The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and the related footnotes thereto. Overview We are a pharmaceutical company focused on the acquisition, development, and commercialization of therapies for serious rare and life-threatening diseases with significant unmet medical needs. We identify and develop treatments where science can be applied in new ways for use in diseases with high unmet need. In theU.S. , OLPRUVA™ (sodium phenylbutyrate) for oral suspension is approved for the treatment of urea cycle disorders ("UCDs") involving deficiencies of carbamylphosphate synthetase ("CPS"), ornithine transcarbamylase ("OTC"), or argininosuccinic acid synthetase ("AS").1 We are also advancing a pipeline of investigational product candidates, including EDSIVO™ (celiprolol) for the treatment of vascular Ehlers-Danlos syndrome ("vEDS") patients with a confirmed type III collagen (COL3A1) mutation, and ACER-801 (osanetant) for the treatment of vasomotor symptoms ("VMS"), post-traumatic stress disorder ("PTSD"), and prostate cancer. We also intend to explore additional lifecycle opportunities for OLPRUVA™ (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 theU.S. ("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 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$140.7 million as ofDecember 31, 2022 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 ofDecember 31, 2022 , we had cash and cash equivalents of$2.3 million and current liabilities of$19.0 million , which include$8.4 million associated with deferred collaboration funding. Our cash and cash equivalents available atDecember 31, 2022 , together with the proceeds from the Second Term Loan (defined below) of$7.0 million which funded onJanuary 31, 2023 , net proceeds from our ATM (defined below) facility subsequent toDecember 31, 2022 , totaling$4.0 million from the sale of 1,462,254 shares for gross aggregate proceeds of$4.1 million and an average per share price of$2.81 less offering costs of$0.1 million , and$2.7 million of gross proceeds from a sale of securities (including 2,335,000 shares of common stock and pre-funded warrants to purchase up to 585,306 shares of common stock pursuant to a registered direct offering as well as warrants to purchase up to 2,920,306 shares of common stock in a concurrent private placement) which closed onMarch 24, 2023 (see Note 12 to our financial statements) (the "March 2023 Offering"), are expected to be sufficient to fund our anticipated operating and capital requirements into the middle of the second quarter of 2023. We will need to raise additional capital to fund continued operations beyond the middle of 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 the middle of 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$29.4 million available as ofMarch 24, 2022 , although we suspended our ATM facility in connection with theMarch 2023 Offering and entered into a related restriction prohibiting us from entering into any agreement to issue or announcing the issuance or proposed issuance of any 82 -------------------------------------------------------------------------------- shares of our common stock or securities convertible or exercisable into our common stock, subject to certain exceptions, untilApril 24, 2023 . (See At-the Market Facility and Common Stock Purchase Agreement in Note 9 as well as Note 12 to our financial statements.) Moreover, due to theSEC'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, we are only able to issue a limited number of shares under our ATM facility. FromMay 19, 2020 throughMarch 24, 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 withLincoln Park (defined below), which equity line facility was completed onDecember 30, 2022 . OnMarch 4, 2022 , we entered into a Credit Agreement (the "SWK Credit Agreement") with the lenders party thereto andSWK 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 onMarch 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 (as defined and described below) and the Marathon Credit Agreement (as defined and described below) and for other working capital and general corporate purposes. OnAugust 19, 2022 , we entered into an amendment (the "First Amendment") to the SWK Credit Agreement, which extended the date through which we have the option to capitalize interest on the SWK Credit Agreement and which revised our minimum cash requirement under the Original Term Loan. OnJanuary 30, 2023 , we entered into a 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 us in an aggregate amount of$7.0 million in a single borrowing which funded onJanuary 31, 2023 (the "Second Term Loan", and together with the Original Term Loan, the "SWK Loans"). The SWK Loans made under the SWK Credit Agreement, as amended by the Second 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. We have the option to capitalize such interest commencing on the date on which the Original Term Loan was funded and continuing untilMay 15, 2023 . Due to topline results announced inMarch 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 startingApril 15, 2023 , until we have issued additional equity or subordinated debt resulting in net cash proceeds of not less than$7.7 million (i.e., the sum of$10.0 million less the net proceeds from theMarch 2023 Offering), at which point the SWK Loans would revert to amortizing at a rate of$1.3 million payable quarterly. The final maturity date of the SWK Loans isMarch 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 SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK 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 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 on or beforeApril 15, 2023 , 1.18, (ii) if the repayment occurs on or afterApril 16, 2023 but prior toMay 16, 2023 , 1.28667, (iii) if the repayment occurs on or afterMay 16, 2023 but prior toJune 16, 2023 , 1.39334, and (iv) if the repayment occurs on or afterJuly 16, 2023 , 1.5. Due to topline results announced inMarch 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).
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
83 -------------------------------------------------------------------------------- (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 a warrant (the "First SWK Warrant") to purchase 150,000 shares of our common stock at an exercise price of$2.46 per share. In connection with the 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, together with the First SWK Warrant and Second 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 includingMarch 4, 2029 . OnMarch 4, 2022 , we also entered into a Secured Convertible Note Purchase Agreement withMAM Aardvark, LLC ("Marathon") andMarathon Healthcare Finance Fund, L.P. ("Marathon Fund " and together with "Marathon" each a "Holder" and collectively the "Holders") (the "Marathon Convertible Note Purchase Agreement") pursuant to which we issued and sold 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 onMarch 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 Agreement and for other working capital and general corporate purposes. OnJanuary 30, 2023 , we entered into an Amendment Agreement (the "Marathon Amendment Agreement") withMarathon 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 throughMarch 31, 2023 , with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred afterMarch 31, 2023 , to be due and payable in cash by us onApril 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 ofJune 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 sinceJanuary 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, together with any accrued but unpaid interest thereon to the date of such repurchase; 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; and provided, further, that if such repurchase has not occurred byApril 15, 2023 , the Buy-Out Percentage shall be increased by 2500 basis points for each 90-day period afterApril 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 onMay 30, 2023 , the Buy-Out Percentage shall be increased to 212.5%). 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.
84 -------------------------------------------------------------------------------- OnMarch 4, 2022 , we also entered into a Credit Agreement (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 (the "Term Loan"). The Term Loan was available to be borrowed only following full FDA approval for marketing of ACER-001 and untilDecember 31, 2022 . We received approval for our NDA for ACER-001 onDecember 22, 2022 , and we and Marathon agreed to an Extension Agreement with respect to the Term Loan onDecember 30, 2022 , which extended the commitment date for funding the Term Loan toJanuary 16, 2023 . We elected to terminate the Marathon Credit Agreement by entering into a Termination Agreement onJanuary 30, 2023 , which terminated the Credit Agreement and an associated Royalty Agreement. OnMarch 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 (the "Option Agreement," together the "Agreements") previously entered into between us and Relief onJanuary 25, 2021 . Pursuant to the Agreements, we received from Relief an upfront non-refundable payment of$1.0 million and a reimbursement payment of$14.0 million . Under the terms of the Collaboration Agreement, Relief committed to pay us Development Payments (the "Development Payments") of up to an additional$20.0 million forU.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months endedJune 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 theFDA's acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . 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. The terms of the Agreements are further described in Critical Accounting Estimates later in this section and in the Revenue Recognition and Accounting for Collaboration Agreements section of Note 2 to our financial statements. 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 date these financial statements are available, orMarch 27, 2023 . Our financial statements do not include any adjustments or classifications that may result from our possible inability to continue as a going concern.
Revenue
We have not generated any revenue from product sales. While we received approval for OLPRUVATM onDecember 22, 2022 , we do not expect to generate any revenue from product sales unless and until we commercialize OLPRUVATM and/or any of our product candidates. Our revenue and collaboration funding to date consist of activities in connection with a collaboration agreement, including a license of intellectual property. We expect that any revenue or collaboration funding we generate will fluctuate from quarter to quarter as a result of the timing of achievement of contractually specified milestones, if any, the timing and amount of payments relating to such milestones, and 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.
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Activities Associated with Collaboration Agreement
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.
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:
•
employee-related expenses, including salaries, benefits, and stock-based compensation
•
external research and development expenses incurred under arrangements with third parties, such as contract research organizations ("CROs"), contract manufacturing organizations, consultants, and our scientific advisors
•
license fees and other direct costs of acquiring intellectual property
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 as the service has been performed or as the goods have been received. From time to time, in connection with the Collaboration Agreement with Relief, we may recognize "contra-expense" for the research and development activities which were funded by the Collaboration Agreement. These contra-expense amounts are disclosed parenthetically on the face of the financial statements.
At any time, we are working on multiple 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.
Since our inception inDecember 2013 , we have spent a total of$86.5 million in research and development expenses throughDecember 31, 2022 . Of that amount,$37.2 million was directly related to EDSIVOTM;$29.5 million was directly related to OLPRUVATM, offset by$13.9 million of collaboration funding;$11.7 million was directly related to ACER-801;$5.4 million was directly related to ACER-2820; and$2.7 million was related to other development activities. We expect our research and development expenses to be 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 preclinical 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. While we received approval for OLPRUVATM onDecember 22, 2022 for oral suspension in theU.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, pursue regulatory approvals, and operate our business as planned. 86
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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 legal, business consulting, auditing, and tax services. We expect that general and administrative expenses will be substantial in the future. From time to time, in connection with the Collaboration Agreement with Relief, we may recognize "contra-expense" for the general and administrative activities which were funded by the Collaboration Agreement. These contra-expense amounts are disclosed parenthetically on the face of the financial statements.
Other Income (Expense), Net
Other income (expense), net consists primarily of changes in the value of liabilities measured at fair value, interest income and of gains and losses resulting from the revaluation of assets and liabilities denominated in foreign currencies. We earn interest income from interest-bearing accounts and money market funds, which we classify as cash and cash equivalents. We incur interest expense from loans and notes payable. We record as part of other 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 income (expense), net.
Critical Accounting Estimates
This management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, 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 revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. Additionally, we refer to our significant accounting policies which are included in Note 2 to our financial statements. 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. During the year endedDecember 31, 2022 , we have updated our critical accounting policies to include debt and convertible debt.
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 license of intellectual property. We analyze our 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, 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
87 -------------------------------------------------------------------------------- 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.
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). OnJanuary 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 toJune 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 ACER001. 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. OnMarch 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 forU.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months endedJune 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 theFDA's acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . Further, we retained development and commercialization rights in theU.S. ,Canada ,Brazil ,Turkey andJapan ("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 88 -------------------------------------------------------------------------------- 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 theFirst 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 theU.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 Services unit-of-account will be recognized as contra-expense within their respective categories, consistent with the presentation guidance in ASC 730. 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. AtDecember 31, 2022 , the amount of deferred collaboration funding associated with unsatisfied promises under the Collaboration Agreement amounted to$8.4 million . We have recorded this amount 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 non-current liability reported as ofDecember 31, 2021 represented the then current estimated amount that would have been taken against future net profit payments made to Relief should they have occurred. We expect to recognize this deferred collaboration funding as we incur expenses associated with performing the Services up to the date of first commercial sale in Acer Territory and through the end of the effective date of the Collaboration Agreement. AtDecember 31, 2022 , deferred collaboration funding was composed of$35.0 million received from Relief, offset by$1.3 million recognized as license revenue during the year endedDecember 31, 2021 and by$13.9 million recorded as an offset to research and development expenses, and$11.4 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 the underlying net tangible and intangible assets. We evaluate the recoverability of goodwill according to ASC Topic 350, Intangibles -Goodwill and Other annually, or more 89 -------------------------------------------------------------------------------- frequently if events or changes in circumstances indicate that the carrying value of goodwill 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 perform 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 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.
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.
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Level 1-Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
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Level 2-Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
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Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
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 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 reporting 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 for both our Original Term Loan and our Marathon Convertible Notes datedMarch 14, 2022 (see Note 7 to our financial statements). 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 and the Marathon Convertible Notes 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 90
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the fair value option. At the date of issuance, the fair value for each instrument is derived from the instrument's implied discount rate at inception.
