preclinical testing or take other actions before it will reconsider our application. If the FDA requires additional studies or data, we would incur increased costs and delays in the marketing approval process, which may require us to reduce headcount or other expenses and/or expend more
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resources than we have available. In addition, the FDA may not consider any additional information to be complete or sufficient to support the filing or approval of the NDA.
Regulatory authorities outside of the United States,U.S., such as in Europe and Japan and in emerging markets, also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials conducted in one country may not be accepted or the results may not be found adequate by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one jurisdiction could have a negative impact on our ability to obtain approval in a different jurisdiction. Approval processes vary among countries and can involve additional product candidate testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time consuming.time-consuming. Foreign regulatory approval may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all.
The process to develop, obtain marketing approval for, and commercialize product candidates is long, complex and costly, both inside and outside of the United States,U.S., and approval is never guaranteed. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Even if our product candidates were to successfully obtain approval from regulatory authorities, any such approval might significantly limit the approved indications for use, including more limited patient populations, require that precautions, warnings or contraindications be included on the product labeling, including black box warnings, require expensive and time-consuming post-approval clinical studies, risk evaluation and mitigation strategies or surveillance as conditions of approval, or, through the product label, the approval may limit the claims that we may make, which may impede the successful commercialization of our product candidates. Following any approval for commercial sale of our product candidates, certain changes to the product, such as changes in manufacturing processes and additional labeling claims, as well as new safety information, may require new studies and will be subject to additional FDA notification, or review and approval. Also, marketing approval for any of our product candidates may be withdrawn. If we are unable to obtain marketing approval for our product candidates in one or more jurisdictions, or any approval contains significant limitations, our ability to market to our full target market will be reduced and our ability to realize the full market potential of our product candidates will be impaired. Furthermore, we may not be able to obtain sufficient funding or generate sufficient revenue and cash flows to continue or complete the development of any of our current or future product candidates.
If we are unable to submit an application forobtain approval under Section 505(b)(2) of the FFDCA or if we are required to generate additional data related to safety andor efficacy in order to obtainseek approval under Section 505(b)(2), we may be unable to meet our anticipated development and commercialization timelines.
Traditional drug development typically relies upon Section 505(b)(1) of the FFDCA for seeking marketing authorization in the U.S., where the sponsor of the product candidate (i.e., the applicant for marketing authorization) is required to conduct all of the studies needed to demonstrate the safety and efficacy of such candidate, a pathway that we plan to use for EDSIVOTM and ACER-801. Our current strategy for seeking marketing authorization in the United StatesU.S. for OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, OLPRUVATM relied on Section 505(b)(2) of the FFDCA, and our intended strategy for other product candidates relies primarilymay rely on Section 505(b)(2) of the FFDCA, which permits use of a marketing application, referred to as a 505(b)(2) application, where at least some of the information requiredneeded to demonstrate the safety and efficacy of the product candidate at issue for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use. The FDA interprets this to mean that an applicant may rely for approval on such data as that found in published literature or the FDA’s finding of safety or effectiveness, or both, of a previously approved drug product owned by a third party. There is no assurance that the FDA would find third-party data relied upon by us in a 505(b)(2) application sufficient or adequate to support approval, and the FDA may require us to generate additional data to support the safety and efficacy of our product candidates. Consequently,Depending on the time, nature, risk, and cost of obtaining that data or undertaking the required activities, we may needdecide that we are not able or willing to conduct substantial new researchproceed with development, and development activities beyond those we currently plan to conduct. Such additional new researchmay or may not reduce headcount and development activities would be costly and time consuming and there is no assurance that such data generated from such additional activities would be sufficient to obtain approval.
If the data to be relied upon in a 505(b)(2) application are related to drug products previously approved by the FDA and covered by patents that are listed in the FDA’s Orange Book, we would be required to submit with our 505(b)(2) application a Paragraph IV Certification in which we must certify that we do not infringe the listed patents or that such patents are invalid or
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unenforceable, and provide notice to the patent owner or the holder of the approved NDA. The patent owner or NDA holder would have 45 days from receipt of the notification of our Paragraph IV Certification to initiate a patent infringement action against us. If an infringement action is initiated, the approval of our NDA would be subject to a stay of up to 30 months or more while we defend against such a suit. Approval of our product candidates under Section 505(b)(2) may, therefore, be delayed until patent exclusivity expires or until we successfully challenge the applicability of those patents to our product candidates. Alternatively, we maymight elect a Section 505(b)(1) pathway to generate sufficient clinical data so that we would no longer need to rely on third-party data, whichdata. However, a Section 505(b)(1) pathway would likely be costly and time consumingtime-consuming and there would be no assurance that such data generated from such additional activities would be sufficient to seek or obtain approval.
We may not be able to obtain shortened review of our applications, and the FDA may not agree that our product candidates qualify for marketing approval. If we are required to generate additional data to support approval, we may be unable to meet anticipated or reasonable development and commercialization timelines, may be unable to generate the additional data at a reasonable cost, or at all, and may be unable to obtain marketing approval of our product candidates. If the FDA changes its interpretation of Section 505(b)(2) allowing reliance on data in a previously approved drug application owned by a third party, or if there is a change in the law affecting Section 505(b)(2), this could delay or even prevent the FDA from approving any Section 505(b)(2) application that we submit.
Marketing approval may be substantially delayed or may not be obtained for one or all of our product candidates if regulatory authorities require additional or more studies to assess the safety and efficacy of our product candidates. We could decide not to pursue further development of one or all of our product candidates, depending on, among other things, the expected time, cost, and risks associated with generating any such additional data.
We may be unable to initiate or complete development of our product candidates on schedule, if at all. The completion of the studies for certain of our product candidates will require us to obtain substantial additional funding beyond our current resources. In addition, regulatory authorities may require additional or more time-consuming studies to assess the safety or efficacy of our product candidates than we are currently planning. For example, in June 2019, we received a Complete Response Letter from the FDA regarding our NDA for EDSIVO™ for the treatment of vascular Ehlers-Danlos syndrome (“vEDS”). The Complete Response Letter stated that it will be necessary to conduct an adequate and well-controlled trial to determine whether celiprolol reduces the risk of clinical events in patients with vEDS. In light of the FDA’s Complete Response Letter regarding our NDA for EDSIVOTM, we halted precommercial activities. In December 2019, we submitted a Formal Dispute Resolution Request to the Office of New Drugs appealing the FDA’s decision as outlined in the Complete Response Letter. In March 2020, we received a response to our Formal Dispute Resolution Request from the Office of New Drugs of the FDA stating that it had denied our appeal of the Complete Response Letter in relation to the NDA for EDSIVO™. In its Appeal Denied letter, the Office of New Drugs (i) described possible paths forward for us to explore that could provide the substantial evidence of effectiveness needed to support a potential resubmission of the EDSIVO™ NDA for the treatment of patients with vEDS with a confirmed COL3A1 mutation and (ii) referred to the FDA Guidance document issued in December 2019, where substantial evidence of effectiveness can be provided by two or more adequate and well-controlled studies demonstrating efficacy, or a single positive adequate and well-controlled study plus confirmatory evidence.
Following a Type B meeting with the FDA in the second quarter of 2021, we are now conducting a U.S.-based prospective, randomized, double-blind, placebo-controlled, decentralized pivotal clinical trial in patients with COL3A1-positive vEDS, which we refer to as the DiSCOVER trial. The proposed design features of the trial under SPA agreement with the FDA include: the acceptability of a decentralized (virtual) clinical trial design and use of an independent centralized adjudication committee; acceptability of a primary endpoint based on clinical events associated with disease outcome; agreement with modest safety data collection (based on the known safety profile of the drug); and a statistical plan that considers the rare disease classification of vEDS. In the fourth quarter of 2021, we submitted a protocol for the prospective pivotal trial, along with an IND. In April 2022, we received breakthrough therapy designation and reached agreement on a SPA in May 2022. The trial plan is to enroll approximately 150 COL3A1-positive vEDS patients in the U.S., and the duration of the trial is estimated to be approximately 3.5 years to complete once fully enrolled (based on statistical power calculations and number of primary events). Additional capital will be needed to fund the trial through and beyond the second quarter of 2023. One interim analysis (based on number of primary events) is planned at approximately 18 months after full enrollment. There can be no assurance that the resulting data from the trial would be adequate to support approval of our NDA. We may also conclude at any point that the cost, risk and uncertainty of obtaining that additional data does not justify continuing with the development of EDSIVO™.
