| 2021 Sale of Common and Preferred Stock, Warrants and Royalty Interest | Open Market Sale Agreement On March 1, 2019, the Company entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program under which the Company may sell, from time to time at its sole discretion, shares of common stock having an aggregate offering price of up to $50.0 million, referred to as Placement Shares, through Jefferies as its sales agent. The Company will pay Jefferies a commission equal to 3.0% of the gross sales proceeds of any Placement Shares sold through Jefferies under the ATM Agreement. On November 5, 2020, the Company entered into an amendment to the ATM Agreement with Jefferies to increase the aggregate offering price of Placement Shares that may be sold pursuant to the ATM Agreement from up to $50.0 million to up to $100.0 million. However, on March 7, 2021, the Company’s ability to further use the first $50.0 million expired. As a result, after March 7, 2021, the Company may only sell up to an additional $50.0 million pursuant to the ATM Agreement. During the year ended December 31, 2021, the Company sold 165,323 shares of common stock pursuant to the ATM Agreement for net proceeds of $2.0 million, after payment of cash commissions of 3.0% of the gross proceeds to Jefferies. Cash provided by financing activities for the nine months ended September 30, 2021 included $0.5 million in net proceeds from sales pursuant to the ATM Agreement that had been classified as a receivable as of December 31, 2020. During the nine months ended September 30, 2022, the Company did not sell any shares of common stock pursuant to the ATM Agreement. In November 2021, the Company entered into a structured financing, or the 2021 Financing, consisting of a securities purchase agreement, warrant agreements, or the Warrants, and a royalty purchase agreement, or the RPA. Pursuant to the 2021 Financing, the Company received aggregate gross proceeds of $65.0 million in exchange for the sale to a select group of institutional investors, or the Investors, of (i) 2,253,000 shares of common stock, (ii) 13,997 shares of Series X1 Preferred Stock, (iii) Warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of the Company’s right to receive potential future AVP-786 royalties, or the Royalty Interest, under an existing development and licensing agreement, or the Avanir Agreement, with Avanir Pharmaceuticals, Inc., or Avanir, a subsidiary of Otsuka Pharmaceuticals, Co., Ltd. Preferred Stock In November 2021, the Company filed a certificate of designation with the Delaware Secretary of State setting forth the preferences, rights and limitations of a newly designated series of preferred stock known as “Series X1 Preferred Stock.” 32,500 shares have been designated as Series X1 Preferred Stock. The Series X1 Preferred Stock is convertible into shares of common stock at a conversion rate of 1,000 shares of common stock per share of Series X1 Preferred Stock, at the option of the holder, subject to certain limitations. Except in limited circumstances, the Series X1 Preferred Stock does not have voting rights. Holders of the Series X1 Preferred Stock are entitled to receive dividends on an as converted to common stock basis when and if declared on the common stock. In any liquidation or dissolution of the Company, the Series X1 Preferred Stock will rank on parity with the common stock in the distribution of assets, to the extent legally available for distribution, and will receive any dividends declared but unpaid on such shares. Warrants The Warrants consisted of (i) warrants to purchase an aggregate of 8,125 shares of Series X1 Preferred Stock at an initial exercise price (on a common stock equivalent basis) of $5.34 per share, or the First Tranche Warrants, and (ii) warrants to purchase an aggregate of an additional 8,125 shares of Series X1 Preferred Stock at an initial exercise price (on a common stock equivalent basis) of $7.35 per share, or the Second Tranche Warrants. The Warrants are exercisable at any time prior to the expiration date. Upon issuance, the term of the First Tranche Warrants and Second Tranche Warrants was contingent on the outcome of the Company’s deuruxolitinib THRIVE-AA1 Phase 3 clinical trial and THRIVE-AA2 Phase 3 clinical trial, respectively. The Warrants would expire 90 days after the occurrence of both (i) the public disclosure by the Company of the achievement of statistical significance on each of the primary endpoints of the respective clinical trial and (ii) a determination by the Company that there are no safety or other issues that would impede the Company’s filing of an NDA without first requiring an additional clinical trial that is not already contemplated by the Company’s development plans for deuruxolitinib. In the event that either event (i) or (ii) does not occur, the Warrants would expire 90 days after the earlier of (a) the public release of topline data from two ongoing Phase 3 clinical trials being conducted by Avanir in the indication of agitation in Alzheimer’s disease patients and (b) written notification to the Investors that the Company has received written notice from Avanir of a decision to cease both such clinical trials early. In the event that neither event (a) nor (b) occurs, the Warrants would expire upon the tenth anniversary from issuance. The exercise price of the Warrants is subject to a one-time adjustment in the event that the Company sells capital stock or derivative securities convertible into or exercisable for capital stock (subject to certain exemptions) at a weighted-average price per share below the initial exercise price, in which case the initial exercise price is automatically reset upon exercise of the Warrant to an exercise price that is the midpoint between the initial exercise price and the weighted-average price per share, provided that the adjusted exercise price cannot be less than $2.88 per share. On May 23, 2022, the Company announced the achievement of statistical significance on the primary endpoint of the deuruxolitinib THRIVE-AA1 Phase 3 clinical trial and determined that there were no safety or other issues that would impede the Company’s filing of an NDA without first requiring an additional clinical trial that was not already contemplated by the Company’s development plans for deuruxolitinib. As a result, the expiration date of the First Tranche Warrants became 90 days after May 23, 2022, or August 21, 2022. On June 1, 2022, concurrent with the June 2022 public offering detailed in Note 14, the Company entered into warrant amendment agreements to the First Tranche Warrants with the Investors. Pursuant to such amendments, in consideration for such Investors’ collective exercise of First Tranche Warrants to purchase an aggregate of 3,981 shares of Series X1 Preferred Stock for approximately $18.9 million concurrently with and contingent upon the offering, or the Exercise Commitments, the Company agreed to (i) reduce the exercise price of the First Tranche Warrants that were subject to the Exercise Commitments from $5.34 per share on a common stock equivalent basis to $4.75 per share on a common stock equivalent basis and (ii) extend the expiration date of the First Tranche Warrants that remain outstanding to the later of August 21, 2022 and the 21st day after the Company’s public disclosure of the topline results of its deuruxolitinib THRIVE-AA2 Phase 3 clinical trial, or the Modified First Tranche Warrants Expiration Date. Upon closing on June 6, 2022, the Investors satisfied the Exercise Commitments, resulting in net cash proceeds to the Company of $18.9 million. Pursuant to the original terms of the Warrants, following the June 2022 public offering detailed in Note 14 and assuming no other events that cause further adjustments, the exercise prices of the remaining First Tranche Warrants and the Second Tranche Warrants were adjusted to $5.05 per share and $6.05 per share (each on a common stock equivalent basis), respectively, upon exercise of such Warrants, which are the respective midpoints of the initial exercise prices and the public offering price per share. On August 1, 2022, the Company announced the achievement of statistical significance on the primary endpoint of the deuruxolitinib THRIVE-AA2 Phase 3 clinical trial. On August 2, 2022, the Company determined that there were no safety or other issues that would impede the Company’s filing of an NDA without first requiring an additional clinical trial that was not already contemplated by the Company’s development plans for deuruxolitinib. As a result, the expiration date of the remaining First Tranche Warrants and the Second Tranche Warrants became August 22, 2022 and October 31, 2022, respectively. In August 2022, the Investors exercised the remaining 4,144 First Tranche Warrants at the adjusted exercise price of $5.05 per share, resulting in net cash proceeds to the Company of $20.9 million. The Second Tranche Warrants were not exercised by October 31, 2022 and therefore expired. Royalty Interest As part of the 2021 Financing, under the RPA, the Investors purchased the Royalty Interest. Investors are initially entitled to an aggregate base amount of the future royalty payments of 35.0% in respect of worldwide net sales of licensed products under the Avanir Agreement, and may increase their percentage ownership (i) by up to an additional 7.5% based on the amount of First Tranche Warrants that are exercised and (ii) by up to an additional 7.5% based on the amount of Second Tranche Warrants that are exercised. Upon exercise of any portion of the First Tranche Warrants and/or Second Tranche Warrants by any Investor, such Investor is entitled to receive its pro rata share of the percentages set forth in the RPA. Based on the full exercise of the First Tranche Warrants referenced above, the Investors’ collective ownership of the Royalty Interest increased to 42.5%. Accounting Treatment The Company received aggregate net proceeds of $64.4 million at the closing of the 2021 Financing after deducting offering expenses of $0.6 million payable by the Company. The common