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 sometimes 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 as the services are performed.
Clinical Trial and Preclinical Study Expenses
We make estimates of prepaid and/or accrued expenses as of each balance sheet date in our financial statements based on certain facts and circumstances at that time. Our accrued expenses for preclinical studies and clinical trials are based on estimates of costs incurred for services provided by CROs, manufacturing organizations, and for other trial- 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. No material changes in estimates were recognized in the years endedDecember 31, 2022 and 2021. Our accounts payable and accrued expenses include costs associated with preclinical or clinical studies of$0.9 million and$0.2 million atDecember 31, 2022 and 2021, respectively.
Results of Operations
Comparison of the years ended
The following table summarizes our results of operations for the years ended
Years Ended December 31, 2022 2021 $ Change % Change Revenue $ -$ 1,260,000 $ (1,260,000 ) N/A Operating expenses: Research and development (net of collaboration funding of$7,825,263 and$6,055,295 in the years ended December 2022 and 2021, respectively) 11,924,837 6,508,055 5,416,782 83 % General and administrative (net of collaboration funding of$8,248,813 and$3,197,659 in the years ended December 2022 and 2021, respectively) 12,689,422 10,700,334 1,989,088 19 % Loss from operations (24,614,259 ) (15,948,389 ) (8,665,870 ) 54 % Total other income (expense), net (1,623,056 ) 574,396 (2,197,452 ) (383 )% Net loss$ (26,237,315 ) $ (15,373,993 ) $ (10,863,322 ) 71 % 91
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Revenue
We recognized revenue of$1.3 million during the year endedDecember 31, 2021 related to the license of intellectual property as part of the Collaboration Agreement with Relief.
Research and Development Expenses
Research and development expenses were$11.9 million , net of collaboration funding of$7.8 million , for the year endedDecember 31, 2022 , as compared to$6.5 million , net of collaboration funding of$6.1 million , for the year endedDecember 31, 2021 . This increase of$5.4 million was primarily due to increases in employee-related expenses including a bonus accrual and expenses related to clinical studies, partially offset by the increase in recognition of contra-expense from the collaboration funding from the Collaboration Agreement with Relief. Research and development expenses for the year endedDecember 31, 2022 were comprised of$8.2 million related to OLPRUVATM, offset by$7.8 million of collaboration funding;$5.9 million related to ACER-801;$4.0 million related to EDSIVOTM;$0.2 million related to ACER-2820; and$1.4 million related to other development activities.
General and Administrative Expenses
General and administrative expenses were$12.7 million , net of collaboration funding of$8.2 million , for the year endedDecember 31, 2022 , as compared to$10.7 million , net of collaboration funding of$3.2 million , for the year endedDecember 31, 2021 . This increase of$2.0 million was primarily due to increases in precommercial activities, employee-related expenses including a bonus accrual, professional services, and information technology, partially offset by the increase in the recognition of contra-expense from the collaboration funding from the Collaboration Agreement with Relief.
Other Income (Expense), Net
Other expense, net of$1.6 million during the year endedDecember 31, 2022 was primarily attributable to debt issuance cost, partially offset by changes in the fair value of debt instruments. Other income, net of$0.6 million during the year endedDecember 31, 2021 was primarily attributable to a gain on extinguishment of debt related to forgiveness of a PPP loan and to foreign currency gain.
Liquidity and Capital Resources
We have never been profitable and have incurred operating losses in each year since inception. From inception toDecember 31, 2022 , we have raised net cash proceeds of$115.5 million , primarily from common stock offerings, private placements of convertible preferred stock, debt instruments, and convertible debt instruments. In addition, from inception toDecember 31, 2022 , we have raised cash proceeds of$35.0 million from collaboration agreements. As ofDecember 31, 2022 , we had$2.3 million in cash and cash equivalents and current liabilities aggregating to$19.0 million , which include$8.4 million associated with deferred collaboration funding. Our net loss for the years endedDecember 31, 2022 and 2021, was$26.2 million and$15.4 million , respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$140.7 million . Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. 92
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The following table summarizes our cash flows for the years endedDecember 31, 2022 and 2021: Years Ended December 31, 2022 2021 Net cash (used in) provided by: Operating activities$ (30,251,898 ) $ (134,909 ) Investing activities (171,170 ) (54,944 ) Financing activities 20,041,524 7,139,047 Net (decrease) increase in cash and cash equivalents$ (10,381,544 ) $ 6,949,194 Cash and cash equivalents, beginning of the year 12,710,762 5,761,568 Cash and cash equivalents, end of the year$ 2,329,218 $ 12,710,762 Operating Activities Net cash used in operating activities was$30.3 million for the year endedDecember 31, 2022 , as compared to$0.1 million for the year endedDecember 31, 2021 . The increase in cash used in operations of$30.2 million was primarily the result of an increase in net loss after adjusting for non-cash changes in the fair value of debt and reductions in collaboration funding related to cash received from Relief pursuant to the Agreements net of amounts recognized as contra-expense. Additionally, these increases were partially offset by a decrease in accounts receivable and increases in accounts payable and accrued expenses. During the year endedDecember 31, 2021 , we recorded in other current liabilities a$9.2 million liability related to the securities class action and stockholder derivative actions settlements and legal costs, for which we also recorded in other current assets an asset of an equal amount representing the expected recovery from our insurance carriers. During the year endedDecember 31, 2022 , we reduced the value of this liability and this asset each by$9.2 million as settlement was made by our insurance carriers. The increase in the net loss during 2022 was a result of increased precommercial spend associated with the anticipated approval of OLPRUVATM, as well as increased clinical trial related expenses for osanetant and EDSIVOTM.
Investing Activities
Cash used in investing activities during the years ended
Financing Activities
Net cash provided by financing activities was$20.0 million for the year endedDecember 31, 2022 , as compared to$7.1 million for the year endedDecember 31, 2021 . Net cash provided by financing activities during the year endedDecember 31, 2022 consisted primarily of$7.4 million net proceeds from the issuance of common stock through our ATM and equity line agreements and$1.5 million proceeds from the issuance of common stock through a private placement;$6.0 million net proceeds received from the Original Term Loan;$5.5 million net proceeds received from the Marathon Convertible Notes and$0.3 million received from the issuance of the First SWK Warrant, partially offset by issuance costs of$0.7 million related to these debt and convertible debt instruments. Net cash provided by financing activities during the year endedDecember 31, 2021 pertained to the$4.0 million received from the secured loan from Relief, which was settled net against the Reimbursement Payment received from Relief in connection with the Collaboration Agreement, as well as to$3.1 million proceeds from the issuance of common stock, net of issuance costs, comprised of$2.6 million proceeds from our ATM facility and$0.5 million proceeds from our equity line facility entered into withLincoln Park . 93
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Future Capital Requirements
We have not generated 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 to continue to incur significant expenses 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 commercializing any such product candidates, we anticipate that we will need substantial additional funding in connection with our continuing operations. As ofDecember 31, 2022 , we had$2.3 million in cash and cash equivalents and current liabilities of$19.0 million , which include$8.4 million associated with deferred collaboration funding. Our cash and cash equivalents available atDecember 31, 2022 , together with the proceeds from the Second Term Loan of$7.0 million which funded onJanuary 31, 2023 , net proceeds from our ATM facility subsequent toDecember 31, 2022 totaling$4.0 million from the sale of 1,462,254 shares for gross aggregate proceeds of$4.1 million and an average per share price of$2.81 less offering costs of$0.1 million , and$2.7 million of gross proceeds from a sale of securities (including 2,335,000 shares of common stock and pre-funded warrants to purchase up to 585,306 shares of common stock pursuant to a registered direct offering as well as warrants to purchase up to 2,920,306 shares of common stock in a concurrent private placement) which closed onMarch 24, 2023 (see Note 12 to our financial statements) (the "March 2023 Offering"), are expected to be sufficient to fund our anticipated operating and capital requirements into the middle of 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". OnNovember 29, 2022 , we entered into a securities purchase agreement for the sale and issuance of an aggregate of 1,229,508 shares of our common stock, for an aggregate purchase price of$1.5 million , in a private placement transaction with our President and Chief Executive Officer and a member of our Board of Directors and with the Chairman of our Board of Directors at a price per share of$1.22 . The shares of common stock issued in the private placement constitute "restricted securities" under the federal securities laws and are subject to a minimum six-month holding period. The proceeds from the private placement will be used by us for working capital and general corporate purposes. OnMarch 4, 2022 , we entered into the SWK Credit Agreement with the lenders party thereto and, 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 onMarch 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. OnAugust 19, 2022 , we entered into the First Amendment which extended the date through which we have the option to capitalize interest on the SWK Credit Agreement and which revised our minimum cash requirement under the Original Term Loan. OnJanuary 30, 2023 , we entered into the Second Amendment. In addition to other provisions, the Second Amendment provides 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 onJanuary 31, 2023 (i.e., the Second Term Loan). The SWK Loans 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. We have the option to capitalize such interest commencing on the date on which the Original Term Loan was funded and continuing untilMay 15, 2023 . Due to topline results announced inMarch 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 startingApril 15, 2023 , until we have issued additional equity or subordinated debt resulting in net cash proceeds of not less than$7.7 million (i.e., the sum of$10.0 million less the net proceeds from theMarch 2023 Offering), at which point the SWK Loans would revert to amortizing at a rate of$1.3 million 94 -------------------------------------------------------------------------------- payable quarterly. The final maturity date of the SWK Loans isMarch 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 SWK receives an aggregate amount (inclusive of all principal, interest and origination and other fees paid to SWK 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 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 on or beforeApril 15, 2023 , 1.18, (ii) if the repayment occurs on or afterApril 16, 2023 but prior toMay 16, 2023 , 1.28667, (iii) if the repayment occurs on or afterMay 16, 2023 but prior toJune 16, 2023 , 1.39334, and (iv) if the repayment occurs on or afterJuly 16, 2023 , 1.5. Due to topline results announced inMarch 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). The SWK Loans are secured by a first priority lien on all of our assets and any of our future subsidiaries pursuant to the SWK Security Agreement which 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 common 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 includingMarch 4, 2029 . OnMarch 4, 2022 , we also 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 onMarch 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 Agreement and for other working capital and general corporate purposes. OnJanuary 30, 2023 , we entered into the Marathon Amendment Agreement withMarathon 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 throughMarch 31, 2023 , with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred afterMarch 31, 2023 , to be due and payable in cash by us onApril 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 ofJune 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 sinceJanuary 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, together with any accrued but unpaid interest thereon to the date of such repurchase; 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; and provided, further, that if such repurchase has not occurred byApril 15, 2023 , the Buy-Out Percentage shall be increased by 2500 basis points for each 90-day period afterApril 15, 2023 , pro-rated for the 95 -------------------------------------------------------------------------------- actual number of days elapsed in the 90-day period before repurchase actually occurs (for example, if the repurchase occurs onMay 30, 2023 , the Buy-Out Percentage shall be increased to 212.5%). 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.