We currently do not have, and may not be able to obtain, adequate funding to complete the necessary steps for approval for any or all of our product candidates. Additional delays may result if the FDA, an FDA Advisory Committee (if one is convened to review any NDA we file) or another regulatory authority indicates that a product candidate should not be approved or there should be restrictions on approval, such as the requirement for a Risk Evaluation and Mitigation Strategy (“REMS”), to ensure the safe use
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of the drug. Delays in marketing approval or rejections of applications for marketing approval in the U.S. or other markets may result from many factors, including:
The lengthy and unpredictable approval process, as well as the unpredictability of future clinical trial results, may result in our failure to obtain marketing approval to market our product candidates, which would significantly harm our business, results of operations and prospects and could lead to reduction in headcount.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and resultsoutcome. Clinical development of earlier studies and trials may not be predictive of future trial results.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. The FDA and comparable foreign regulatory authorities have substantial discretion in the approval process and determining when or whether marketing approval will be obtained for our current product candidates. Even if we believe the data collected from clinical trials of our current product candidates are promising, such data may not be sufficient to support approval by the FDA or comparable foreign authorities. Our future clinical trial results may not be successful.
It is impossible to predict the extent to which the clinical trial process may be affected by legislative and regulatory developments. Due to these and other factors, our current product candidates or future product candidates could take a significantly longer time to gain marketing approval than expected or may never gain marketing approval. This could delay or eliminate any potential product revenue by delaying or terminating the potential commercialization of our current product candidates.
Preclinical trials must also be conducted in accordance with the FDA and comparable foreign authorities’ legal requirements, regulations or guidelines, including current Good Laboratory Practice or GLP,(“cGLP”), an international standard meant to harmonize the conduct and quality of nonclinical studies and the archiving and reporting of findings. Preclinical studies including long-term toxicity studies and carcinogenicity studies in experimental animals may result in findings that may require further evaluation, which could affect the risk-benefit evaluation of clinical development, or which may even lead the regulatory agencies to delay, prohibit the initiation of or halt clinical trials or delay or deny marketing authorization applications. Failure to adhere to the applicable GLPcGLP standards or misconduct during the course of preclinical trials may invalidate the data and require one or more studies to be repeated or additional testing to be conducted.
Clinical trials must also be conducted in accordance with the FDA and comparable foreign authorities’ legal requirements, regulations or guidelines, including human subject protection requirements and GCP.cGCP. Clinical trials are subject to further oversight by these governmental agencies and institutional review boards, or IRBs,Institutional Review Boards (“IRBs”), at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our current product candidates produced under cGMP and other requirements. Our clinicalClinical trials are usually conducted at multiple sites, potentially including some sites in countries outside the United StatesU.S. and the European Union, which may subject us to further delays and expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of foreign and non-EU clinical research organizations, as well as expose us
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to risks associated with clinical investigators who are unknown to the FDA or the European regulatory authorities, and with different standards of diagnosis, screening and medical care.
The commencement and completion of clinical trials for our current product candidates may be delayed, suspended or terminated as a result of many factors, including but not limited to:
Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating.
There are significant requirements imposed on us and on clinical investigators who conduct clinical trials that we sponsor. Although we are responsible for selecting qualified clinical investigators, providing them with the information they need to conduct the clinical trial properly, ensuring proper monitoring of the clinical trial, and ensuring that the clinical trial is conducted in accordance with the general investigational plan and protocols contained in the IND, we cannot ensure the clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record data, omit data, or even falsify data. We cannot ensure that the clinical investigators in our trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on our ability to obtain marketing approval, our business, and our financial condition.
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We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trial is being conducted, by the data safety monitoring board or DSMB,(“DSMB”) for such trial, or by the FDA or comparable foreign regulatory authorities. We or such authorities may impose a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, safety issues or adverse side effects, failure to demonstrate a benefit from using the drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of any clinical trial of our current product candidates, the commercial prospects of our current product candidates will be harmed, and our ability to generate product revenues from our product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow our development and approval process and jeopardize our ability to commence product sales and generate revenues. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing approval of our product candidates.
Any of these occurrences could materially adversely affect our business, financial condition, results of operations, and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing approval of our current product candidates. Significant clinical trial delays could also allow our competitors to bring products to market before we are able to do so, shorten any periods during which we have the exclusive right to commercialize our current product candidates and impair our ability to commercialize our current product candidates, which may harm our business, financial condition, results of operations, and prospects.
Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we advance through clinical trials may not have favorable results in later clinical trials or receive marketing approval.
Clinical failure can occur at any stage of our clinical development. For example, topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women.
The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical or preclinical testing. Data obtained from tests are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent marketing approval.
In addition, the design of a clinical trial can determine whether our results will support approval of a product or approval of a product for desired indications, and flaws or shortcomings in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval for our desired indications. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If one of our product candidates is found to be unsafe or lack efficacy, we will not be able to obtain marketing approval for it and our business would be harmed. For example, if the results of our clinical trials of our product candidates do not achieve pre-specified endpoints or we are unable to provide primary or secondary endpoint measurements deemed acceptable by the FDA or comparable foreign regulators or if we are unable to demonstrate an acceptable level of safety relative to the efficacy associated with our proposed indications, the prospects for approval of our product candidates would be materially and adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 2 and Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.
In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including differences in trial protocols and design, the size and type of the patient population, adherence to the dosing regimen and the rate of dropout among clinical trial participants. We do not know whether any clinical trials we may conduct will demonstrate consistent and/or adequate efficacy and safety to obtain marketing approval for our product candidates.
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As an organization, we have never completed anylimited experience in designing and completing clinical trial beforetrials and may be unable to do so efficiently or at all for our current product candidates or any product candidate we develop.
We intendwill need to conduct clinical trials of our product candidates. The conduct of clinical trials and the submission of a successful NDA is a complicated process. As an organization, we have not completed alimited experience in designing and completing clinical trial before,trials, and we have limited experience in preparing and submitting regulatory filings. Consequently, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to NDA submission and approval of our current product candidates or for any other product candidate we develop.candidates. We may require more time and incur greater costs than anticipated and may not succeed in obtaining marketing approval of the product candidates we develop. Failure to commence or complete, or delays in, our planned clinical trials would prevent us from or delay us in commercializing our current product candidates or any other product candidate we develop.
Our product candidates may cause undesirable adverse effects or have other properties that could delay or prevent their marketing approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if obtained.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or other comparable foreign authorities. If any of our current product candidates or any other product candidate we develop is associated with serious adverse, undesirable or unacceptable side effects, we may need to abandon such candidate’s development or limit development to certain uses or sub-populationssubpopulations in which such side effects are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in early-stage or clinical testing have later been found to cause side effects that prevented further development of the compound. Results of our trials could reveal a high and unacceptable prevalence of these or other side effects. In such an event, our trials could be suspended or terminated, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims.
For OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, and for other product candidates that receive marketing approval, if any, and we or others latermay identify undesirable side effects caused by such products and a number of potentially significant negative consequences could result, including:
Any of these events could prevent us from achieving or maintaining market acceptance of our product candidates, if approved, and could materially adversely affect our business, financial condition, results of operations and prospects.
Even if we receive marketing approval for our product candidates, such approved products will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions, and we may be subject to penalties and legal sanctions if we fail to comply with regulatory requirements or experience unanticipated problems with our approved products.
For OLPRUVATM for oral suspension in the FDA approves anyU.S. for the treatment of ourcertain patients with UCDs involving deficiencies of CPS, OTC, or AS, and for other product candidates that receive marketing approval, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject
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to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP regulations and GCP for any clinical trials that we conduct post-approval. Any marketing approvals that we receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor safety and efficacy.
Later discovery of previously unknown problems with an approved product, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, or evidence of acts that raise questions about the integrity of data supporting the product approval, may result in, among other things:
The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay marketing approval, manufacturing or commercialization of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United StatesU.S. or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or we are not able to maintain regulatory compliance, we may lose any marketing approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.
Agencies likesuch as the FDA and national competition regulators in European countries regulate the promotion and uses of drugs not consistent with approved product labeling requirements. If we are found to have improperly promoted our current product candidates for uses beyond those that are approved, we may become subject to significant liability.
Regulatory authorities likesuch as the FDA and national competition lawsagencies in Europe strictly regulate the promotional claims that may be made about prescription products, such as EDSIVOOLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or ACER-001,AS, as well as our product candidates, EDSIVOTM, ACER-801, or ACER-2820, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or comparable foreign regulatory authorities as reflected in the product’s approved labeling, known as “off-label” use, nor may it be promoted prior to obtaining marketing approval. If we receive marketing approval for our product candidates for our proposed indications, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label if the physicians personally believe in their professional medical judgment it could be used in such manner. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.