stock, Series X1 Preferred Stock, Warrants and Royalty Interest were determined to be freestanding instruments, as they are legally detachable and separately exercisable from each other. The Series X1 Preferred Stock is not redeemable outside the control of the Company, and the Company has the ability to settle any conversion in shares. As such, the Series X1 Preferred Stock is classified as a component of permanent stockholders’ equity within additional paid-in capital. The ability of the Series X1 Preferred Stock to be converted to common stock, or the Conversion Option, represents an embedded call option, and therefore, the Company performed an evaluation in accordance with ASC 815, Derivatives and Hedging , to determine whether the Conversion Option requires bifurcation as a derivative. As a result of the evaluation, the Company concluded that the Conversion Option feature is clearly and closely related to the equity host instrument and is not an embedded derivative requiring bifurcation. Additionally, the Company evaluated the Series X1 Preferred Stock for a beneficial conversion feature in accordance with ASC 470, Debt . The evaluation identified a beneficial conversion feature; however, because the Series X1 Preferred Stock was recorded at par value with the incremental amount recorded to additional paid-in capital, the beneficial conversion feature had no impact. As of January 1, 2022, the Company adopted ASU 2020-06. ASU 2020-06 eliminates the cash conversion and beneficial conversion feature accounting models for convertible debt and convertible preferred stock. As a result, the Company's adoption of ASU 2020-06 eliminated the beneficial conversion feature of the Series X1 Preferred Stock. Upon issuance, the Warrants included an exercise contingency that was based on an observable index other than the Company’s own operations, and therefore, were precluded from equity classification. As a result, the Warrants were classified as a liability and measured at fair value at inception with subsequent changes in fair value recognized in earnings. The Royalty Interest does not meet the debt classification criteria, and as such, is accounted for under the deferred income model to be amortized under the units of revenue method. The two options to acquire an additional 7.5% of ownership in future AVP-786 royalties, or the Royalty Step Ups, are features embedded in the Royalty Interest. The Royalty Step Ups do not require bifurcation, as they are subject to scope exception because they pertain to the sale of future revenues. The aggregate proceeds of the 2021 Financing were first allocated to the Warrants based on fair value, with the remaining proceeds allocated to the common stock, Series X1 Preferred Stock and Royalty Interest on a relative fair value basis. The First Tranche Warrants and Second Tranche Warrants were valued using a Black-Scholes-Merton option pricing model, resulting in a fair value of $7.5 million and $5.9 million, respectively, as of the date the Company entered into the 2021 Financing. The relative fair value allocated to common stock and Series X1 Preferred Stock totaled $6.5 million and $40.3 million, respectively. The relative fair value allocated to the Royalty Interest was $4.8 million. Reclassification of Warrants to Equity On May 23, 2022, the Company announced the achievement of statistical significance on the primary endpoint of the deuruxolitinib THRIVE-AA1 Phase 3 clinical trial and determined that there were no safety or other issues that would impede the Company’s filing of an NDA without first requiring an additional clinical trial that was not already contemplated by the Company’s development plans for deuruxolitinib, which established the expiration date of the First Tranche Warrants as August 21, 2022. Similarly, as of August 2, 2022, the Company had announced the achievement of statistical significance on the primary endpoint of the deuruxolitinib THRIVE-AA2 Phase 3 clinical trial and determined that there were no safety or other issues that would impede the Company's filing of an NDA without first requiring an additional clinical trial that was not already contemplated by the Company's development plans for deuruxolitinib, which established the expiration date of the Second Tranche Warrants as October 31, 2022. As a result, the Warrants were no longer based on an observable index other than the Company’s own operations, and therefore, were no longer precluded from equity classification. Upon the Company’s reassessment, the Warrants were classified as a component of permanent stockholders’ equity within additional paid-in capital. The Warrants were equity classified because they are freestanding financial instruments that are legally detachable and separately exercisable from other equity instruments, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, permit the holders to receive a fixed number of shares of Series X1 Preferred Stock upon exercise, are indexed to the Company’s common stock and meet the equity classification criteria. The First