OnMarch 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 untilDecember 31, 2022 . We received approval for our NDA for ACER-001 onDecember 22, 2022 , and we and Marathon agreed to an Extension Agreement with respect to the Term Loan onDecember 30, 2022 , which extended the commitment date for funding the Term Loan toJanuary 16, 2023 . We elected to terminate the Marathon Credit Agreement by entering into a Termination Agreement onJanuary 30, 2023 , which terminated the Credit Agreement and an associated Royalty Agreement. OnMarch 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 forU.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months endedJune 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 theFDA's acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . Further, we retained development and commercialization rights in theU.S. ,Canada ,Brazil ,Turkey andJapan ("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 onJanuary 25, 2021 , Relief released its security interest in all of our assets pursuant to the Note. OnApril 30, 2020 , we entered into a$15.0 million equity line purchase agreement and registration rights agreement withLincoln Park Capital Fund, LLC ("Lincoln Park") pursuant to which we had the right to sell toLincoln Park an aggregate of up to$15.0 million in shares of our common stock, subject to certain conditions and limitations. Under the terms and subject to the conditions of the purchase agreement,Lincoln Park was obligated to purchase up to an aggregate of$15.0 million in shares of common stock (subject to certain limitations) from time to time over a 36-month period commencing onJune 8, 2020 . We were able to directLincoln Park , at our sole discretion and subject to certain conditions, to purchase up to 50,000 shares of common stock in regular purchases, increasing to amounts of up to 100,000 shares depending upon the closing sale price of our common stock. In addition, we were able to directLincoln Park to purchase additional amounts as accelerated purchases or as additional accelerated purchases. The purchase price of shares of common stock was based upon the market price of our common stock preceding the time of sale as computed under purchase agreement. However, there could be no assurance that we would have been able to receive the entire obligation amount fromLincoln Park because the 96 -------------------------------------------------------------------------------- purchase agreement contains limitations, restrictions, requirements, events of default and other provisions that could limit our ability to causeLincoln Park to buy common stock from us. During the year endedDecember 31, 2021 , we sold 200,000 shares of common stock under our purchase agreement withLincoln Park at a weighted average gross sale price of$2.47 per share, resulting in proceeds of$0.5 million . During the year endedDecember 31, 2022 , we sold an additional 772,057 shares of common stock under the purchase agreement at a weighted average sale price of$1.42 per share, resulting in additional proceeds of$1.1 million . TheLincoln Park facility was completed onDecember 30, 2022 . OnMarch 18, 2020 , we entered into an amended and restated sales agreement withJonesTrading Institutional Services LLC ("JonesTrading") andRoth Capital Partners, LLC ("Roth Capital "). This agreement provides a facility for the offer and sale of 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 theSEC'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. FromMay 19, 2020 throughDecember 31, 2021 , we sold an aggregate of 2,716,064 shares of common stock at an average gross sale price of$3.6794 per share, for gross proceeds of$10.0 million . Proceeds, net of$0.5 million of fees and offering costs were$9.5 million . During the year endedDecember 31, 2022 , we sold 3,312,471 additional shares of common stock through our ATM facility at an average gross sale price of$1.9749 per share, for gross proceeds of$6.5 million . Proceeds, net of$0.2 million in fees and offering costs, were$6.3 million . As ofDecember 31, 2022 , we had no commitments for any additional financing, except for the ATM facility and the Marathon Credit Agreement for the Term Loan (defined below), which was subsequently terminated onJanuary 30, 2023 . In connection with theMarch 2023 Offering, we suspended our ATM facility and entered into a related restriction prohibiting us from entering into any agreement to issue or announcing the issuance or proposed issuance of any shares of our common stock or securities convertible or exercisable into our common stock, subject to certain exceptions, untilApril 24, 2023 .
Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
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any continued development and potential commercialization of OLPRUVATM
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any continued development of EDSIVOTM, including pursuant to the DiSCOVER pivotal clinical trial
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any continued development of ACER-801, including the initiation of one or more clinical trials
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our ability to obtain adequate levels of financing to meet our operating plan
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the costs associated with filing, outcome, and timing of regulatory approvals
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the terms and timing of any strategic alliance, licensing and other arrangements that we may establish
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the cost and timing of hiring any new employees to support our business operations
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the costs and timing of having clinical supplies of our product candidates manufactured
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the initiation and progress of ongoing preclinical studies and clinical trials for our product candidates
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the costs involved in patent filing, prosecution, and enforcement
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the number of programs we pursue
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any development of ACER-2820 we may choose to pursue (although any such development will depend upon the availability of non-dilutive financing)
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 97
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financial condition and our ability to develop our product candidates, pursue regulatory approvals, potentially commercialize (if approved) our product candidates, and operate our business as planned.
We expect to incur significant expenses and operating losses for at least the foreseeable future as we initiate and continue the clinical development of, seek regulatory approval for, and potentially commercialize (if approved) our product candidates. In addition, operating as a publicly-traded company involves 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. 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 alliances. As ofDecember 31, 2022 , 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 and the Marathon Credit Agreement for the Term Loan (defined below), which was subsequently terminated onJanuary 30, 2023 . 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 and/or our equity line facility, although we suspended our ATM facility in connection with theMarch 2023 Offering and entered into a related restriction prohibiting us from entering into any agreement to issue or announcing the issuance or proposed issuance of any shares of our common stock or securities convertible or exercisable into our common stock, subject to certain exceptions, untilApril 24, 2023 . To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing 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.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 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. OnMay 31, 2022 , we received a letter from the listing qualifications department staff of Nasdaq indicating that for the last 30 consecutive business days our minimum Market Value ofListed Securities ("MVLS") was below the$35 million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq listing rule 5550(b)(2). Our stockholder's equity and net income from continuing operations were also below the alternate listing standards levels at that time. In accordance with Nasdaq listing rules, we had 180 calendar days, or untilNovember 28, 2022 , to regain compliance. OnDecember 29, 2022 , theNasdaq Stock Market LLC formally notified us that we had regained compliance for continued listing on the Nasdaq Capital Market. 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 inMarch 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 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 theNasdaq 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, 98
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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 provide rights to develop and market product candidates to third parties that we would otherwise prefer to develop and, if applicable, market ourselves. Further, 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 currently anticipated, 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. Contractual Commitments License Agreements InApril 2014 , we obtained exclusive rights to patents and certain other 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 an exclusive license agreement withBaylor College of Medicine ("BCM"). Under the terms of the agreement, as amended, we 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. InJune 2016 , we entered into an agreement withAventis 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 theUK regulatory approval procedure, for the sole purpose of allowing us to further develop, manufacture, register and commercialize celiprolol in theU.S. andBrazil for the treatment of EDS, Marfan syndrome and Loeys-Dietz syndrome. We have paid 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 ofNorth and South America . InAugust 2016 , we entered into an agreement with AP-HP granting us the exclusive worldwide rights to access and use 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. InSeptember 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 threeU.S. patent applications on this subject matter inOctober 2018 . We may choose to limit our pursuit of patent applications to specific territories, in which case AP-HP would have the right to revise our territorial license rights accordingly.
In
99
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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. We plan to initially pursue development of ACER-801 as a potential treatment for iVMS.
Collaboration Agreement
OnMarch 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 onJanuary 25, 2021 , which provided Relief with an exclusive period of time up toJune 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 the principal amount of$4.0 million with interest 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 forU.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months endedJune 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 theFDA's acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . Further, we retained development and commercialization rights in theU.S. ,Canada ,Brazil ,Turkey andJapan ("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 onJanuary 25, 2021 , Relief released its security interest in all of our assets pursuant to the Promissory Note. 100
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm (
102
Balance Sheets as ofDecember 31, 2022 and 2021
104
Statements of Operations for the Years Ended
105
Statements of Changes in Stockholders' (Deficit) Equity for the Years
Ended
106
Statements of Cash Flows for the Years Ended
107
Notes to Financial Statements 108 101
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of DirectorsAcer Therapeutics Inc. Newton, Massachusetts
Opinion on the Financial Statements
We have audited the accompanying balance sheets ofAcer Therapeutics Inc. (the "Company") as ofDecember 31, 2022 and 2021, the related statements of operations, changes in stockholders' (deficit) equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company atDecember 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted inthe United States of America .
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, 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 balance requirements under their existing SWK Credit Agreement, that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 102
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Accounting for Complex Financial Instruments
As described in Notes 1, 2, 6 and 7 to the financial statements, inMarch 2022 the Company entered into the SWK Credit Agreement, 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"). 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 at an exercise price of$2.46 per share. InMarch 2022 the Company also entered into the Marathon Convertible Note Purchase Agreement with two parties pursuant to which the Company issued and sold convertible notes in an aggregate amount of$6.0 million (the "Marathon Convertible Notes"). We identified the evaluation of accounting for the Original Term Loan, the First SWK Warrant and the Marathon Convertible Notes as a critical audit matter. The principal considerations for our determination were: (i) the evaluation as to whether the Original Term Loan and the Marathon Convertible Notes were within the scope of ASC 480, Distinguishing Liabilities from Equity, or not, and if they were eligible for the election of the fair value option under ASC 825, Financial Instruments, and (ii) the evaluation of financial statement classification related to the First SWK Warrant. Auditing these elements involved especially complex auditor judgment due to the terms of the applicable agreements and the audit effort required to address these matters, including the extent of specialized skills and knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
Reviewing and analyzing: (i) the terms of the agreements associated with each arrangement, (ii) the completeness and accuracy of the Company's technical accounting analysis, and (iii) the application of the relevant accounting literature.
•
Utilizing personnel with specialized knowledge and skills in technical accounting to assist in: (i) evaluating relevant terms of each arrangement in relation to the appropriate accounting literature, and (ii) assessing the appropriateness of conclusions reached by the Company.
/s/BDO USA, LLP We have served as the Company's auditor since 2019.Boston, Massachusetts March 27, 2023 103
-------------------------------------------------------------------------------- ACER THERAPEUTICS INC. BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021 2022 2021 Assets Current assets: Cash and cash equivalents$ 2,329,218 $ 12,710,762 Collaboration receivable - 5,000,000 Prepaid expenses 759,292 1,094,229 Deferred financing costs 408,000 - Other current assets 20,188 9,283,625 Total current assets 3,516,698 28,088,616 Property and equipment, net 214,578 114,112 Other assets: Goodwill 7,647,267 7,647,267 Other non-current assets 245,683 406,956 Total assets$ 11,624,226 $ 36,256,951 Liabilities and Stockholders' (Deficit) Equity Current liabilities: Accounts payable$ 3,813,280 $ 1,405,734 Accrued expenses 3,657,394 2,428,193 Deferred collaboration funding, current 8,412,971
15,825,938
Other current liabilities 741,425
9,450,085
Original Term Loan payable, current, at fair value 2,326,630
-
Total current liabilities 18,951,700
29,109,950
Deferred collaboration funding, non-current -
8,661,109
Original Term Loan payable, non-current, at fair value 3,240,601
-
Convertible note payable, at fair value 6,047,532
-
Other non-current liabilities 145,665
209,497
Total liabilities 28,385,498
37,980,556
Commitments and Contingencies (Note 8) Stockholders' (deficit) equity: Preferred stock,$0.0001 par value; authorized 10,000,000 shares; none issued and outstanding -
-
Common stock,$0.0001 par value; authorized 150,000,000 shares; 19,624,280 and 14,310,244 shares issued and outstanding at December 31, 2022 and 2021, respectively 1,962 1,431 Additional paid-in capital 123,984,035 112,784,918 Accumulated deficit (140,747,269 ) (114,509,954 ) Total stockholders' deficit (16,761,272 )
(1,723,605 )
Total liabilities and stockholders' deficit
The accompanying notes are an integral part of these financial statements.
104 --------------------------------------------------------------------------------
ACER THERAPEUTICS INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 2022 2021 Revenue $ -$ 1,260,000 Operating expenses: Research and development (net of collaboration funding of$7,825,263 and$6,055,295 in the years endedDecember 2022 and 2021, respectively) 11,924,837
6,508,055
General and administrative (net of collaboration funding of$8,248,813 and$3,197,659 in the years endedDecember 2022 and 2021, respectively) 12,689,422 10,700,334 Total operating expenses 24,614,259 17,208,389 Loss from operations (24,614,259 ) (15,948,389 ) Other income (expense), net: Costs of debt issuance (1,720,094 )
-
Changes in fair value of debt instruments gain (loss) 245,138
-
Interest and other income (expense), net (101,432 )
519,639
Foreign currency transaction (loss) gain (46,668 )
54,757
Total other income (expense), net (1,623,056 ) 574,396 Net loss$ (26,237,315 ) $ (15,373,993 ) Net loss per share - basic$ (1.66 ) $ (1.08 ) Weighted average common shares outstanding - basic 15,767,152
14,268,245
Net loss per share - diluted$ (1.66 ) $ (1.08 ) Weighted average common shares outstanding - diluted 15,767,152
14,268,245
The accompanying notes are an integral part of these financial statements.