In addition, the FDA requires that promotional claims not be “false or misleading” as such terms are defined in the FDA’s regulations. For example, the FDA requires substantial evidence, which generally consists of two adequate and well-controlled head-to-head clinical trials, for a company to make a claim that its product is superior to another product in terms of safety or effectiveness. Generally, unless we perform clinical trials meeting that standard comparing our product candidates to competitive products and these claims are approved in our product labeling, we will not be able promote our current product candidates as superior to other products. If we are found to have made such claims, we may become subject to significant liability. In the United States,U.S., the federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in improper promotion. The FDA has also requested that companies enter into consent decrees or corporate integrity agreements. The FDA could also seek permanent injunctions under which specified promotional conduct is monitored, changed or curtailed.
Our current and future relationships with healthcare professionals, investigators, consultants, collaborators, actual customers, potential customers and third-party payors in the United StatesU.S. and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency, health information privacy and security and other healthcare laws and regulations, which could expose us to sanctions.
Healthcare providers, physicians and third-party payors in the United StatesU.S. and elsewhere will play a primary role in the recommendation and prescription of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs
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involving deficiencies of CPS, OTC, or AS, and for any other drug candidatesproducts for which we may obtain marketing approval. Our current and future arrangements with healthcare professionals, investigators, consultants, collaborators, actual customers, potential customers and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, that may constrain the business or financial arrangements and relationships through which we sell, market and distribute any drug candidates for which we obtain marketing approval. In addition, we may be subject to physician payment transparency laws and patient privacy and security regulation by the U.S. federal government and states and by the U.S. states and foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws that may affect our ability to operate include the following:
Further, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided that the government may assert that a claim including
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items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
Efforts to ensure that our future business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to it,us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could significantly harm our business. If any of the physicians or other healthcare providers or entities with whom we expect to do business, including our current and future collaborators, if any, are found not to be in compliance with applicable laws, those persons or entities may be subject to criminal, civil or administrative sanctions, including exclusion from participation in government healthcare programs, which could also affect our business.
The impact of recent healthcare reform legislation and other changes in the healthcare industry and healthcare spending on us is currently unknown and may adversely affect our business model.
In the United StatesU.S. and some foreign jurisdictions, legislative and regulatory changes and proposed changes regarding the healthcare system could prevent or delay marketing approval of our drug candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any drug candidates for which we obtain marketing approval.
Our revenue prospects could be affected by changes in healthcare spending and policy in the United StatesU.S. and abroad. We operate in a highly regulated industry and new laws and judicial decisions, or new interpretations of existing laws or decisions, related to healthcare availability, the method of delivery or payment for healthcare products and services could negatively impact our business, financial condition, results of operations and prospects. There is significant interest in promoting health carehealthcare reform, as evidenced by the enactment in the United StatesU.S. of the Affordable Care Act. Among other things, the Affordable Care Act contains provisions that may reduce the profitability of drug products, including, for example, revising the methodology by which rebates owed by manufacturers for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, extending the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans, imposing mandatory discounts for certain Medicare Part D beneficiaries, and subjecting drug manufacturers to payment of an annual fee.
We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue or commercialize our drugs.
It is likely that federal and state legislatures within the United StatesU.S. and foreign governments will continue to consider changes to existing healthcare legislation.legislation including the Affordable Care Act. It is also possible that the executive branch may take certain steps by executive action which could modify or solidify aspects of the Affordable Care Act. Certain stakeholders are also pursuing litigation challenging certain provisions which, if successful, would have the effect of modifying some or all of the provisions of the Affordable Care Act. We cannot predict the reform initiatives that may be adopted or litigation outcomes in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on our business, financial condition or results of operations.
Our research, development and developmentcommercialization activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use, and disposal of hazardous materials, including the components of our product candidates and
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other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by us and our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of specified materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage.
Other Risks Related to Our Business
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our limited resourcesproduct candidates.
Our success as a pharmaceutical company depends on our continued ability to attract, retain and access to capital, we must decide to prioritize developmentmotivate highly qualified management and scientific and clinical personnel. The loss of the services of any of our currentsenior management could delay or prevent obtaining marketing approval or commercialization of our product candidates for certain indications and at certain doses. These decisions maycandidates.
As of March 31, 2023, we had a workforce of 33 full-time employees, in addition to several consultants or independent contractors, to conduct our planned business operations. If our projections prove to be inaccurate or if we are forced to implement any workforce reductions, we may not have been wrongsufficient staffing to pursue our research and development goals.
We may materially adversely affectnot be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among pharmaceutical businesses, and other pharmaceutical, biotechnology and other businesses. Our failure to attract, hire, integrate and retain qualified personnel could impair our ability to achieve our business financial condition, results of operations and prospects.
We may not be able to win government, academic institution or non-profit contracts or grants.
From time to time, we may apply for contracts or grants from government agencies, non-profit entities and academic institutions. For example, we are pursuing several financing options, including federally-funded research contracts and grants and other potentially non-dilutive funding sources, to fund our planned ACER-2820 development program for the potential treatment of patients with COVID-19. Such contracts or grants can be highly attractive because they provide capital to fund the ongoing development of our product candidates without diluting our shareholders.stockholders. However, there is often significant competition for these contracts or grants. Entities offering contracts or grants may have requirements to apply for or to otherwise be eligible for certain contracts or grants that our competitors may be able to satisfy that we cannot. In addition, such entities may make arbitraryunfavorable decisions as to whether to offer contracts or make grants, to whom the contracts or grants may or will be awarded and the size of the contracts or grants to each awardee. Even if we are able to satisfy the award requirements, there is no guarantee that we will be a successful awardee. Therefore, we may not be able to win any contracts or grants in a timely manner, if at all.
If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, we could be forced to pay substantial damage awards.
The use of any of our product candidates in clinical trials, and the sale of any approved products such as OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, may expose us to product liability claims. We currently maintain product liability insurance coverage in amounts we consider to be reasonable for up to $5.0 million per occurrence, up to an aggregate limitour stage of $5.0 million.development. We intend to monitor the amount of coverage we maintain as our commercialization efforts progress for OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, and as the size and design of our clinical trials evolve, and if we are successful in such commercialization efforts or obtaining approval to commercialize any of our other product candidates, and adjust the amount of coverage we maintain accordingly. However, there is no assurance that such insurance coverage will fully protect us against some or all of the claims to which we might become subject. We might not be able to maintain adequate insurance coverage at a reasonable cost or in sufficient amounts
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or scope to protect us against potential losses. In the event a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against us.
Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct financial and managerial resources to such defense and adverse publicity could result, all of which could harm our business.
Our employees, independent contractors, investigators, contract research organizations, consultants, collaborators and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees and other third parties may engage in fraudulent conduct or other illegal activity. Misconduct by employees and other third parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, or laws that require the reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee and other third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.
Our internal computer systems, or those of our development collaborators, third-party clinical research organizations or other contractors or consultants, may fail or suffer cybersecurity or other security breaches, which could result in a material disruption of our product development programs.
Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs and other contractors, consultants and collaborators are vulnerable to cybersecurity breaches and damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. In addition, there has recently been a significant increase in ransomware and cybersecurity attacks related to the ongoing conflict between Russia and Ukraine, which could lead to interruptions, delays, or loss of critical data if we or one of our partners is the subject of such an attack. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our commercialization efforts, our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our marketing approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we intend to rely on third parties to manufacture our products and product candidates and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or cybersecurity or other security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, and theour further development and commercialization of our product candidatesefforts could be delayed.
Risks Related to Commercialization of Our Product Candidates
Even if we obtain the required regulatory approvals in the United StatesU.S. and other territories, the commercial success of our product candidates will depend on, among other factors, market awareness and acceptance of our product candidates.
Despite the FDA’s approval of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, and even if we obtain marketing approval for our current product candidates or any other product candidates, that we may develop or acquire in the future, the products may not gain market acceptance among physicians, key opinion leaders, healthcare payors, patients and the medical community. Market acceptance of any approved products depends on a number of factors, including:
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Market acceptance is critical to our ability to generate revenue. Any product candidate, if approved and commercialized, may be accepted in only limited capacities or not at all. If any approved products are not accepted by the market to the extent that we expect, we may not be able to generate revenue and our business would suffer.
If the market opportunities for ourOLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, or for other product candidates to treat rare diseases are smaller than we believe they are, then our revenues may be adversely affected and our business may suffer.
The market for OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS is limited, and the diseases that some of our current and future product candidates are being developed to address are rare. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, and our assumptions relating to pricing are based on estimates. Given the small number of patients who have some of the diseases that we are targeting, our eligible patient population and pricing estimates may differ significantly from the actual market addressable by our product candidates.
For OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, we believe the prevalence of vEDS, UCD and MSUD are based on studies of small subsets of the population of specific geographic areas, which are then extrapolated to estimate the prevalence of the diseasesis no more than approximately 2,100 individuals in the broader world population. It is difficult to precisely measure the incidence or prevalence of vEDS in any population. Studies estimate the prevalence of vEDS as ranging from approximately 1 in 90,000 to 1 in 250,000. Studies indicate that MSUD affects an estimated 1 in 185,000 infants worldwide.
If we decide not to pursue further development of ACER-801 (osanetant) for the treatment of vasomotor symptoms following our pause of that program to conduct a thorough review of the full data set from our Phase 2a proof of concept clinical trial, we will have significantly reduced our portfolio of development programs as well as a possible revenue source.
In March 2023 we announced that topline results from our Phase 2a proof of concept clinical trial to evaluate ACER-801 (osanetant) as a potential treatment for moderate to severe Vasomotor Symptoms (VMS) associated with menopause showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women. As a result, we paused the ACER-801 program to conduct a
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thorough review of the full data set. If we decide not to pursue further development of osanetant, we will have significantly reduced our portfolio of development programs as well as a possible revenue source.
We currently have limited marketing and sales experience. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any product sales revenue.
We have never commercialized a product candidate and, we currently have no marketing and sales organization. Toalthough precommercial activities had been conducted for OLPRUVATM for oral suspension in the extentU.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as for EDSIVOTM prior to our product candidates are approved for marketing, if we are unablereceipt of the FDA’s Complete Response Letters with respect to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to effectively market and sell our product candidates or generate product revenue.
If we fail to enter into strategic relationships or collaborations, our business, financial condition, commercialization prospects and results of operations may be materially adversely affected.
Our product development programs and the potential commercialization of our current product candidates that receive marketing approval, including OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, will require substantial additional cash to fund expenses. Therefore, in addition to financing the development of our product candidates through additional equity financings or through debt financings, we may decide to enter into collaborations with pharmaceutical or biopharmaceutical companies for the development and potential commercialization of our product candidates.
We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may also be restricted under existing and future collaboration agreements from entering into agreements on certain terms with other potential collaborators. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular product, reduce or delay one or more of our development programs, delay our potential commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue. If we do enter into aOur existing Collaboration Agreement with Relief, and any other collaboration agreement, itagreements, could be subject to the following risks, each of which may materially harm our business, commercialization prospects and financial condition:
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Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our products profitably.
There is significant uncertainty related to third-party coverage and reimbursement of newly approved pharmaceuticals. Market acceptance and sales of any approved product candidates will depend significantly on the availability of coverage and adequate reimbursement from third-party payors and may be affected by existing and future healthcare reform measures. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Government authorities and third-party payors, such as private health insurers, health maintenance organizations, and government payors like Medicare and Medicaid, decide which drugs they will pay for and establish reimbursement levels. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for drugs and products. Coverage and reimbursement may not be available for any product that we commercialize and, even if coverage is provided, the level of reimbursement may not be satisfactory. Inadequate reimbursement levels may adversely affect the demand for, or the price of, any drug candidate for which we obtain marketing approval.
Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is, among other things:
Obtaining coverage and adequate reimbursement approval for a product from a government or other third-party payor is a time consuming and costly process that could require us to conduct expensive pharmacoeconomic studies and provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and adequate reimbursement. In addition to examining the medical necessity and cost-effectiveness of new products, coverage may be limited to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication. There may also be formulary placements that result in lower reimbursement levels and higher cost-sharing borne by patients, any of which could have an adverse effect on our revenues and profits. Moreover, a third-party payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for drug products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular drug product does not ensure that other payors will also provide coverage for the drug product, or even if coverage is available, establish an adequate reimbursement rate.
We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize certain of our products. In the United States,U.S., third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs. Third-party payors are increasingly challenging the prices charged for medical products and services, examining the medical necessity and reviewing the cost-effectiveness of drug products and medical services and questioning safety and efficacy. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs. Additionally, emphasis on managed care in the United StatesU.S. has increased and we expect will continue to increase the pressure on drug pricing. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover the products for which we receive FDA approval or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.
Coverage policies, third-party reimbursement rates and drug pricing regulation (including indirect techniques of pricing pressure, such as allowing reimportation from markets outside the U.S.) may change at any time, and there is the potential for significant movement in these areas in the foreseeable future. Even if favorable coverage and reimbursement status is attained for
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one or more products for which we receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
We face substantial competition, which may result in others discovering, developing or commercializing products for our targeted indications before, or more successfully, than we do.
The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are generally developing and marketing therapeutic products. Such competition may include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic companies and medical technology companies. Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of our product candidates for the treatment of orphan and ultraorphanultra-orphan diseases for which there is a small patient population in the United States.U.S. A drug designated an orphan drugOrphan Drug may receive up to seven years of exclusive marketing in the United StatesU.S. for that indication. Our objective is to design, develop and commercialize product candidates by repurposing or reformulating existing drugs, generally for orphan diseases, with significant unmet medical need.
Many of our potential competitors have significantly greater financial, manufacturing, marketing, development, technical and human resources than we do. Large pharmaceutical and biotechnology companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and in manufacturing clinical products. These companies also have significantly greater research and marketing capabilities than we do and may also have products that have been approved or are in late stages of development, and have collaborative arrangements in our target markets with leading companies and research institutions. Established companies may also invest heavily to accelerate discovery and development of compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, the obtaining of orphan drugOrphan Drug designation for our product candidates to treat rare diseases is essentialhighly desirable to our viability since our competitors may, among other things:
Should any of these events occur, our business, financial condition, results of operations, and prospects could be materially adversely affected. If we are not able to compete effectively against potential competitors, our business will not grow and our financial condition and operations will suffer.
We believe that our ability to successfully compete in the rare disease category will depend in part on our ability to obtain orphan drugOrphan Drug designation for our product candidates to treat rare diseases as well as:
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If our competitors are able to obtain orphan drugOrphan Drug exclusivity for their products that are the same drug as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.
We expect to seek orphan drughave Orphan Drug exclusivity designation fromin the FDAU.S. and the European Medicines Agency, orUnion for OLPRUVATM for MSUD and in the EMA,U.S. for EDSIVO and ACER-001, and there can be no assurance that we will be successful.TM for vEDS. If we are unable to secure orphan status in either Europe or the United States,maintain our current Orphan Drug exclusivities, it may have a material negative effect on our business.
Generally, if a product with an orphan drugOrphan Drug designation subsequently receives the first marketing approval for the indication for which it has such designation, that product is entitled to a period of marketing exclusivity, which precludes the applicable regulatory authority from approving another marketing application for the same drug for the same indication for that time period. The applicable period is seven years in the United StatesU.S. and ten years in the European Union. The exclusivity period in the European Union can be reduced to six years if the product no longer meets the criteria for orphan drugOrphan Drug designation or if its commercialization is sufficiently profitable so that market exclusivity is no longer justified. Orphan drugDrug exclusivity may be lost if the FDA or the EMA determines that the request for designation was materially defective or if the manufacturer is unable to ensure sufficient quantity of the product to meet the needs of patients with the rare disease or condition. Obtaining orphan drugMaintaining Orphan Drug exclusivity for EDSIVOOLPRUVATM and ACER-001EDSIVOTM may be important to the product candidate’s success. Even if we obtain orphan drug exclusivity for EDSIVO for vEDS and ACER-001 for UCD and MSUD,success, which we may not be able to maintain it.do. For example, if a competitive product that treats the same disease as our product candidate is shown to be clinically superior to our product candidate, any orphan drugOrphan Drug exclusivity we have obtained will not block the approval of such competitive product and we may effectively lose what had previously been orphan drugOrphan Drug exclusivity. Orphan drugDrug exclusivity for EDSIVOOLPRUVATM or ACER-001EDSIVOTM also will not bar the FDA from approving another celiprolol drug product or a sodium phenylbutyrate or NaPB(“NaPB”) product, for another indication. In the United States,U.S., reforms to the Orphan Drug Act, if enacted, could also materially affect our ability to maintain orphan drugOrphan Drug exclusivity for EDSIVOOLPRUVATM for vEDSMSUD and ACER-001EDSIVOTM for UCD and MSUD.
Price controls, importation of drug products from outside the U.S., or other rules may be imposed in domestic or foreign markets, which may adversely affect our future profitability.