Tranche Warrants were recorded at their fair value of $2.9 million as of May 23, 2022 using a Black-Scholes-Merton option pricing model, with the change in fair value of $5.9 million applied to unrealized gain on warrant liabilities during the three months ended June 30, 2022. The Second Tranche Warrants were recorded at their fair value of $11.5 million as of August 2, 2022 using a Black-Scholes Merton option pricing model, with the change in fair value of $0.1 million applied to unrealized gain on warrant liabilities during the three months ended September 30, 2022. The fair value assumptions related to the equity-classified First Tranche Warrants as of May 23, 2022 and equity-classified Second Tranche Warrants as of August 2, 2022 were as follows: As of May 23, 2022 August 2, 2022 First Tranche Warrants Second Tranche Warrants Expected volatility 91.20% 114.92% Expected term 0.25 years 0.25 years Risk-free interest rate 1.07% 2.56% Expected dividend yield —% —% The expected term was based on the respective expiration date for each tranche of Warrants. The expected volatility was calculated based on the historical volatility of the Company commensurate with the expected term. The risk-free interest rate was based on the average treasury bill interest rate over a period commensurate with the expected term for each tranche of Warrants. The expected dividend yield was zero, as the Company has not paid any dividends to date and has no current intention of paying cash dividends. First Tranche Warrants Modification and Exercise On June 6, 2022, the First Tranche Warrants were modified, or the First Tranche Warrants Modification, to reduce the exercise price for the warrants subject to the Exercise Commitments from $5.34 per share to $4.75 per share on a common stock equivalent basis and to extend the expiration date of the remaining First Tranche Warrants to the Modified First Tranche Warrants Expiration Date. The modification of the First Tranche Warrants lowered the exercise price of the Exercise Commitments to the price per share contemplated in an ongoing public offering. The First Tranche Warrants remained a freestanding equity-classified instrument following the modification. The Company concluded that the modification of the First Tranche Warrants provided more favorable terms to the Investors with the purpose of inducing the Investors to exercise the Exercise Commitments. Pursuant to ASU 2021-04, the Company remeasured the fair value of the First Tranche Warrants as of the modification date based on the modified terms and recorded the increase in fair value of $3.7 million as equity issuance costs to additional paid-in capital, reducing proceeds from the exercise of the First Tranche Warrants. The fair value assumptions related to the modification of the First Tranche Warrants as of June 6, 2022 were as follows: As of June 6, 2022 First Tranche Warrants (Post-Modification) Expected volatility 107.94% Expected term 0.24 years Risk-free interest rate 1.26% Expected dividend yield —% The expected term was based on 21 days following the approximate anticipated timing of the topline results of the THRIVE-AA2 Phase 3 clinical trial. The expected volatility was calculated based on the historical volatility of the Company commensurate with the expected term. The risk-free interest rate was based on the average treasury bill interest rate over a period commensurate with the expected term. The expected dividend yield was zero, as the Company has not paid any dividends to date and has no current intention of paying cash dividends. The date of the First Tranche Warrants Modification was previously disclosed as June 1, 2022. The date has been adjusted to June 6, 2022 to reflect the date the First Tranche Warrants Modification became effective, as opposed to the date the Company entered into the warrant amendment agreements to the First Tranche Warrants. The increase in fair value of $3.7 million treated as equity issuance costs to additional paid-in capital is as of June 6, 2022. Because the adjustment relates to additional paid-in capital, there is no financial impact. In conjunction with the First Tranche Warrants Modification, the Investors exercised 3,981 First Tranche Warrants in accordance with the Exercise Commitments, resulting in net cash proceeds of $18.9 million. Additionally, in August 2022, the Investors exercised the remaining 4,144 First Tranche Warrants, resulting in net cash proceeds of $20.9 million. The Company recorded the settlement of net cash proceeds to the par value of the preferred stock and additional paid-in capital. Warrant Liability Fair Value Assumptions As of December 31, 2021, the fair value of the First Tranche Warrants and Second Tranche Warrants was $8.5 million and $6.9 million, res pectively. The Company estimated the fair value of the Warrants using the Black-Scholes-Merton option pricing model. The fair value assumptions related to the Warrants as of December 31, 2021 were as follows: As of December 31, 2021 First Tranche Warrants Second Tranche Warrants