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ACER THERAPEUTICS INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY FOR THE YEARS ENDEDDECEMBER 31, 2022 AND 2021
Stockholders'(Deficit) Equity
Total Additional Stockholders' Paid-in Accumulated (Deficit) Common stock Capital Deficit Equity Shares Amount Balance as of December 31, 2020 13,233,137$ 1,324 $ 107,358,971 $ (99,135,961 ) $ 8,224,334 Issuance of common stock, net of issuance costs 1,077,107 107 3,138,940 - 3,139,047 Stock-based compensation - - 2,287,007 - 2,287,007 Net loss - - - (15,373,993 ) (15,373,993 ) Balance as of December 31, 2021 14,310,244$ 1,431 $ 112,784,918 $ (114,509,954 ) $ (1,723,605 ) Issuance of common stock, net of issuance costs 5,314,036 531 8,909,187 - 8,909,718 Proceeds allocated to First SWK Warrant - - 327,031 - 327,031 Value of Second SWK Warrant - - 122,400 - 122,400 Stock-based compensation - - 1,840,499 - 1,840,499 Net loss - - - (26,237,315 ) (26,237,315 ) Balance as of December 31, 2022 19,624,280$ 1,962 $ 123,984,035 $ (140,747,269 ) $ (16,761,272 )
The accompanying notes are an integral part of these financial statements.
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ACER THERAPEUTICS INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 2022 2021 Cash flows from operating activities: Net loss$ (26,237,315 ) $ (15,373,993 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 1,840,499 2,287,007 Depreciation 66,035 70,913 Gain on extinguishment of debt - (568,909 ) Non-cash changes in fair value of debt, (gain) loss (245,138 )
-
Debt issuance costs recognized as expense 1,720,094
-
Loss on disposal of property and equipment, net 4,669
-
Changes in operating assets and liabilities Collaboration receivable 5,000,000 (5,000,000 ) Prepaid expenses 334,937 (414,767 ) Other current assets 9,280,463 (9,265,745 ) Accounts payable 2,407,546 (266,375 ) Accrued expenses 916,133 (1,352,908 ) Deferred collaboration funding (16,074,076 )
20,487,047
Other current liabilities (9,265,745 )
9,262,821
Net cash used in operating activities (30,251,898 ) (134,909 ) Cash flows from investing activities: Purchase of property and equipment (171,170 ) (54,944 ) Net cash used in investing activities (171,170 ) (54,944 ) Cash flows from financing activities: Proceeds from issuance of common stock, net of issuance costs 8,909,718
3,139,047
Receipt of funds from Relief secured loan -
4,000,000
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 allocated to First SWK Warrant based on valuation 327,031
-
Payment of debt and convertible debt issuance costs (724,929 )
-
Net cash provided by financing activities 20,041,524
7,139,047
Net (decrease) increase in cash and cash equivalents (10,381,544 )
6,949,194
Cash and cash equivalents, beginning of the year 12,710,762 5,761,568 Cash and cash equivalents, end of the year
$ 2,329,218 $
12,710,762
Supplemental cash flow information: Cash paid for interest$ 136,500 $
-
Non-cash financing activities: Non-cash repayment of secured loan $ - $
4,000,000
Extinguishment of debt $ - $
568,909
Issuance of Second SWK Warrant$ 122,400 $
-
The accompanying notes are an integral part of these financial statements.
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ACER THERAPEUTICS INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDEDDECEMBER 31, 2022 AND 2021 1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business
Acer Therapeutics Inc. , aDelaware corporation (the "Company"), is a pharmaceutical company focused on the acquisition, development, and commercialization of therapies for serious rare and life-threatening diseases with significant unmet medical needs. The Company identifies and develops treatments where science can be applied in new ways for use in diseases with high unmet need. In theU.S. , OLPRUVA™ (sodium phenylbutyrate) for oral suspension is approved for the treatment of urea cycle disorders ("UCDs") involving deficiencies of carbamylphosphate synthetase ("CPS"), ornithine transcarbamylase ("OTC"), or argininosuccinic acid synthetase ("AS"). The Company is also advancing a pipeline of investigational product candidates, including EDSIVO™ (celiprolol) for the treatment of vascular Ehlers-Danlos syndrome ("vEDS") in patients with a confirmed type III collagen (COL3A1) mutation, and ACER-801 (osanetant) for the treatment of vasomotor symptoms ("VMS"), post-traumatic stress disorder ("PTSD"), and prostate cancer. We also intend to explore additional lifecycle opportunities for OLPRUVA™ (sodium phenylbutyrate) in various disorders where proof of concept data exists, subject to additional capital. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, and raising capital. The Company has received revenue and collaboration funding related to the collaboration and license agreement (the "Collaboration Agreement") with Relief Therapeutics Holding AG ("Relief") as described below but has not generated any product revenue from sales to date and may never generate any product revenue from sales in the future.
Liquidity
The Company had an accumulated deficit of$140.7 million and cash and cash equivalents of$2.3 million as ofDecember 31, 2022 . Net cash used in operating activities was$30.3 million and$0.1 million for the years endedDecember 31, 2022 and 2021, respectively. OnNovember 9, 2018 , the Company entered into a sales agreement withRoth Capital Partners, LLC , and onMarch 18, 2020 , an amended and restated sales agreement was entered into withJonesTrading Institutional Services LLC andRoth 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, 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 agreement and may at any time suspend sales pursuant to the agreement. Each party may terminate the agreement at any time without liability. During the year endedDecember 31, 2022 , the Company sold 3,312,471 shares of common stock through its ATM facility at a gross sale price of$1.9749 per share, for proceeds of$6.5 million . Proceeds, net of$0.2 million of fees and offering costs, were$6.3 million . As ofDecember 31, 2022 ,$33.5 million remained available under the Company's ATM facility, subject to various limitations. Subsequent toDecember 31, 2022 , the Company sold an aggregate of 1,462,254 shares of common stock under its ATM facility at an average gross sale price of$2.81 per share, resulting in gross proceeds of$4.1 million . Proceeds, net of$0.1 million of offering costs, were$4.0 million . In connection with theMarch 2023 Offering (defined below), the Company suspended the ATM facility and entered into a related restriction 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, untilApril 24, 2023 . OnApril 30, 2020 , the Company entered into an equity line purchase agreement and registration rights agreement pursuant to whichLincoln Park committed to purchase up to$15.0 million of the Company's common 108 -------------------------------------------------------------------------------- stock. Under the terms and subject to the conditions of the purchase agreement, the Company had the right, but not the obligation, to sell toLincoln Park , andLincoln Park was obligated to purchase up to$15.0 million of the Company's common stock, subject to various limitations. 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 onJune 8, 2020 . The number of shares the Company was able to sell toLincoln 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 directLincoln 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. During the year endedDecember 31, 2021 , the Company sold 200,000 shares of common stock under its purchase agreement withLincoln Park at a weighted average gross sale price of$2.47 per share, resulting in gross proceeds of$0.5 million . During the year endedDecember 31, 2022 , the Company sold 772,057 shares of common stock under its purchase agreement withLincoln Park at a weighted average gross sale price of$1.42 per share, resulting in proceeds of$1.1 million . TheLincoln Park facility was completed onDecember 30, 2022 . OnJanuary 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 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 toJune 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 ACER001. In consideration for the grant of the Exclusivity Option, (i) the Company received from Relief an upfront nonrefundable payment of$1.0 million , (ii) Relief provided to the Company a 12-month secured loan in the principal amount of$4.0 million , as evidenced by a Promissory Note (the "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 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. OnMarch 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 the$4.0 million outstanding balance of the Note 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 forU.S. development and commercial launch costs for the UCDs and MSUD indications (the "Development Payments"). During the three months endedJune 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 theFDA's acceptance of a New Drug Application ("NDA") for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . Further, the Company retained development and commercialization rights in theU.S. ,Canada ,Brazil ,Turkey , andJapan ("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 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. OnMarch 4, 2022 , the Company entered into a Credit Agreement (the "SWK Credit Agreement") with the lenders party thereto andSWK Funding LLC ("SWK"), as the agent, sole lead arranger and sole bookrunner, which 109 -------------------------------------------------------------------------------- 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 onMarch 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 (as defined and described below) and the Marathon Credit Agreement (as defined and described below) and for other working capital and general corporate purposes. OnAugust 19, 2022 , the Company entered into an amendment (the "First Amendment") to the 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. OnJanuary 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 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 funded onJanuary 31, 2023 (the "Second Term Loan", and together with the Original Term Loan, the "SWK Loans"). The SWK Loans made under the SWK Credit Agreement as amended by the Second 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. The Company has the option to capitalize such interest commencing on the date on which the Original Term Loan was funded and continuing untilMay 15, 2023 . Due to topline results announced inMarch 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 startingApril 15, 2023 , until the Company has issued additional equity or subordinated debt resulting in net cash proceeds of not less than$7.7 million (i.e., the sum of$10.0 million less the net proceeds from theMarch 2023 Offering), at which point the SWK Loans would revert to amortizing at a rate of$1.3 million payable quarterly. The final maturity date of the SWK Loans isMarch 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 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 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 on or beforeApril 15, 2023 , 1.18, (ii) if the repayment occurs on or afterApril 16, 2023 but prior toMay 16, 2023 , 1.28667, (iii) if the repayment occurs on or afterMay 16, 2023 but prior toJune 16, 2023 , 1.39334, and (iv) if the repayment occurs on or afterJuly 16, 2023 , 1.5. Due to topline results announced inMarch 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 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). The SWK Loans are 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 entered into onMarch 4, 2022 , between the Company and SWK, as agent (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. 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 at 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 "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 110 -------------------------------------------------------------------------------- share (such warrant, the "Third SWK Warrant" and, together with the First SWK Warrant and Second 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 includingMarch 4, 2029 . OnMarch 4, 2022 , the Company also entered into a Marathon Convertible Note Purchase Agreement withMAM Aardvark, LLC ("Marathon") andMarathon Healthcare Finance Fund, L.P. ("Marathon Fund " and together with "Marathon" each a "Holder" and collectively the "Holders") (the "Marathon Convertible Note Purchase Agreement") pursuant to which the Company issued and sold 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 onMarch 14, 2022 . 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. OnJanuary 30, 2023 , the Company entered into an Amendment Agreement (the "Marathon Amendment Agreement") withMarathon 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 Company of accrued and unpaid interest on their respective Marathon Convertible Note existing on the date of the Marathon Amendment Agreement throughMarch 31, 2023 , with such deferred interest, together with any accrued and unpaid interest on each Marathon Convertible Note incurred afterMarch 31, 2023 , to be due and payable in cash by the Company onApril 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 ofJune 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 sinceJanuary 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, together with any accrued but unpaid interest thereon to the date of such repurchase; 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; and provided, further, that if such repurchase has not occurred byApril 15, 2023 , the Buy-Out Percentage shall be increased by 2500 basis points for each 90-day period afterApril 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 onMay 30, 2023 , the Buy-Out Percentage shall be increased to 212.5%). 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 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. OnMarch 4, 2022 , the Company also entered into a Credit Agreement (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 (the "Term Loan"). The Term Loan was available to be borrowed only following full FDA approval for marketing of OLPRUVATM and untilDecember 31, 2022 . The Company received approval for its NDA for OLPRUVATM onDecember 22, 2022 , and the Company and Marathon agreed to an Extension Agreement with respect to the Term Loan onDecember 30, 2022 , which extended the commitment date for funding the Term Loan toJanuary 16, 2023 .