The U.S. government, state legislatures, and foreign governments have shown significant interest in implementing cost-containment programs to limit the growth of government-paid healthcare costs and drug prices in general, including for therapies for rare diseases. These measures include price controls, transparency requirements triggered by the introduction of new high-cost drugs into the market, drug re-importation, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. Some laws and regulations have already been enacted in these areas, and additional measures have been introduced or are under consideration at both the federal and state levels. Additionally, legislation that affects reimbursement for drugs with small patient populations could be adopted, limiting payments for pharmaceuticals such as our product candidates, which could adversely affect our potential future net revenue and results. Adoption of such controls and measures and tightening of restrictive policies in jurisdictions with existing controls and measures could limit payments for pharmaceuticals such as our drug product candidates and could adversely affect our net revenue and results.
In some countries, particularly member states of the European Union, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. There is also the potential for a reference pricing system using drug prices from other countries, sometimes referred to as “most favored nation” treatment. In some countries, we may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.
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Rapid technological change could make our productsproduct candidates obsolete.
Pharmaceutical technologies have undergone rapid and significant change, and we expect that they will continue to do so. As a result, there is significant risk that our product candidates may be rendered obsolete or uneconomical by new discoveries before we recover all or any expenses incurred in connection with their development. If any of our product candidates are rendered obsolete by advancements in pharmaceutical technologies, our prospectsbusiness will suffer.
Government controls and health carehealthcare reform measures could adversely affect our business.
The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payors to contain or reduce the costs of health care.healthcare. In the United StatesU.S. and in foreign jurisdictions, there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health carehealthcare system. For example, in some foreign countries, particularly in Europe, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost-effectiveness of any product candidate to other available therapies. If reimbursement of any product candidate is unavailable or limited in scope or amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability in such country. In the United States,U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 or MMA,(“MMA”) changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated prices for any product candidate covered by a Part D prescription drug plan will likely be lower than the prices that might otherwise be obtained outside of the Medicare Part D prescription drug plan. Moreover, while Medicare Part D applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment under Medicare Part D may result in a similar reduction in payments from non-governmental payors.
The United StatesU.S. and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell any product candidate. Among policy-makers and payors in the United StatesU.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States,U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.initiatives and executive actions. There have been, and likely will continue to be, legislative and executive regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect: the demand for any product candidate; the ability to set a price that we believe is fair for any product candidate; our ability to generate revenues and achieve or maintain profitability; the level of taxes that we are required to pay; and the availability of capital.
Risks Related to Third Parties
We rely on third-party suppliers and other third parties for productionmanufacture of OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as any of our other product candidates, and our dependence on these third parties may impair or delay the commercialization of OLPRUVATM as well as the advancement of our research and development programs and the development of our other product candidates.
We do not currently own or operate manufacturing facilities for clinical or commercial production of our product candidates. We lackslack the resources and the capability to manufacture OLPRUVATM for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS, as well as any of our other product candidates on a clinical or commercial scale. Instead, we rely on, and expect to continue to rely on, third parties for the supply of raw materials and manufacture of drug supplies necessary to conduct our preclinical studies and clinical trials.trials and for our commercialization efforts. Our reliance on third parties may expose us to more risk than if we were to manufacture OLPRUVATM or our currentother product candidates or other products ourselves. Delays in production by third parties could delay our clinical trials or have an adverse impact on anyour commercial activities. In addition, the fact that we are dependent on third parties for the manufacture of and formulation of OLPRUVATM and our other product candidates means that we are subject to the risk that the productsOLPRUVATM or our other product candidates may have manufacturing defects that we have limited ability to prevent or control. Although we oversee these activities to ensure compliance with our quality standards, budgets and timelines, we have had and will continue to have less control over the manufacturing of OLPRUVATM and our other product candidates than potentially would be the case if we were to manufacture
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OLPRUVATM or our other product candidates.candidates ourselves. Further, due to the ongoing impact of the COVID-19 pandemic, new pandemic lockdowns in China, global supply chain issues, Russia’s invasion of Ukraine, or other reasons, the third parties we deal with could experience increased costs in transportation, logistics, raw materials and other costs, may have difficulty sourcing raw materials, may have staffing difficulties, might undergo changes in priorities or may become financially distressed, which would adversely affect the manufacturing and production of our product candidates. In addition, a third party could be acquired by, or enter into an exclusive arrangement with, one of our competitors, which would adversely affect our ability to access the formulations we require.
The facilities used by our current contract manufacturers and any future manufacturers to manufacture our product candidates must be inspected by the FDA after we submit our NDA.NDA for a product candidate. For example, the Complete Response Letter we received in June 2022 for OLPRUVATM (before it was approved by the FDA in December 2022 for oral suspension in the U.S. for the treatment of certain patients with UCDs involving deficiencies of CPS, OTC, or AS) identified satisfactory inspection of our packaging and labeling contract vendor as a necessary prerequisite to any approval for marketing. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturers for compliance with the regulatory requirements, known as cGMPs, for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, the FDA may refuse to approve any of our NDA.NDAs. If the FDA or a comparable foreign regulatory authority does not approve our NDA because of concerns about the manufacture of our product candidates or if significant manufacturing issues arise in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop our product candidates, to obtain marketing approval of our NDA or to continue to market our product candidates, if approved. Although we are ultimately responsible for ensuring compliance with these regulatory requirements, we do not have day-to-day control over a contract manufacturing organization or CMO,(“CMO”) or other third-party manufacturer’s compliance with applicable laws and regulations, including cGMPs and other laws and regulations, such as those related to environmental health and safety matters. Any failure to achieve and maintain compliance with these laws, regulations and standards could subject us to the risk that we may have to suspend the manufacturing of OPLRUVATM or our other product candidates or that obtained approvals could be revoked, which would adversely affect our business and reputation. In addition, third-party contractors, such as our CMOs, may elect not to continue to work with us due to factors beyond our control. TheyAlthough we have contracts in place, they may also refuse to work with us because of their own financial difficulties, business priorities or other reasons, at a time that is costly or otherwise inconvenient for us. If we were unable to find adequate replacement or another acceptable solution in time, our clinical trials could be delayed or our commercial activities could be harmed.
Problems with the quality of the work of third parties may lead us to seek to terminate our working relationships and use alternative service providers. However, making this change may be costly and may delay clinical trials. In addition, it may be very challenging, and in some cases impossible, to find replacement service providers that can develop and manufacture our drug candidates in an acceptable manner and at an acceptable cost and on a timely basis. The sale of products containing any defects or any delays in the supply of necessary services could adversely affect our business, financial condition, results of operations, and prospects.
Growth in the costs and expenses of components or raw materials may also adversely affect our business, financial condition, results of operations, and prospects. Supply sources could be interrupted from time to time and, if interrupted, supplies may not be resumed (whether in part or in whole) within a reasonable timeframe and at an acceptable cost or at all.
We plan to rely on third parties to conduct clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, it may cause delays in commencing and completing clinical trials of our product candidates or we may be unable to obtain marketing approval for or commercialize our product candidates.
Clinical trials must meet applicable FDA and foreign regulatory requirements. We do not have the ability to independently conduct Phase 2 or Phase 3 clinical trials for any of our product candidates. We expecthave and will continue to rely on third parties, such as CROs, medical institutions, clinical investigators and contract laboratories, to conduct all of our clinical trials of our product candidates; however, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with our investigational plan and protocol. Moreover, the FDA and other foreign regulatory authorities require us to comply with IND and human subject protection regulations and current good clinical practice standards, commonly referred to as GCPs, for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our third-party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. There is no assurance that upon
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inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCPs. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the marketing approval process.
There are significant requirements imposed on us and on clinical investigators who conduct clinical trials that we sponsor. Although we are responsible for selecting qualified CROs or clinical investigators, providing them with the information they need to conduct the clinical trials properly, ensuring proper monitoring of the clinical trials, and ensuring that the clinical trials are conducted in accordance with the general investigational plan and protocols contained in the IND, we cannot ensure that the CROs or clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record data, omit data, or even falsify data. We cannot ensure that the CROs or clinical investigators in our trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on our ability to obtain marketing approval, our business, and our financial condition.
We or the third parties we rely on may encounter problems in clinical trials that may cause us or the FDA or foreign regulatory agencies to delay, suspend or terminate our clinical trials at any phase. These problems could include the possibility that we may not be able to manufacture sufficient quantities of materials for use in our clinical trials, conduct clinical trials at our preferred sites, enroll a sufficient number of patients for our clinical trials at one or more sites, or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, we, the FDA or foreign regulatory agencies may suspend clinical trials of our product candidates at any time if we or they believe the subjects participating in the trials are being exposed to unacceptable health risks, whether as a result of adverse events occurring in our trials or otherwise, or if we or they find deficiencies in the clinical trial process or conduct of the investigation.