Expected volatility 75.90% 76.40% Expected term 2.68 years 2.80 years Risk-free interest rate 0.97% 0.97% Expected dividend yield —% —% The expected term was probability-weighted based on the anticipated terms dictated by the possible outcomes of the Warrants. The expected volatility was calculated based on the historical volatility of the Company commensurate with the expected term. The risk-free interest rate was based on the average treasury bill interest rate over a period commensurate with the expected term for each tranche of Warrants. The expected dividend yield was zero, as the Company has not paid any dividends to date and has no current intention of paying cash dividends. Down Round Feature of Warrants The Company concluded that the exercise price adjustment of the Warrants as a result of the June 2022 public offering meets the definition of a triggered down round feature. The exercise price adjustment lowered the exercise price of the Warrants, but did not change the proportion of instruments convertible into common stock. Further, the exercise price adjustments serve as anti-dilution protection and do not provide excess value to the Investors. As of the closing of the June 2022 public offering, the First Tranche Warrants represented an equity-classified freestanding equity contract, and as such, required the value of the effect of the down round feature to be recognized when triggered. The value of the effect represents the difference between the fair value of the First Tranche Warrants without the down round feature (prior to the reduced exercise price) and the fair value of the First Tranche Warrants with the down round feature (subsequent to the reduced exercise price). The value of the effect of the down round feature on the First Tranche Warrants was determined to be $0.4 million and was recorded as a dividend with a reduction to income available to common stockholders when calculating basic earnings per share. The fair value assumptions used in determining the value of the effect of the down round feature were consistent with the modified First Tranche Warrants discussed above, with the exception of the reduced exercise price of $5.05 per share for the down-rounded First Tranche Warrants. The value of the effect of the down round feature on the First Tranche Warrants of $0.4 million reflects the date the First Tranche Warrants Modification became effective. The adjustment from the previous quarter is reflected in the condensed consolidated statement of stockholders' equity for the three months ended September 30, 2022 and in the loss per share for the nine months ended September 30, 2022. The impact to loss per share is immaterial. As of the closing of the June 2022 public offering, the Second Tranche Warrants represented a liability-classified freestanding equity contract, which did not require specific treatment upon the triggering of a down round feature. The reduced exercise price of the Second Tranche Warrants was considered in the subsequent remeasurements. Related Party Participation in the 2021 Financing The Investors included RA Capital Healthcare Fund, L.P., or RA Capital. At the time of entering into the 2021 Financing, RA Capital held greater than 5% of the Company’s outstanding common stock, and two members of the Company’s board of directors maintained minority, non-controlling interests in RA Capital. RA Capital purchased 7,500 shares of Series X1 Preferred Stock, 7,500 Warrants and a base amount of 16.2%, which could potentially increase up to 23.1%, of the Royalty Interest for $30.0 million in cash. As a participant in the First Tranche Warrant exercises in June and August 2022, RA Capital purchased an additional 3,750 shares of Series X1 Preferred Stock and increased their Royalty Interest to 19.6%. The Company’s condensed consolidated balance sheet includes RA Capital’s portion of warrant liabilities of $7.1 million as of December 31, 2021 and deferred revenue of $2.2 million as of both September 30, 2022 and December 31, 2021. For the nine months ended September 30, 2022, the Company’s condensed consolidated statement of operations and comprehensive loss and condensed consolidated statement of cash flows includes RA Capital’s portion of the unrealized gain on warrant liabilities of $0.5 million. In June 2022, the Company closed an underwritten public offering of 11,500,000 shares of its common stock to the public at $4.75 per share, or the 2022 Financing, which included the full exercise of the underwriters' option to purchase 1,500,000 additional shares of common stock. The Company received net proceeds of $51.0 million from the 2022 Financing, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. Related Party Participation in the 2022 Financing An entity affiliated with Richard Aldrich, one of our directors, and Thomas Auchincloss and Christine van Heek, two of our other directors, purchased approximately $1.0 million, $29 thousand and $50 thousand, respectively, in shares of our common stock in the 2022 Financing at the public offering price. |