The Company, subsequent to
111 -------------------------------------------------------------------------------- entering into a Termination Agreement onJanuary 30, 2023 , which terminated the Credit Agreement and the associated Royalty Agreement. See Note 12, Subsequent Events for further discussion of the status of the Marathon Convertible Notes, and the Marathon Credit Agreement.The Nasdaq Capital Market's continued listing standards for the Company's common stock require, among other things, that the Company maintain either (i) stockholders' equity of$2.5 million , (ii) market value of listed securities 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. OnMay 31, 2022 , 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 Market Value ofListed Securities ("MVLS") was below the$35 million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq listing rule 5550(b)(2). The Company's stockholder's equity and net income from continuing operations were also below the alternate listing standards levels at that time. In accordance with Nasdaq listing rules, the Company had 180 calendar days, or untilNovember 28, 2022 , to regain compliance. OnDecember 29, 2022 theNasdaq Stock Market LLC formally notified the Company that the Company had regained compliance for continued listing on the Nasdaq Capital Market. 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 inMarch 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 the Company. The Company's cash and cash equivalents available atDecember 31, 2022 , together with the proceeds from the Second Term Loan of$7.0 million which funded onJanuary 31, 2023 , net proceeds from its ATM facility subsequent toDecember 31, 2022 , totaling$4.0 million from the sale of 1,462,254 shares for gross aggregate proceeds of$4.1 million and an average per share price of$2.81 less offering costs of$0.1 million , and$2.7 million of gross proceeds from a sale of securities (including 2,335,000 shares of common stock and pre-funded warrants to purchase up to 585,306 shares of common stock pursuant to a registered direct offering as well as warrants to purchase up to 2,920,306 shares of common stock in a concurrent private placement) which closed onMarch 24, 2023 (the "March 2023 Offering"), are expected to be sufficient to fund its anticipated operating and capital requirements into the middle of the second quarter of 2023. Going Concern The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in theU.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 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, 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 112
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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 ofDecember 31, 2022 , the Company had cash and cash equivalents of$2.3 million and current liabilities of$19.0 million , which include$8.4 million associated with deferred collaboration funding (see Revenue Recognition and Accounting for Collaboration Agreements below in Note 2, Significant Accounting Policies). The Company's cash and cash equivalents available atDecember 31, 2022 , together with the proceeds from the Second Term Loan of$7.0 million which funded onJanuary 31, 2023 , net proceeds from its ATM facility subsequent toDecember 31, 2022 , totaling$4.0 million from the sale of 1,462,254 shares for gross aggregate proceeds of$4.1 million and an average per share price of$2.81 less offering costs of$0.1 million , and$2.7 million of gross proceeds from the registered direct offering closed onMarch 24, 2023 , are expected to be sufficient to fund the Company's anticipated operating and capital requirements into the middle of the second quarter of 2023. The Company will need to raise additional capital to fund continued operations beyond the middle of 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 the middle of 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 has$29.4 million available as ofMarch 24, 2023 , although the Company suspended its ATM facility in connection with theMarch 2023 Offering and entered into a related restriction 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 our common stock, subject to certain exceptions, untilApril 24, 2023 . (See At-the-Market Facility and Common Stock Purchase Agreement in Note 9 as well as Note 12.) Due to theSEC'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. FromMay 19, 2020 throughMarch 24, 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 withLincoln Park , which equity line facility was completed onDecember 30, 2022 . 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 plan, curtail various aspects of its operations, cease operations, or seek relief under applicable bankruptcy laws. In such event, the Company's stockholders may lose a substantial portion or even all of their investment. These factors individually and collectively raise substantial doubt about the Company's ability to continue as a going concern for at least 12 months from the date these financial statements are available, orMarch 27, 2023 . The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern. Basis of Presentation Any reference in these notes to applicable guidance is meant to refer to the authoritative accounting principles generally accepted in theU.S. , as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of theFinancial Accounting Standards Board ("FASB").
2.
SIGNIFICANT ACCOUNTING POLICIES
The preparation of these financial statements and related disclosures is in conformity with GAAP. A summary of the significant accounting policies followed by the Company in the preparation of the accompanying 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. From time to time, estimates having relatively higher significance include determination of stand-alone selling price and variable consideration estimates for 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 Accounting for Collaboration Agreements
The Company's revenue and collaboration 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 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 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 analogy 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 contract, 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 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.
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)
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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).
OnJanuary 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 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 toJune 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 ACER001. In consideration for the grant of the Exclusivity Option, (i) the Company received from Relief an upfront nonrefundable payment of$1.0 million , (ii) Relief provided to the Company a 12-month secured loan in the principal amount of$4.0 million , as evidenced by the Note issued by the Company to Relief, and (iii) the Company granted to Relief a security interest in all of its assets to secure performance of the Note, as evidenced by 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. OnMarch 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 repayment of the$4.0 million outstanding balance of the Note, 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 forU.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months endedJune 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 theFDA's acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . Further, the Company retained development and commercialization rights in theU.S. ,Canada ,Brazil ,Turkey andJapan ("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 Option Fee of$1.0 million , the Reimbursement Payment of$14.0 million , and theFirst Development Payment of$10.0 million . The Company 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 the Company's NDA is accepted for review by the FDA, and Relief receives EU 115
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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, the Company 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 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 theU.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 contra-expense within their respective categories, consistent with the presentation guidance in ASC Topic 730. The Company recognizes a receivable under the Collaboration Agreement when the consideration to be received 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 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. AtDecember 31, 2022 , the amount of deferred collaboration funding associated with unsatisfied promises under the Collaboration Agreement amounted to$8.4 million . The Company has recorded$8.4 million as a current liability, which equates to the Company's estimate of remaining spending under the Collaboration 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 non-current liability reported as ofDecember 31, 2021 represented the then current estimated amount that would have been taken against future net profit payments made to Relief should they have occurred. The Company expects to recognize this deferred collaboration funding as it incurs expenses associated with performing the Services up to the date of first commercial sale in the Acer Territory and through the end of the effective date of the Collaboration Agreement. AtDecember 31, 2022 , deferred collaboration funding was composed of$35.0 million received from Relief, offset by$1.3 million recognized as license revenue during the year endedDecember 31, 2021 and$13.9 million recorded as an offset to research and development expenses and$11.4 million recorded as an offset to general and administrative expenses subsequent to signing the Collaboration Agreement and through the date of this report.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by theFederal Deposit Insurance Corporation ("FDIC") up to$250,000 . AtDecember 31, 2022 and 2021, the Company had$2.1 million and$12.5 million , respectively, in excess of theFDIC insured limit. Under the Original Term Loan as amended, the Company's minimum cash requirement was such that its unencumbered liquid assets must not be less than the lesser of (a) the outstanding principal amount of the Original Term Loan, or (b)$1.5 million ; provided, however, that due to topline results announced inMarch 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, required amount pursuant to the foregoing clause (b) is increased to$3.0 million . 116 -------------------------------------------------------------------------------- The Company recognized a$4.0 million non-cash reduction in a secured loan from Relief during the year endedDecember 31, 2021 , since the Reimbursement Payment from Relief was received net of the amount of principal and interest due in connection with the secured loan.
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 Company's own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect 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:
· Level 1-Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
· Level 2-Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
· Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized 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 reporting period. See Note 7 for additional information on the fair value of the debt liabilities. The Company elected the fair value option for both its Original Term Loan and its Marathon Convertible Notes datedMarch 14, 2022 (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.
Debt
Convertible notes are regarded as compound instruments, consisting of a liability component and an equity component. The Company determined that it is eligible for the fair value option election in connection with the Original Term Loan and the Marathon Convertible Notes. 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 issuance, the fair value for each instrument is derived from the instrument's implied discount rate at inception. 117
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Research and Development Expenses
Research and development costs are expensed as incurred and include compensation and related benefits, license fees, and third-party contracted research and manufacturing consultants. The Company sometimes makes 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 the goods are received or that the services are performed. From time to time, in connection with the Collaboration Agreement with Relief, the Company may recognize "contra-expense" for the research and development activities which were funded by the Collaboration Agreement. These contra-expense amounts are disclosed parenthetically on the face of the financial statements.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, and stock-based compensation; precommercial costs; and professional fees for legal, business consulting, auditing, and tax services. The Company expects that general and administrative expenses will be substantial in the future. From time to time, in connection with the Collaboration Agreement with Relief, the Company may recognize "contra-expense" for the general and administrative activities which were funded by the Collaboration Agreement. These contra-expense amounts are disclosed parenthetically on the face of the financial statements.
Clinical Trial and Preclinical Study Expenses
The Company makes estimates of prepaid and/or accrued expenses as of each balance sheet date in its financial statements based on certain facts and circumstances at that time. The Company's accrued expenses for preclinical studies and clinical trials are based on estimates of costs incurred for services provided by contract research organizations ("CROs"), manufacturing organizations, and for other trial- and study-related activities. Payments under the Company's 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, the Company obtains information from various sources and estimates the level of effort or expense allocated to each period. Adjustments to research and development expenses may be necessary in future periods as the Company's estimates change. As these activities are generally material to the Company's financial statements, subsequent changes in estimates may result in a material change in the Company's accruals. No material changes in estimates were recognized in either of the years endedDecember 31, 2022 and 2021. Accounts payable and accrued expenses include costs associated with preclinical or clinical studies of$0.9 million and$0.2 million atDecember 31, 2022 and 2021, 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 date of the grant. The fair value of awards is recognized as an expense in the statement of operations over the requisite service period, which is generally the vesting period. The Company utilizes the simplified method to estimate the expected term of options until such time that it has adequate option granting and exercise history to refine this estimate. The fair value of options is calculated using the Black-Scholes option pricing model. This option valuation model requires the use of assumptions including, among others, the volatility of stock price, the expected term of the option, and the risk-free interest rate. A limited number of option grants are periodically made to non-employee contractors.
The following assumptions were used to estimate the fair value of stock options
granted during the years ended
2022 2021 Risk-free interest rate 1.18% - 2.95% 0.37% - 0.84% Expected life (years) 6.25 6.25 Expected volatility 112.0% - 115.0% 92.4% Dividend rate 0% 0% 118
-------------------------------------------------------------------------------- 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 theU.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 Nasdaq Capital Market on the date of grant.
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. The Company's goodwill is allocated to the Company's single reporting unit. The Company evaluates 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 goodwill might be impaired. The Company may opt to perform a qualitative assessment or a quantitative impairment test to determine 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 ofJune 21, 2022 as it considered the Complete Response Letter received from the FDA inJune 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. The Company performed a qualitative analysis of goodwill as ofDecember 31, 2022 and 2021, in which management concluded that it was more likely than not that the fair value of the reporting unit is greater than its carrying amount.
Foreign Currency Transaction Gain/(Loss)
Gains and losses arising from transactions and revaluation of balances
denominated in currencies other than
Income Taxes
The Company recorded no income tax expense or benefit during the years endedDecember 31, 2022 and 2021, due to a full valuation allowance recognized against its net deferred tax assets. The Company is primarily subject toU.S. federal andMassachusetts state income taxes. The Company's tax returns for years 2016 through present are open to tax examinations byU.S. federal and state tax authorities; however, carryforward attributes that were generated prior toJanuary 1, 2016 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. 119
-------------------------------------------------------------------------------- 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 ofDecember 31, 2022 and 2021. The Company's policy is to recognize interest and penalties related to income tax, if any, in income tax expense. As ofDecember 31, 2022 and 2021, the Company had no accruals for interest or penalties related to income tax matters. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in theU.S. onMarch 27, 2020 . The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The Company is required to recognize the effects of tax law changes in the period of enactment. The enactment of the CARES Act did not result in material adjustments for the income tax provision for the year endedDecember 31, 2022 or to the Company's assessment of the realizability of deferred tax assets as the carry back of net operating losses was used as a source of income. There were no other effects to the Company's tax provision as a result of the CARES Act as ofDecember 31, 2022 .