The FDA and foreign regulatory agencies could also require additional clinical trials before or after granting of marketing approval for any products, which would result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market after obtaining marketing approval. Our failure to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent obtaining marketing approval of the product candidate and, after obtaining marketing approval, data from post-approval studies could result in the product being withdrawn from the market, either of which would likely have a material adverse effect on our business.
In addition, the potential benefits of any collaboration.
Risks Related to Our Intellectual Property
Our proprietary rights may not adequately protect our technologies and product candidates.
Our commercial success will depend in part on our ability to obtain additional patents and protect our existing patent position as well as our ability to maintain adequate protection of other intellectual property for our technologies, product candidates, and any future products in the United StatesU.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. The laws of some foreign countries do not protect our proprietary rights to the same extent or in the same manner as U.S. laws, and we may encounter significant problems in protecting and defending our proprietary rights in these countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.
We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. We cannot be certain that our patent applications will be approved or that any patents issued will adequately protect our intellectual property.
While we are responsible for and typically have control over the filing and prosecuting of patent applications and maintaining patents which cover making, using or selling OLPRUVATM, EDSIVO and ACER-001,TM, or ACER-801, we may lose any such rights if we decide to allow any licensed patent to lapse. If we fail to appropriately prosecute and maintain patent protection for any of our product
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candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.
Moreover, the patent positions of pharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles are evolving and remain unresolved. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, we do not know whether:
The actual protection afforded by a patent varies based on products or processes, from country to country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country, the validity and enforceability of the patents and our financial ability to enforce our patents and other intellectual property. Our ability to maintain and solidify our proprietary position for our products will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, narrowed, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.
We may also rely on trade secrets to protect some of our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While we use reasonable efforts to protect our trade secrets, we or any of our collaborators’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors and we may not have adequate remedies in respect of that disclosure. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.
We are a party to license or similar agreements under which we license intellectual property, anddata, and/or receive commercialization rights relating to OLPRUVATM, EDSIVOTM and ACER-001.ACER-801. If we fail to comply with obligations in such agreements or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business; any termination of such agreements would adversely affect our business.
In April 2014, we entered into an agreement with Baylor College of Medicine pursuant to which we obtained an exclusive worldwide license to develop and commercialize NaPB (OLPRUVATM) for treatment of MSUD. In August 2016, we entered into an agreement with Assistance Publique—Hôpitaux de Paris, Hôpital Européen Georges Pompidou or AP-HP,(“AP-HP”), pursuant to which we obtained an exclusive worldwide right to access and use data from the Ong trial, which we intend to useused to support an NDA filing for EDSIVOTM for the treatment of vEDS. In September 2018, we entered into an additional agreement with AP-HP pursuant to which we obtained the exclusive worldwide intellectual property rights to three European patent applications relating to certain uses of celiprolol including (i) the optimal dose of celiprolol in treating vEDS patients, (ii) the use of celiprolol during pregnancy and (iii)
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the use of celiprolol to treat kyphoscoliotic Ehlers-Danlos syndrome (type VI). In December 2018, we entered into an exclusive license agreement with Sanofi granting us worldwide rights to ACER-801, a clinical-stage, selective, non-peptide tachykinin NK3 receptor antagonist. Under each license agreement, we are subject to commercialization and development diligence obligations, royalty payments and other obligations. If we fail to comply with any of these obligations or otherwise breach any of these license agreements, the licensor may have the right to terminate the license in whole or in part or to terminate the exclusive nature of the license. The loss of the licenses granted to us under our agreements with these licensors or the rights provided therein would prevent us from developing, manufacturing or marketing products covered by the license or subject to supply commitments, and could materially harm our business, financial condition, results of operations and prospects.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United StatesU.S. can be less extensive than those in the United States.U.S. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.U.S. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States,U.S., or from selling or importing products made using our inventions in and into the United StatesU.S. or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement rights are not as strong as those in the United States.U.S. These products may compete with our product candidates in jurisdictions where we do not have any issued patents and our patent claims or other intellectual rights may not be effective or sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
The patent term extension in the United States under the Hatch-Waxman Act and in foreign countries under similar legislation, thereby potentially extending the term of marketing exclusivityprotection for our product candidates may expire before we are able to maximize their commercial value, which may subject us to increased competition and reduce or eliminate our businessopportunity to generate product revenue.
The patents for our product candidates have varying expiration dates and, if these patents expire, we may be materially harmed.
Nevertheless, we may not be granted patent term extension either in the United StatesU.S. or in any foreign country because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority could be less than we request.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The United StatesU.S. Patent and Trademark Office or USPTO,(“USPTO”) and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent prosecution process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patent and/or pending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a patent or patent application. We employ an outside firm and rely on our outside counsel to pay these fees. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and patent applications directed to our product candidates, our competitors might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect on our business.
We may become involved in lawsuits to protect our patents or other intellectual property rights, which could be expensive, time-consuming and ultimately unsuccessful.
Competitors may infringe our patents or other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, directly or through our licensors, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of our licensor is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of the patents we license at risk of being invalidated or interpreted narrowly and could put our licensors’ patent applications at risk of not issuing.
Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents or the patents of our licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential and proprietary information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
Third-party claims of intellectual property infringement or misappropriation may adversely affect our business and could prevent us from developing or commercializing our product candidates.
Our commercial success depends in part on us not infringing the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States,U.S., involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex-parte review and inter partes reexamination and post-grant review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing and may develop our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:
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Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of OLPRUVATM or our other product candidates that we failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United StatesU.S. remain confidential until issued as patents. Except for the preceding exceptions, patentPatent applications in the United StatesU.S. and elsewhere are otherwise generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering OLPRUVATM or our other product candidates could have been filed by others without the knowledge of us or our licensors. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover OLPRUVATM or our other product candidates or the use or manufacture of OLPRUVATM or our other product candidates. We may also face a claim of misappropriation if a third party believes that we inappropriately obtained and used trade secrets of such third party. If we are found to have misappropriated a third party’s trade secrets, we may be prevented from further using such trade secrets, limiting our ability to develop our product candidates, and we may be required to pay damages.
If any third-party patents were held by a court of competent jurisdiction to cover aspects of our materials, formulations, methods of manufacture or methods for treatment, the holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate until such patent expired or unless we obtain a license. These licenses may not be available on acceptable terms, if at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our product candidates, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of OLPRUVATM or our other product candidates. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our commercialization efforts, continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development collaborations that would help us bring OLPRUVATM or our other product candidates to market.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
As is the case with other pharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents and patent rights. Obtaining and enforcing patents and patent rights in the specialty pharmaceutical industry involves both technological and legal complexity, and therefore, is costly, time-consuming and inherently uncertain. In addition, the United StatesU.S. has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, several recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents and patent rights, once obtained.
For our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act (the “America Invents Act” or the America Invents Act, or AIA,“AIA”) was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted, reviewed after issuance, and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associated with the AIA. It is not clear what other, if any, impact the AIA will have on the operation of our business. Moreover, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of patent rights, all of which could have a material adverse effect on our business and financial condition.
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An important change introduced by the AIA is that, as of March 16, 2013, the United StatesU.S. transitioned to a “first-inventor-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before the filing of a patent application by a licensor or us could therefore be awarded a patent covering an invention of ours even if said licensor or we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, our ability to obtain and maintain valid and enforceable patent rights depends on whether the differences between the licensor’s or our technology and the prior art allow our technology to be patentable over the prior art. Since patent applications in the United StatesU.S. and most other countries are confidential for a period of time after filing, we cannot be certain that a licensor or we were the first to either (a) file any patent application related to our product candidates or (b) invent any of the inventions claimed in our patents or patent applications.
Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. This applies to all U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United StatesU.S. federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid as unpatentable even though the same evidence may be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate patent rights that would not have been invalidated if first challenged by the third party as a defendant in a district court action.
Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Intellectual property rights do not address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and protect other proprietary information.
We consider proprietary trade secrets and/or confidential know-how and unpatented know-how to be important to our business. We may rely on trade secrets and/or confidential know-how to protect our technology, especially where patent protection is believed by us to be of limited value. However, trade secrets and/or confidential know-how can be difficult to maintain as confidential.
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To protect this type of information against disclosure or appropriation by competitors, our policy is to require our employees, consultants, contractors and advisors to enter into confidentiality agreements with us. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party obtained illegally and is using trade secrets and/or confidential know-how is expensive, time consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction.