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. 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 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 require 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).
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of a pharmaceutical company focused on the acquisition, development, and commercialization of therapies for serious rare and life-threatening diseases with significant unmet medical needs.
Recently Adopted Accounting Pronouncements
In
120 -------------------------------------------------------------------------------- simplifies the accounting for convertible instruments by removing, in certain cases, the need for models that required separate accounting for embedded conversion features and also amends the guidance for the derivatives scope exceptions for contracts in an entity's own equity. This ASU also requires expanded disclosures, including additional information related to the terms and features of convertible instruments and information about events or conditions that cause conversion contingencies to be met or conversion terms to be significantly changed. The Company early adopted ASU No. 2020-06 in the first quarter of 2021. See Note 6 regarding the Marathon Convertible Notes which were recognized in the first quarter of 2022 consistent with the adoption of this guidance. InMay 2021 , the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of theFASB Emerging Issues Task Force ), which clarifies and reduces diversity in issuers' accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The Company adopted ASU No. 2021-04 in the first quarter of 2022. There was no impact on the Company's financial statements or disclosures as a result of the adoption of this guidance. InNovember 2021 , the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires annual disclosures regarding transactions with a government that are accounted for by applying a grant or contribution accounting model. The Company adopted ASU No. 2021-10 in the fourth quarter of 2021. There was no impact on the Company's financial statements or disclosures as a result of the adoption of this guidance. 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at
December 31, 2022 December 31, 2021 Computer hardware and software $ 142,870 $ 113,847 Leasehold improvements 52,887 60,535 Furniture and fixtures 111,603 145,487 Manufacturing equipment 135,330 - Subtotal property and equipment, gross 442,690 319,869 Less accumulated depreciation (228,112 ) (205,757 ) Property and equipment, net $ 214,578 $ 114,112 Property and equipment are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Major renewals and improvements are capitalized, while minor replacements, maintenance and repairs are charged to current operations. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Computer hardware and software are depreciated over an estimated useful life of 3 years, leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the duration of the current lease arrangement, furniture and fixtures are depreciated over an estimated useful life of 7 years, and manufacturing equipment is depreciated over the estimated useful life of the particular asset. 121
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4.
ACCRUED EXPENSES
Accrued expenses consisted of the following at
December 31 ,
2022
2021
Accrued employee bonus and vacation$ 2,624,910 $ 419,354 Accrued interest 313,068 - Accrued precommercial costs 203,016 395,923 Accrued legal 172,945 162,812 Accrued accounting, audit, and tax fees 82,779
167,630
Accrued license fees 80,526
86,259
Accrued contract research and regulatory consulting 68,432
47,637
Accrued miscellaneous expenses 66,039
216,103
Accrued contract manufacturing 42,679 827,390 Accrued consulting 3,000 105,085 Total accrued expenses$ 3,657,394 $ 2,428,193 5. LEASES OnMarch 6, 2018 , the Company entered into a lease agreement (the "Newton Lease"), commencing onOctober 1, 2018 , for certain premises, which consist of 2,760 square feet of office space located inNewton, Massachusetts . OnMarch 5, 2019 , the Company entered into a modified lease agreement (the "AdditionalNewton Lease ") to lease an additional 1,600 square feet of office space, commencing onJune 1, 2019 , located inNewton, Massachusetts . The Newton Lease expired onMay 31, 2022 . OnOctober 15, 2021 , the Company entered into a lease amendment extending the AdditionalNewton Lease throughDecember 31, 2022 . Effective with the expiration of the Newton Lease and the extension of the Newton Additional Lease, the space leased by the Company inNewton was reduced to 1,600 square feet as ofJune 1, 2022 . The AdditionalNewton Lease expired onDecember 31, 2022 , and the Company is renting space on month-to-month basis for this facility. The Company is required to share in certain taxes and operating expenses associated with the Newton Lease and the AdditionalNewton Lease . The Company entered into a triple net lease (the "Bend Lease") effectiveApril 1, 2018 for certain premises consisting of 2,288 square feet of office space located inBend, Oregon . OnApril 23, 2019 , the Company entered into a modified lease agreement (the "Additional Bend Lease") to lease an additional 1,389 square feet of office space, commencing onMay 1, 2019 , located inBend, Oregon . OnNovember 17, 2021 , the Company entered into a lease agreement to extend the term of the Bend Lease and the Additional Bend Lease toJune 30, 2022 and to further extend the term either (1) untilJune 30, 2027 if FDA approval of OLPRUVATM was received inJune 2022 , or (2) untilJune 30, 2025 if FDA approval of OLPRUVATM was not received inJune 2022 . As FDA approval of OLPRUVATM was not received inJune 2022 , the Company entered into a lease amendment inJune 2022 such that the renewal term for this office space was extended untilJune 30, 2025 . The leases for the Newton andBend office space are classified as operating leases. The leases contain 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. In the year endedDecember 31, 2021 , the Company recorded a non-cash transaction to recognize an additional$0.4 million right of use asset and lease liability in conjunction with the modifications to the leases. The Company's lease liability as ofDecember 31, 2022 and 2021 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 leases. As ofDecember 31, 2022 , the weighted average remaining lease term was 2.8 years. For the years endedDecember 31, 2022 and 2021, the Company recorded expense of$0.2 million and$0.3 million , respectively, related to the leases and made cash payments of$0.2 million and$0.3 million , respectively, for amounts included in the measurement of lease liabilities. The Company is therefore reporting a right-of-use asset of$0.2 million in Other non-current assets and lease liabilities totaling$0.2 million in Other current liabilities and Other non-current liabilities as ofDecember 31, 2022 . 122
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The following table reconciles the undiscounted lease liabilities to the total
lease liabilities recognized on the balance sheet as of
Undiscounted lease liabilities for years ending
2023 103,925 2024 107,290 2025 54,579 Total undiscounted lease liabilities$ 265,794 Less effects of discounting (16,204 ) Total lease liabilities as ofDecember 31, 2022 $ 249,590 The Company's lease liabilities are reported on the balance sheets as follows:December 31, 2022 2021
Other current liabilities
Total lease liabilities$ 249,590 $ 393,837 6. DEBT SWK Credit Agreement OnMarch 4, 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 term loan facility in an aggregate amount of$6.5 million in a single borrowing (the "Original Term Loan"). The Original Term Loan closed onMarch 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. OnAugust 19, 2022 , the Company entered into an amendment (the "First Amendment") to the 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 bears 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 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. For the period endedDecember 31, 2022 , the current interest rate applicable to the Original Term Loan is 15.8%. The Company has the option to capitalize such interest commencing on the date on which the Original Term Loan was funded and continuing untilFebruary 15, 2023 . Commencing onFebruary 15, 2023 , the principal amount of the Original Term Loan will amortize at a rate of$0.7 million payable quarterly. The final maturity date of the Original Term Loan isMarch 4, 2024 . The 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 and origination and other fees paid to SWK 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 paid-in-kind interest amounts. The Original Term Loan contains a provision for the establishment of an alternative rate of interest if LIBOR were to no longer be available at any point while the Original Term Loan is outstanding. Under the Original Term Loan as amended, the Company's minimum cash requirement is such that its unencumbered liquid assets must not be less than the lesser of (a) the outstanding principal amount of the Original Term Loan, or (b)$1.5 million ; provided, however, that such$1.5 million amount shall automatically be increased to$3.0 million on the date that is 14 days following the date, if 123 -------------------------------------------------------------------------------- any, that the Company's Board of Directors determines that discontinuation of the development program for the Company's product candidate known as ACER-801 (osanetant) for the treatment of vasomotor symptoms is warranted based upon a serious adverse event or a lack of efficacy at any dose studied in the results from a completed Phase 2a trial. 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. AtDecember 31, 2022 , the Company did not deem probable any events that would give rise to such an acceleration. The Company classified the fair value of the interest and principal amortization payments of$1.5 million due within twelve months from the date of this report as current in the balance sheet as ofDecember 31, 2022 . 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 at 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 includingMarch 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
See Note 12, Subsequent Events for further discussion of the status of the SWK Credit Agreement and related arrangements.
Marathon Convertible Notes
OnMarch 4, 2022 , the Company also entered into the Marathon Convertible Note Purchase Agreement withMAM Aardvark, LLC ("Marathon") andMarathon 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 onMarch 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 at 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 full of the Original Term Loan, interest will not be payable in cash, but will accrue and be 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 124 -------------------------------------------------------------------------------- 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 Marathon 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 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, 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.
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
See Note 12, Subsequent Events for further discussion of the status of the Marathon Convertible Notes.
Marathon Credit Agreement
OnMarch 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 untilDecember 31, 2022 (i.e., if OLPRUVATM Approval does not occur on or beforeDecember 31, 2022 , then the Term Loan will not be available unless the Company is able to obtain an extension for the time period beyondDecember 31, 2022 , to the actual PDUFA target action date), and funding of the Term Loan is also subject to the satisfaction of conditions as set forth in 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 UCDs has been accepted for substantive review by the FDA, the PDUFA target action date isJanuary 15, 2023 . The Term Loan, if it becomes available, will 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. Should the Term Loan become available, the Company will 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 orDecember 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 toMarch 4, 2025 , then the greater of 5% or the amount of interest that would have accrued from the date of prepayment untilMarch 4, 2025 , (b) if the prepayment is made on or afterMarch 4, 2025 , but prior toMarch 4, 2026 , then 3%, (c) if the prepayment is made on or afterMarch 4, 2026 , but prior toMarch 4, 2027 , then 2%, or (d) if the prepayment is made on or afterMarch 4, 2027 , then 1%. 125 -------------------------------------------------------------------------------- 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, onMarch 4, 2022 , the Company, Marathon and theMarathon 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 theMarathon 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 theMarathon Fund the difference between$15.0 million and the aggregate amount of the payments previously made by the Company to Marathon and theMarathon Fund pursuant to the Royalty Agreement. As ofDecember 31, 2022 , the Company had not requested funding of the Term Loan, and as such had not triggered the associated Royalty Agreement. OnDecember 30, 2022 , the Company and Marathon entered into an Extension Agreement which extended the Term Loan Commitment Date toJanuary 16, 2023 . See Note 12, Subsequent Events for further discussion of the status of the Marathon Convertible Notes and the Marathon Credit Agreement. 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. 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. Therefore, both the Original 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. Additionally, all issuance costs incurred in connection with a debt instrument that is measured at fair value pursuant to the election of the fair value option are expensed during the period the debt is acquired. The Original Term Loan was recorded at fair value of$6.2 million after allocating the fair value of the First SWK Warrant of$0.3 million . 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 endedDecember 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 endedDecember 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 ofDecember 31, 2022 , and has recognized expense during the period of$0.2 million for this fee.
See Note 12, Subsequent Events for further discussion of the status of the Term Loan and related arrangements.
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7. FAIR VALUE MEASUREMENTS
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3. The valuation methodologies used for the Company's financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below.
The following table presents the Company's assets and liabilities that are
measured and recognized at fair value on a recurring basis classified under the
appropriate level of the fair value hierarchy as of
Fair Value Measurements As of December 31, 2022 As of December 31, 2022 Carrying Amount Fair Value Level 1 Level 2 Level 3 Assets: Money Market Funds in Cash Equivalents$ 1,829,218 $ 1,829,218 $ 1,829,218 $ - $ - Liabilities: Debt:
Marathon Convertible Notes
- $ -$ 6,360,600 Original Term Loan$ 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 atDecember 31, 2022 . 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, default intensity rate, and expected recovery rate given default. The Company updated its estimate of fair value of the Original Term Loan based on the probability-weighted net present value of future cash flows atDecember 31, 2022 . The significant unobservable inputs used in calculating the fair value of the Marathon Convertible Notes and Original Term Loan 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 recognized a decrease in the fair value of the Original Term Loan of$0.6 million during the year endedDecember 31, 2022 through non-operating income in the statement of operations as "Changes in fair value of debt instruments gain (loss)". During the year endedDecember 31, 2022 , the Company recognized an increase in the fair value of the Marathon Convertible Notes of$0.4 million through non-operating income in the statement of operations. The Company recognized$0.3 million of accrued interest in connection with the Marathon Convertible Notes as ofDecember 31, 2022 for the interest accrued on the notes since the date of 127
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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.
The following table describes changes in debt recorded at fair value in the
Company's financial statements for the year ended
Accrued Adjustment to interest Fair Value December 31, December 31, 2021 Loan Received Payments expense Mark to Market 2022 Marathon Convertible Notes (1) $ -$ 6,000,000 $ -$ 313,068 $ 47,532 $ 6,360,600 Original Term Loan - 6,172,969 - - (605,738 ) 5,567,231 $ -$ 12,172,969 $ -$ 313,068 $ (558,206 ) $ 11,927,831
(1) Marathon Convertible Notes were recorded as
8. COMMITMENTS AND CONTINGENCIES
License Agreements
InApril 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 withBaylor 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. InAugust 2016 , the Company signed an agreement with Assistance Publique-Hôpitaux deParis , Hôpital EuropéenGeorges Pompidou ("AP-HP") (via itsDepartment of Clinical Research and Development ) granting the Company the exclusive worldwide rights to access and use data from a randomized, controlled clinical study of celiprolol. The Company used this pivotal clinical data to support an NDA regulatory filing for EDSIVOTM for the treatment of vEDS. The agreement requires the Company to make certain upfront payments to AP-HP, as well as reimburse certain costs and make payment of royalties in the low single-digit percent range on net sales of celiprolol over the royalty term. InSeptember 2018 , the Company entered into a License Agreement for Development and Exploitation 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 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, 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 development, 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 threeU.S. patent applications on this subject matter inOctober 2018 . 128
-------------------------------------------------------------------------------- InDecember 2018 , the Company entered into an exclusive license agreement with Sanofi granting the Company worldwide rights to ACER-801, a clinical-stage, selective, non-peptide tachykinin NK3 receptor antagonist. The agreement required the Company to make a certain upfront payment 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. The Company plans to initially pursue development of ACER-801 as a potential treatment for iVMS. InMay 2021 , the Company entered into an agreement withEmory 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 bothEurope andthe United States and continues to pursue additional claim scope in both jurisdictions. Pursuant to the agreement, the Company reimbursesEmory 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
OnMarch 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 onJanuary 25, 2021 , which provided Relief with an exclusive period of time up toJune 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 forU.S. development and commercial launch costs for the UCDs and MSUD indications. During the three months endedJune 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 theFDA's acceptance of an NDA for OLPRUVATM in a UCD for filing and review. This acceptance was received onOctober 4, 2021 . OnOctober 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 ofOctober 12, 2021 andJanuary 14, 2022 . Further, the Company retained development and commercialization rights in theU.S. ,Canada ,Brazil ,Turkey andJapan ("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.
Paycheck Protection Program ("PPP") Loan
OnApril 11, 2020 , the Company was advised that its principal bank,JPMorgan Chase Bank, N.A ., had approved a$0.6 million loan under the PPP pursuant to the CARES Act that was signed into law onMarch 27, 2020 . As aU.S. small business, the Company qualified for the PPP, which allows businesses and nonprofits with fewer than 500 employees to obtain loans of up to$10 million to incent companies to maintain their workers as they manage the business disruptions caused by the COVID-19 pandemic. 129 -------------------------------------------------------------------------------- The loan, evidenced by a promissory note toJPMorgan Chase Bank, N.A . as lender, had a term of two years, was unsecured, and was guaranteed by theSmall Business Administration . The loan bore interest at a fixed rate of one percent per annum, with the first six months of interest and principal deferred. Some or all of a loan may be forgiven if at least 75% of the loan proceeds are used by the Company to cover payroll costs, including benefits, and if the Company maintains its employment and compensation within certain parameters during the period following the loan origination date and complies with other relevant conditions. OnJune 5, 2020 , the Payroll Protection Flexibility Act of 2020 was signed into law, adjusting certain terms of the loans issued under the PPP, including extending the initial deferral period from six to up to ten months, reducing from 75% to 60% the portion of loan proceeds required to be used to cover payroll costs, and allowing borrowers to elect a 24-week rather than an eight-week period related to employment and compensation provisions. The Company accounted for the loan according to ASC 470. The Company was advised byJPMorgan Chase Bank, N.A . that the principal and interest associated with its PPP loan were forgiven in full as ofJune 10, 2021 .
Litigation
From time to time, the Company may become involved in litigation or proceedings relating to claims arising out of its operations. To the extent that the Company incurs legal costs associated with any potential loss contingency, those legal costs are expensed as incurred.
The Securities Class Action and Stockholder Derivative Actions
OnJuly 1, 2019 , plaintiffTyler Sell filed a putative class action lawsuit, Sell v.Acer Therapeutics Inc. et al., No. 1:19-cv-06137GHW, against the Company,Chris Schelling andHarry Palmin , in theU.S. District Court for the Southern District of New York . The Complaint alleged that the 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 Therapeutics 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 onJanuary 7, 2022 . As ofDecember 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 insurance carriers of an equal amount. Both the liabilities and the asset were derecognized during the year endingDecember 31, 2022 as payment of the settlement was made by the Company's insurance carriers. OnAugust 12, 2019 , a stockholder derivative action, Gress v. Aselage et al., No. 1:19-cv-01505-MN, was filed in theU.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. OnMarch 17, 2020 , a second stockholder derivative action, Giroux v. Amello et al., No. 1:20-cv-10537-GAO, was filed in theU.S. District 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. OnJune 23, 2020 , a third stockholder derivative action, King v. Schelling, et al., No. 1:20-cv-04779-GHW, was filed in theU.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. OnJuly 6, 2020 , a fourth stockholder derivative action, Diaz v. Amello et al., No. 1:20-cv-00909-MN, was filed in theU.S. District Court for the District of Delaware . By Stipulation and Order datedAugust 7, 2020 , the Gress and Diaz cases were consolidated under the caption In reAcer 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 onMay 12, 2021 in theDistrict 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 costs in excess of the retention (deductible) amount, has been made by the Company's insurance carriers.
Commitments Under Clinical Trial Agreements
The Company has entered into agreements with two CROs in connection with the conduct of two separate clinical trials for EDSIVOTM and ACER-801. As a part of those agreements, the Company has agreed to pay any 130 -------------------------------------------------------------------------------- third-party costs or subcontracts associated with those agreements which are 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.
9. STOCKHOLDERS' (DEFICIT) EQUITY
At-the-Market Facility
OnNovember 9, 2018 , the Company entered into a sales agreement withRoth Capital Partners, LLC , and onMarch 18, 2020 , the Company entered into an amended and restated sales agreement withJonesTrading Institutional Services LLC andRoth 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, 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 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 theSEC'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 year endedDecember 31, 2022 , the Company sold an aggregate of 3,312,471 shares of common stock through the ATM at an average gross sale price of$1.9749 per share, for gross proceeds of$6.5 million . Proceeds, net of$0.2 million in fees and offering costs, were$6.3 million . During the year endedDecember 31, 2021 , the Company sold 877,107 shares of common stock at an average gross sale price of$3.1692 per share, for gross proceeds of$2.8 million . Proceeds, net of$0.2 million of fees and offering costs were$2.6 million . As ofDecember 31, 2022 ,$33.5 million remained available under the Company's ATM facility.
See Note 12, Subsequent Events for further discussion of the status of the Company's ATM facility.
Common Stock Purchase Agreement
OnApril 30, 2020 , the Company entered into an equity line purchase agreement and a registration rights agreement pursuant to whichLincoln 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 toLincoln Park , andLincoln 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 onJune 8, 2020 . The number of shares the Company was able to sell toLincoln 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 directLincoln 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. Under applicable rules of the Nasdaq Capital Market, in no event may the Company issue or sell toLincoln 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 obtains 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 toLincoln Park under the purchase agreement equals or exceeds$2.1668 , such that issuances and sales of the common stock toLincoln Park under the purchase agreement would be exempt from the issuance limitation under applicable Nasdaq rules. 131 --------------------------------------------------------------------------------Lincoln Park has no right to require the Company to sell any shares of common stock toLincoln Park , butLincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. In all instances, the Company may not sell shares of its common stock toLincoln Park under the purchase agreement if doing so would result inLincoln Park beneficially owning more than 9.99% of its common stock. The Company determined that the right to sell additional shares represents a freestanding put option under ASC 815 Derivatives and Hedging, but has a fair value of zero, and therefore no additional accounting was required. Actual sales of shares of common stock toLincoln Park under the purchase agreement will depend 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 can be no assurance that the Company will be able to receive the entire obligation amount fromLincoln Park because the purchase agreement contains limitations, restrictions, requirements, events of default and other provisions that could limit the Company's ability to causeLincoln Park to buy common stock from the Company. The proceeds under the purchase agreement to the Company will depend on the frequency and prices at which the Company sells shares of its stock toLincoln Park . The Company issued 148,148 shares of common stock toLincoln 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 year endedDecember 31, 2022 , the Company sold 772,057 shares of common stock under its purchase agreement withLincoln Park at a weighted average price of$1.42 per share, resulting in net proceeds of$1.1 million . During the year endedDecember 31, 2021 , the Company sold 200,000 shares of common stock under its purchase agreement withLincoln Park at a weighted average price of$2.47 per share, resulting in proceeds of$0.5 million . TheLincoln Park facility was completed onDecember 30, 2022 .
Private Placement
OnNovember 29, 2022 , the Company entered into a securities purchase agreement for the sale and issuance of an aggregate 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 Chief 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 private placement constitute "restricted securities" under the federal securities laws and are subject to a minimum six-month holding period.
2018 Stock Incentive Plan
The Company's 2018 Stock Incentive Plan (the "2018 Plan"), adopted onMay 14, 2018 , originally provided for the grant of up to 500,000 shares of common stock as stock options, restricted stock, stock appreciation rights, restricted stock units, performance-based awards and cash-based awards that may be settled in cash, stock or other property to employees, executive officers, directors, and consultants. In addition to the 500,000 shares, the total number of shares reserved for issuance under the 2018 Plan also consists of the sum of the number of shares subject to outstanding awards under the Company's 2010 Stock Incentive Plan, as amended and restated (the "2010 Plan"), and the 2013 Stock Incentive Plan, as amended (the "2013 Plan"), as of the effective date of the 2018 Plan that are subsequently forfeited or terminated for any reason prior to being exercised or settled, plus the number of shares subject to vesting restrictions under the 2010 Plan and the 2013 Plan on the effective date of the 2018 Plan that are subsequently forfeited, plus the number of shares reserved but not issued or subject to outstanding grants under the 2010 Plan and the 2013 Plan as of the effective date of the 2018 Plan, up to a maximum of 635,170 shares in aggregate. In addition, the number of shares authorized for issuance under the 2018 Plan is automatically increased (the "evergreen provision") on the first day of each fiscal year beginning onJanuary 1, 2019 , and ending on (and including)January 1, 2028 , in an amount equal to the lesser of (i) 4% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (ii) another amount (including zero) determined by the Company's Board of Directors. OnJanuary 1, 2022 and 132
-------------------------------------------------------------------------------- 2021, 572,410 and 529,325 additional shares, respectively, were authorized according to the evergreen provision. OnFebruary 18, 2022 , the Company's Board of Directors amended and restated the 2018 Plan to add a provision permitting the grant of inducement awards under Nasdaq Marketplace Rule 5635(c)(4) to eligible recipients and initially reserved 200,000 shares of the Company's common stock for issuance pursuant to inducement awards granted under the 2018 Plan. Any shares subject to awards granted under the 2018 Plan that are forfeited or terminated before being exercised or settled, or are not delivered to the participant because such award is settled in cash, will again become available for issuance under the 2018 Plan. Shares withheld to satisfy the grant, exercise price or tax withholding obligation related to an award will again become available for issuance under the 2018 Plan. 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 the 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 amount of cash subject to awards to be granted, whether an option is to be an incentive stock options or non-incentive stock options and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the 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 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 ten 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 the 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 onSeptember 18, 2019 , 50% vest on each ofJanuary 1, 2021 andJanuary 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 years endedDecember 31, 2022 or 2021 and no unvested restricted stock units as ofDecember 31, 2022 or 2021.