Failure to obtain or maintain trade secrets and/or confidential know-how trade protection could adversely affect our competitive position. Moreover, our competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, our competitors could limit our use of our trade secrets and/or confidential know-how.
We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of OLPRUVATM or our other product candidates. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize OLPRUVATM or our other product candidates, in which case we would be required to obtain a license from these third parties. Such a license may not be available on commercially reasonable terms or at all, which could materially harm our business.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers.
Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. We may also be subject to claims that former employees, consultants, independent contractors, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such an outcome could have a material adverse effect on our business.
Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents and other intellectual property. We may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.
Because we rely on third parties to assist with research and development and to manufacture our product candidates, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the
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technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.
In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with in the future will usually expect to be granted rights to publish data arising out of such collaboration, provided that we are notified in advance and given the opportunity to delay publication for a limited time period in order for us to secure patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. In the future we may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.
Risks Related to Our Securities
Our share price is currently a limited market for our securities, and any trading market that exists in our securities may be highly illiquid andvery volatile, may not reflect the underlying value of our net assets or business prospects.
The market price of our common stock could be subject to significant fluctuations. The market prices for securities of pharmaceutical and biotechnology companies, and early-stage drug discovery and development companies like ours in particular, have historically been highly volatile and may continue to be highly volatile in the future. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:
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Broad market and industry factors, as well as economic and political factors, also may materially adversely affect the market price of our common stock.
We do not currently, and in the future we may not be able to comply with the Nasdaq Capital Market’s continued listing standards for our common stock, which could result in our common stock being delisted from the Nasdaq Capital Market as well as a number of negative implications, including reduced market price and liquidity of our common stock, the potential loss of confidence by suppliers, partners, employees and institutional investor interest, fewer business development opportunities, greater difficulty in obtaining financing and breaches of or events of default under certain contractual obligations (including an event of default under the loan agreement for the Marathon Convertible Notes).
The Nasdaq Capital Market’s continued listing standards for our common stock require, among other things, that we maintain either (i) stockholders’ equity of $2.5 million, (ii) MVLS of $35 million or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. On May 3, 2023, the Company received a letter from the listing qualifications department staff of Nasdaq indicating that for the last 30 consecutive business days, the Company’s minimum MVLS was below the minimum of $35 million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq listing rule 5550(b)(2). In accordance with Nasdaq listing rules, the Company has 180 calendar days, or until October 30, 2023, to regain compliance.
In addition, pursuant to Nasdaq Listing Rules, we are required to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq. Following the announcement of topline results in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or severity of hot flashes in postmenopausal women, our stock has traded below the required minimum bid price for continued listing on Nasdaq.
There can be no assurance that we will be able to regain or maintain compliance with Nasdaq listing standards. Our failure to continue to meet these requirements could result in our common stock being delisted from the Nasdaq Capital Market. If our common stock were delisted from the Nasdaq Capital Market, among other things, this could result in a number of negative implications, including reduced market price and liquidity of our common stock as a result of the loss of market efficiencies associated with the Nasdaq, the loss of federal preemption of state securities laws, as well as the potential loss of confidence by suppliers, partners, employees and institutional investor interest, fewer business development opportunities, greater difficulty in obtaining financing and breaches of or events of default under certain contractual obligations (including an event of default under the loan agreement for the Marathon Convertible Notes).
We have been a defendant in securities litigation in the past and may become the target of securities litigation in the future, which ismay be costly and time-consuming to defend.
Following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders have often instituted class action litigation. This risk is especially relevant for us because pharmaceutical companies like ours have experienced significant stock price volatility in recent years. For example, we were named in a putative securities class action complaint and several stockholder derivative actions, which have been subsequently settled, as a result of the decline in our stock price following a 2019 Complete Response Letter from the FDA regarding our NDA for EDSIVO™. If we become involved in this type of litigation in the future, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.
Our “blank check” preferred stock could be issued to prevent a business combination not desired by management or our majority shareholders.
Our charter authorizes the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined by our boardBoard of directorsDirectors without shareholderstockholder approval. Our preferred stock could be utilized as a method of discouraging, delaying, or preventing a change in control and as a method of preventing shareholdersstockholders from receiving a premium for their shares in connection with a change of control.
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Future sales of our common stock or the issuance of additional debt, convertible debt or other equity securities could cause dilution, and the sale of such securities,common stock by us or by holders of our Marathon Convertible Notes, or the perception that such sales may occur, could cause the price of our stock to fall.
Sales of additional shares of our common stock, as well as securities convertible into or exercisable for common stock, could result in substantial dilution to our shareholdersstockholders and cause the market price of our common stock to decline. An aggregate of 6,450,76624,300,073 shares of common stock were outstanding as of September 30, 2017.May 15, 2023. As of such date, another (i) 165,0003,155,100 shares of common stock were issuable upon exercise of outstanding options, and (ii) 317,630500,000 shares of common stock were issuable upon the exercise of warrants issued to SWK pursuant to the SWK Credit Agreement, the Marathon Convertible Notes were outstanding warrants.and convertible by the holders into shares of common stock (including 2,400,000 shares upon conversion of the original principal amount, without taking into account the limitations on the conversion of the Marathon Convertible Notes, plus additional shares if accrued but unpaid interest on the Marathon Convertible Notes is converted into shares of common stock), and 2,920,306 shares of common stock were issuable pursuant to a common stock purchase warrant we sold in a private placement concurrent with the March 2023 Offering. A substantial majority of the outstanding shares of our common stock, and warrants (asas well as a substantial majority of the shares of common stock issuable upon exercise of outstanding options, and warrants) are freely tradable without restriction or further registration under the Securities Act of 1933.
We may sell additional shares of common stock, as well as securities convertible into or exercisable for common stock, in subsequent public or private offerings. We may also issue additional shares of common stock, as well as securities convertible into or exercisable for common stock, to finance future acquisitions. We will need to raise additional capital in order to initiate or complete additional development activities for EDSIVO in vEDS and for ACER-001 in UCD and MSUD,all of our product candidates or to pursue additional disease indications for our product candidates, and this may require us to issue a substantial amount of securities (including common stock as well as securities convertible into or exercisable for common stock). There can be no assurance that our capital raising efforts will be able to attract the capital needed to execute on our business plan and sustain our operations. Moreover, we cannot predict the size of future issuances of our common stock, as well as securities convertible into or exercisable for common stock, or the effect, if any, that future issuances and sales of our securities will have on the market price of our common stock. Sales of substantial amounts of our common stock by us or by the holders of our Marathon Convertible Notes, as well as securities convertible into or exercisable for common stock, including shares issued in connection with an acquisition or securing funds to complete any clinical trial plans, or the perception that such sales could occur, may result in substantial dilution and may adversely affect prevailing market prices for our common stock.
On November 9, 2018, we entered into a sales agreement with Roth Capital Partners, LLC, and on March 18, 2020, an amended and restated sales agreement was entered into with JonesTrading Institutional Services LLC and Roth Capital Partners, LLC. The agreement provides a facility for the offer and sale of shares of common stock from time to time having an aggregate offering price of up to $50.0 million depending upon market demand and subject to various limitations, in transactions deemed to be an at-the-market offering. We have no obligation to sell any shares of common stock pursuant to the agreement and may at any time suspend sales pursuant to the agreement. Each party may terminate the agreement at any time without liability. As of March 31, 2023, $29.4 million remained available under this facility.
We presently do not intend to pay cash dividends on our common stock.
We currently anticipatesanticipate that no cash dividends will be paid on theour common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that all earnings, if any, will be retained to finance the future expansion of our business.
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.
In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, guarantees, preferred stock, hybrid securities, or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securitiesstock would receive distributions of available assets before distributions to the holders of our common stock. Because our decision to incur debt and issue securities in future offerings may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
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Because a number of factors, including the amount and timing of cash used in our operations and our research and development efforts. Management’s failure to use these funds effectively would have an adverse effect on the value of our common stock and could make it more difficult and costly to raise funds in the future.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” withinchange,” the meaning of Section 382 of the Internal Revenue Code, or Section 382, the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes arising from before the ownership change are subject to limitations on use after the ownership change.offset its post-change income and taxes may be limited. In general, an ownership change“ownership change” occurs if there is a cumulative change in the corporation’s equitya company’s ownership by certain shareholders“five-percent shareholders” that exceeds fifty50 percentage points by value over a rolling three-year period. Similar rules may apply under state tax laws. The Merger resulted inWe experienced an ownership change for uson July 17, 2015 and accordingly, our net operating loss carryforwardsAugust 3, 2018, and certain other tax attributes will now be subject to limitation and possibly elimination. It is possible that Private Acer’s net operating loss carryforwards and certain other tax attributes may also be subject to limitation as a result of prior shifts in equity ownership and/or the Merger. Additionalexperience ownership changes in the future couldas a result of previous or future transactions in additional limitations on our and Private Acer’sstock, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, and certainor other tax attributes. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of our or Private Acer’s net operating loss carryforwards and certain otherpre-change tax attributes, which could have a material adverse effect on cash flowto offset U.S. federal and resultsstate taxable income and taxes may be subject to significant limitations.