At
2013 Stock Incentive Plan
The Company's 2013 Plan provided for the issuance of up to 165,000 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. AtDecember 31, 2022 , all shares available under the 2013 Plan were subject to outstanding equity awards, and no new awards may be granted under the 2013 Plan.
2010 Stock Incentive Plan
The Company's 2010 Plan, as amended and restated, provided for the grant of up to 470,170 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 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. AtDecember 31, 2022 , all shares available under the 2010 Plan were subject to outstanding equity awards, and no new awards may be granted under the 2010 Plan. 133
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Stock Plan Activity
A summary of option activity under the 2018 Plan, 2013 Plan, and 2010 Plan for
the year ended
Weighted Weighted Average Aggregate Average Remaining Intrinsic Number of Exercise Contractual Value (in Shares Price Term (Years) Thousands) Options outstanding at December 31, 2021 1,954,975$ 8.16
7.8
Granted 960,500$ 2.33 Cancelled/forfeited (120,625 )$ 3.41
Options outstanding at
7.4 $ 211 Options exercisable at December 31, 2022 1,462,238$ 9.56 6.3 $ 4 AtDecember 31, 2022 , there was$2.2 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 2.6 years. The weighted average grant-date fair value of options granted during the years endedDecember 31, 2022 and 2021 was$1.99 and$2.57 , respectively. The fair value of shares vested during the years endedDecember 31, 2022 and 2021 was$2.2 million and$2.0 million , respectively. The amount of stock-based compensation expense recorded to research and development expenses and to general and administrative expenses is detailed in table below: Years Ended December 31, 2022 2021 Stock-based compensation expense Research and development$ 615,477 $ 696,283 General and administrative 1,225,022 1,590,724
Total stock-based compensation expense
Warrants issued to SWK Year Ended December 31, 2022 2021 Weighted Weighted Average Average Number Exercise Price Number Exercise Price Outstanding at beginning of the period - $ - - - Granted during the period 250,000 2.08 - - Outstanding at end of the period 250,000 $ 2.08 - $ - Exercisable at end of the period 250,000 $ 2.08 - $ - Weighted average remaining life 6.3 years - 10. INCOME TAXES There was no provision for income taxes for the years endedDecember 31, 2022 and 2021, due to the Company's operating losses and a full valuation allowance on deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: 134
-------------------------------------------------------------------------------- December 31, 2022 2021 Deferred tax assets: Net operating loss carry forwards$ 17,548,951 $
12,059,019
Capitalized research and development costs 22,913,646 18,865,707 Accrued liabilities 691,212 156,415 Tax credit carryforwards 9,457,090 8,730,816 Stock-based compensation 2,086,266 1,745,654 Deferred collaboration funding 2,151,339 3,312,415 Operating lease 63,824 94,946 Debt issuance costs 229,073 - Unrealized foreign exchange gain 13,756 (3,616 ) Total deferred tax assets 55,155,157 44,961,356 Valuation allowance (55,033,001 ) (44,866,411 ) Net deferred tax assets 122,156 94,945 Deferred tax liabilities: Operating lease right of use asset (59,470 ) (94,945 ) Fair value debt (62,686 ) - Total deferred tax liabilities (122,156 ) (94,945 ) $ - $ - A reconciliation of theU.S. federal statutory tax rate to the effective tax rate is as follows: December 31, 2022 2021 Federal statutory rate 21.0 % 21.0 % R&D and Orphan Drug credits 2.7 % 6.4 % State income tax, net of federal tax benefit 15.9 % 5.4 % Valuation allowance (38.9 %) (33.2 %) Share-based compensation (0.7 %) (0.3 %) Other, net 0.0 % 0.7 % Effective tax rate 0.0 % 0.0 % Management currently believes that it is more likely than not that the deferred tax assets relating to the loss carryforwards and other temporary differences will not be realized in the future. ThroughDecember 31, 2022 , for income tax reporting purposes, the Company hadU.S. federal net operating loss carryforwards of$66.6 million and research and development credits and Orphan Drug credits of$9.4 million that can be carried forward and offset against taxable income. For state purposes, the Company had state net operating loss carryforwards of$65.6 million and research and development credits of$67 thousand that can be carried forward and offset against taxable income. Federal net operating loss generated prior to 2018 andMassachusetts net operating losses can be carried forward for 20 years and begin to expire in 2031. Research and development credits and Orphan Drug credits begin to expire in 2032 and 2034, respectively. Federal net operating loss generated after 2017 can be carried forward indefinitely. 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. There were no uncertain tax positions that require accrual or disclosure in the financial statements as ofDecember 31, 2022 and 2021. The Company's policy is to recognize interest and penalties related to income tax, if any, in income tax expense. As ofDecember 31, 2022 and 2021, the Company had no accruals for interest or penalties related to income tax matters.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 ("TCJA") eliminated the option to deduct research and development expenditures in the current year pursuant to IRC Section 174 and requires taxpayers to amortize them
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over five years for research performed in the
The 2017 merger of Opexa Therapeutics, Inc. and privateAcer Therapeutics Inc. resulted in an ownership change for the Company. Additional ownership changes in the future could result in additional limitations on the Company's net operating loss carryforwards and certain other tax attributes. Consequently, even if the Company achieves profitability, it may not be able to utilize a material portion of its net operating loss carryforwards and certain other tax attributes, which could increase its tax obligations and thus have a material adverse effect on its cash flow and results of operations. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ''ownership change,'' the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income and taxes may be limited. In general, an "ownership change" generally occurs if there is a cumulative change in the Company's ownership by "five-percent shareholders" that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The Company experienced an ownership change on July 17, 2015 and August 3, 2018, and may experience ownership changes in the future as a result of this issuance or future transactions in the Company's stock, some of which may be outside the Company's control. As a result, if the Company earns net taxable income, the Company's ability to use the Company's pre-change net operating loss carryforwards, or other pre-change tax attributes, to offsetU.S. federal and state taxable income and taxes may be subject to significant limitations.
11. NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss in each period by the weighted-average number of common shares 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. For 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 as of the December 31, 2022 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.
As of December 31, 2022 and 2021, the number of shares of common stock underlying potentially dilutive securities consist of:
December 31, 2022 2021
Options to purchase common stock 2,794,850 1,954,975 SWK Warrants
250,000 - Total 3,044,850 1,954,975
The application of the "if-converted" method to the 2.4 million shares associated with the Marathon Convertible Notes was not applicable for the year ended December 31, 2022 because to do so would have been antidilutive.
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12. SUBSEQUENT EVENTS
Subsequent to December 31, 2022, the Company sold an aggregate of 1,462,254 shares of common stock under its ATM facility at an average gross sale price of $2.81 per share, resulting in gross proceeds of $4.1 million. Proceeds, net of $0.1 million of offering costs, were $4.0 million.
On March 14, 2023, the Company granted options to acquire a total of 630,000 shares of its common stock to its directors, officers, and employees.
Amendments to Borrowing Agreements
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 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").
Pursuant to the terms of the August 2022 SWK Credit Agreement as amended by the Second Amendment (the "Current SWK Credit Agreement"):
•
Interest Rate: Interest is now calculated on the SWK Loans based on 3-month SOFR instead of 3-month LIBOR, such that the SWK Loans now 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.
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Capitalization of Interest: The Company's option to capitalize accrued interest (the "PIK Amount") has been extended through May 15, 2023 (instead of the previous February 15, 2023).
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Maturity Date: The final maturity date of the Second Term Loan is March 4, 2024, which is the same as the final maturity date of the Original Term Loan.
•
Exit Fees: The Company has the option to prepay the Second Term Loan in whole or in part. Upon the repayment of the Second Term Loan (whether a voluntary prepayment, an accelerated repayment 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 SWK Credit Agreement with respect to the Second Term Loan, but excluding the Third Warrant (defined below)) equal to the outstanding principal amount of the Second Term Loan (inclusive of PIK Amounts) multiplied by: (i) if the repayment occurs on or before April 15, 2023, 1.18, (ii) if the repayment occurs on or after April 16, 2023 but prior to May 16, 2023, 1.28667, (iii) if the repayment occurs on or after May 16, 2023 but prior to June 16, 2023, 1.39334, and (iv) if the repayment occurs on or after July 16, 2023, 1.5. The Second Amendment did not modify the exit fee applicable to the Original Term Loan.
•
Minimum Cash Requirement: The Second Amendment revised the liquidity covenant and, 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 Current SWK Credit Agreement now provides that the Company's cash and cash equivalents balance minus the aggregate amount of any accounts payable which are unpaid more than 90 days beyond terms consistent with the Company's practice must not be less than the lesser of (a) the outstanding principal amount of the SWK Loans, or (b) $3.0 million (as opposed to $1.5 million for clause (b) prior to the announcement of such topline results).
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Amortization: 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 principal amount of the SWK Loans amortizes at a monthly rate of $0.6 million starting April 15, 2023, until the Company has issued additional equity or subordinated debt resulting in net cash proceeds of not less than $7.7 million (i.e., the sum of $10.0 million less the net 137
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proceeds from the March 2023 Offering), at which point the SWK Loans would revert to amortizing at a rate of $1.3 million payable quarterly.
In connection with the execution 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 until and including March 4, 2029.
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.
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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, together with any accrued but unpaid interest thereon to the date of such repurchase; 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; and provided, further, that if such repurchase has not occurred by April 15, 2023, the Buy-Out Percentage shall be increased by 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%). 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 theU.S. for the treatment of certain patients living 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.
Results from ACER-801 Phase 2a Trial
The Company announced on March 17, 2023, that topline results from its 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 138
-------------------------------------------------------------------------------- significance when evaluating ACER-801's ability to decrease the frequency or severity of hot flashes in postmenopausal women. As a result, the Company announced it is pausing the ACER-801 program until it has conducted a thorough review of the full data set.
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 2,335,000 shares (the "Shares") of the Company's common stock, par value $0.0001 per share ("Common Stock"), and pre-funded warrants to purchase up to 585,306 shares of Common Stock (the "Pre-Funded Warrants") 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 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 agreed 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 registration statement on Form S-3 (File No. 333-261342), which was filed with the Securities and Exchange 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 March 21, 2023. With respect to the Company's amended and restated sales agreement dated March 18, 2020 (the "Sales Agreement"), with JonesTrading Institutional Services LLC andRoth Capital Partners, LLC (the "Agents") relating to the offer and sale of Common Stock having an aggregate offering price of up to $50.0 million from time to time through or to the Agents acting as the Company's sales agent or principal, pursuant to which the Company has filed with the Commission several prospectus supplements to the base prospectus included with the Registration Statement (the "Prospectuses"), in connection with the March 2023 Offering, the Company filed with the Commission a further prospectus supplement to suspend the Sales Agreement and terminate the continuous offering by the Company under the Prospectuses. The Common Warrants were offered in a private placement under Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and, along with the shares of Common Stock underlying the Common Warrants, have not been registered under the Securities Act or applicable state securities laws. 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 Offering. 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 full, 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 have a term of five 139
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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 entered into an engagement letter withH.C. Wainwright & Co., LLC ("Wainwright"), pursuant to which Wainwright agreed to serve as the exclusive placement agent for the issuance and sale 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. 140
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