Because of operations.
As of interest that could causeMarch 31, 2023, our stock price to decline.
Anti-takeover provisions in our organizational documents and TexasDelaware law might discourage, delay, or delayprevent an acquisition attempts forattempt or change in control of our company that you might consider favorable.
Our certificate of formationincorporation and bylaws contain provisions that may delay or prevent an acquisition or change in control of our company. Among other things, these provisions:
Further, as a TexasDelaware corporation, we are also subject to provisions of Texas law, which may impairSection 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a takeover attempt that the our shareholders may find beneficial. business combination with interested stockholders subject to certain exceptions.
These anti-takeover provisions and other provisions under TexasDelaware law, our charter and our bylaws could discourage, delay or prevent a transaction involving an acquisition attempt or a change in control of our company, including actions that our shareholdersstockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other shareholdersstockholders to elect directors of your choosing and to cause the us to take other corporate actions you desire.
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Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is more convenient or favorable for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for:
Section 27 of Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of Item 2. Unregistered Sales of Equity Securities and On March 21, 2023, we entered into a securities purchase agreement with an institutional accredited investor pursuant to Item 5. Other Information. On May 12, 2023, we entered into the Third Amendment to the SWK Credit Agreement. In addition to other provisions, the Third Amendment provides for (i) a temporary reduction in the minimum amount of The SWK Loans made under the Current SWK Credit Agreement bear interest at an annual rate of the sum of (i) 3-month SOFR, subject to a 1% floor, plus (ii) a margin of 11%, with such interest payable quarterly in arrears. In the event of default, the interest rate will increase by 3% per annum over the contract rate effective at the time of default but shall not be higher than the maximum rate permitted to be charged by applicable laws. Due to topline results announced in March 2023 from our Phase 2a proof 91 of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, which showed that ACER-801 was safe and well-tolerated but did not achieve statistical significance when evaluating ACER-801’s ability to decrease the frequency or The SWK Loans are secured by a first priority lien on all of our 92 Item 6. Exhibit No. Description 3.1 3.3 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7* 10.8 10.9 10.10 93 10.11 10.12 10.13 31.1* 31.2* 32.1** 32.2** 101.INS* Inline XBRL Instance Document – the 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in * Filed herewith. ** 94 SIGNATURE 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. ACER THERAPEUTICS INC. Date: By: /s/ Harry S. Palmin Chief Financial Officer (Principal Financial and Accounting Officer) 95officersthe Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and directors.Provisionsregulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction.formationincorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is more convenient or favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and bylaws provide thatour directors, officers and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we will indemnify any directormay incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.officer asUse of Proceeds.liabilities incurredwhich we agreed to issue and sell, (i) in their capacity as a directorregistered direct offering, an aggregate of 2,335,000 shares of our common stock and pre-funded warrants to purchase up to 585,306 shares of our common stock at an exercise price of $0.001 per share, and (ii) in a concurrent private placement, warrants to purchase up to 2,920,306 shares of our common stock at an exercise price of $0.791 per share. The securities issued or officerissuable in the concurrent private placement (common warrants and on those termsshares of common stock issuable upon exercise of such common warrants) were not registered under the Securities Act of 1933 and conditions set forth thereinwere offered pursuant to the fullest extentexemption provided in Section 4(a)(2) thereunder.Texas law. Further, we may purchaseunencumbered liquid assets required to be maintained by us pursuant to the SWK Credit Agreement as amended through the Third Amendment (i.e., the Current SWK Credit Agreement), from $3.0 million to $1.75 million through May 30, 2023, and maintain insurance on behalfat the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any such persons whethertemporary reduction(s) to $3.0 million (or, if less, the outstanding principal amount of the SWK Loans) until the SWK Loans are repaid, (ii) our ability to forego a $0.6 million amortization payment otherwise due under the Current SWK Credit Agreement on May 15, 2023, and at the discretion of SWK a second $0.6 million amortization payment otherwise due on June 15, 2023, and (iii) our ability to defer until July 15, 2023 half of the $0.5 million quarterly interest payment otherwise due under the Current SWK Credit Agreement on May 15, 2023.not we wouldseverity of hot flashes in postmenopausal women, the principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million (as opposed to $1.3 million quarterly prior to the announcement of such topline results), although the Third Amendment allows us to forgo the amortization payment otherwise due on May 15, 2023, and at the discretion of SWK a second amortization payment otherwise due on June 15, 2023. The final maturity date of the SWK Loans is March 4, 2024. We have the poweroption to indemnifyprepay the SWK Loans in whole or in part. Upon the repayment of the Original Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK under the Current SWK Credit Agreement on or prior to the prepayment date) equal to 1.5 times the outstanding principal amount of the Original Term Loan, plus any and all payment-in-kind interest amounts. Upon the repayment of the Second Term Loan (whether voluntary or at scheduled maturity), we must pay an exit fee so that SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid in cash to SWK under the Current SWK Credit Agreement with respect to the Second Term Loan) equal to the outstanding principal amount of the Second Term Loan (inclusive of payment-in-kind interest amounts) multiplied by: (i) if the repayment occurs prior to May 16, 2023, 1.28667, (ii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iii) if the repayment occurs on or after July 16, 2023, 1.5. Due to topline results announced in March 2023 from our Phase 2a proof of concept clinical trial to evaluate ACER-801 as a potential treatment for moderate to severe VMS associated with menopause, we are required to maintain for purposes of the SWK Loans unencumbered liquid assets of not less than the lesser of (x) the outstanding principal amount of the SWK Loans or (y) $3.0 million (as opposed to $1.5 million for clause (y) prior to the announcement of such person againsttopline results), although the liability insured against. The foregoing could resultThird Amendment provides for a temporary reduction in substantial expendituresthe minimum amount of unencumbered liquid assets required to be maintained by us under clause (y) (from $3.0 million to $1.75 million through May 30, 2023, and preventat the discretion of SWK a possible further temporary reduction to $1.25 million from May 31, 2023 through June 30, 2023, with such minimum required amount returning following the period(s) of any recovery fromsuch temporary reduction(s) to $3.0 million).officers, directors, agentsassets and employees for losses incurred byany of our future subsidiaries pursuant to a Guarantee and Collateral Agreement entered into on March 4, 2022, between us and SWK, as a result of their actions.agent (i.e., the SWK Security Agreement). The Current SWK Credit Agreement contains customary representations and warranties and affirmative and negative covenants.ExhibitsExhibitNo.DescriptionRestated Certificate of Certificate ofCertificate of Amendment10.3 to the Restated Certificate of Formation (incorporated by reference to Exhibit 3.1 to Acer’sCompany’s Current Report on Form 8-K filed on September 28, 2015)August 23, 2022).CertificateCertificate4.1*Specimen common stock certificate.10.1+Credit Agreement dated March 4, 2022, among Acer Therapeutics Inc. Amended, the lenders party thereto and Restated 2010 Stock Incentive Plan (incorporated by reference to Appendix A to Acer’s Definitive Proxy Statement on Schedule 14A filed on April 11, 2016).**10.2+Amendment No. 1 toMAM Aardvark, LLC, as the Acer Therapeutics Inc. Amendedagent, sole lead arranger and Restated 2010 Stock Incentive Plansole bookrunner (incorporated by reference to Exhibit 10.3510.6 to Acer’s Registration Statement on Form S-4, as amended, (File No. 333-219358) filed on July 19, 2017).**10.3+Acer Therapeutics Inc. 2013 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 of Acer’sthe Registrant’s Current Report on Form 8-K filed on September 20, 2017).March 7, 2022.)31.1*31.2*32.132.2101*Financial statements fromQuarterly Report on Form 10-Q of Acer forinstance document does not appear in the period ended September 30, 2017, formattedInteractive Data File because its XBRL tags are embedded within the Inline XBRL document.Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.Exhibits 101)._______________+ Management contract or compensatory plans or arrangements.Note thatIn accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the namecertifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of this plan has been amended to reflect the current nameSection 18 of the Registrant.SIGNATURESSecurities Exchange Act of 1934. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.November 13, 2017
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