acrs_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q


(Mark one)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-37581

Aclaris Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	46-0571712 (I.R.S. Employer Identification No.)
640 Lee Road, Suite 200 Wayne, PA (Address of principal executive offices)	19087 (Zip Code)

Registrant’s telephone number, including area code: (484) 324‑7933

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Securities Exchange Act of 1934:


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)
		Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒

The number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, as of the close of business on August 2, 2018 was 30,980,663.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except share and per share data)


	June 30,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	46,035	$	20,202
Marketable securities		118,569		173,655
Accounts receivable, net		2,182		481
Inventory		1,026		—
Prepaid expenses and other current assets		3,360		5,883
Total current assets		171,172		200,221
Marketable securities		—		14,997
Property and equipment, net		4,375		2,159
Intangible assets		7,311		7,349
Goodwill		18,504		18,504
Other assets		457		279
Total assets	$	201,819	$	243,509
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,504	$	7,822
Accrued expenses		7,565		4,940
Total current liabilities		20,069		12,762
Contingent consideration		5,244		4,378
Other liabilities		1,754		558
Deferred tax liability		549		549
Total liabilities		27,616		18,247
Stockholders’ Equity:
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at June 30, 2018 and December 31, 2017		—		—
Common stock, $0.00001 par value; 100,000,000 shares authorized at June 30, 2018 and December 31, 2017; 30,965,296 and 30,856,505 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		—		—
Additional paid‑in capital		395,273		384,943
Accumulated other comprehensive loss		(188)		(246)
Accumulated deficit		(220,882)		(159,435)
Total stockholders’ equity		174,203		225,262
Total liabilities and stockholders’ equity	$	201,819	$	243,509

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

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Revenues:
ESKATA product sales, net	$	1,533	$	—	$	1,533	$	—
Contract research		1,143		—		2,261		—
Other revenue		1,000		—		1,000		—
Total revenue, net		3,676		—		4,794		—
Cost of revenue		1,181		—		2,148		—
Gross profit		2,495		—		2,646		—

Operating expenses:
Research and development		13,984		7,965		27,590		15,737
Sales and marketing		12,368		2,188		23,601		3,626
General and administrative		8,121		5,142		14,381		8,862
Total operating expenses		34,473		15,295		65,572		28,225
Loss from operations		(31,978)		(15,295)		(62,926)		(28,225)
Other income, net		760		457		1,479		828
Net loss	$	(31,218)	$	(14,838)	$	(61,447)	$	(27,397)

Net loss per share, basic and diluted	$	(1.01)	$	(0.56)	$	(1.99)	$	(1.04)
Weighted average common shares outstanding, basic and diluted		30,944,899		26,594,854		30,915,577		26,339,250

Other comprehensive income:
Unrealized gain (loss) on marketable securities, net of tax of $0	$	111	$	(4)	$	46	$	(56)
Foreign currency translation adjustments		28		87		12		159
Total other comprehensive income		139		83		58		103
Comprehensive loss	$	(31,079)	$	(14,755)	$	(61,389)	$	(27,294)

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

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF

STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)


						Accumulated
	Common Stock			Additional		Other				Total
		Par		Paid‑in		Comprehensive		Accumulated		Stockholders’
	Shares	Value		Capital		Loss		Deficit		Equity
Balance at December 31, 2017	30,856,505	$	—	$	384,943	$	(246)	$	(159,435)	$	225,262
Exercise of stock options and vesting of RSUs	108,791		—		(62)		—		—		(62)
Unrealized gain on marketable securities	—		—		—		46		—		46
Foreign currency translation adjustment	—		—		—		12		—		12
Stock-based compensation expense	—		—		10,392		—		—		10,392
Net loss	—		—		—		—		(61,447)		(61,447)
Balance at June 30, 2018	30,965,296	$	—	$	395,273	$	(188)	$	(220,882)	$	174,203

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

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended
	June 30,
	2018		2017
Cash flows from operating activities:
Net loss	$	(61,447)	$	(27,397)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		537		105
Stock-based compensation expense		10,392		6,457
Change in fair value of contingent consideration		866		—
Changes in operating assets and liabilities:
Accounts receivable		(1,701)		—
Inventory		(1,026)		—
Prepaid expenses and other assets		2,345		(3,897)
Accounts payable		4,693		3,161
Accrued expenses		1,636		(1,168)
Net cash used in operating activities		(43,705)		(22,739)
Cash flows from investing activities:
Purchases of property and equipment		(650)		(388)
Purchases of marketable securities		(74,246)		(41,534)
Proceeds from sales and maturities of marketable securities		144,375		47,652
Net cash provided by investing activities		69,479		5,730
Cash flows from financing activities:
Proceeds from issuance of common stock under the at-the-market sales agreement, net of issuance costs		—		19,311
Capital lease payments		(335)		—
Proceeds from the exercise of employee stock options		394		235
Net cash provided by financing activities		59		19,546
Net increase in cash and cash equivalents		25,833		2,537
Cash and cash equivalents at beginning of period		20,202		30,171
Cash and cash equivalents at end of period	$	46,035	$	32,708
Supplemental disclosure of non-cash investing and financing activities:
Additions to property and equipment included in accounts payable	$	442	$	190
Property and equipment obtained pursuant to capital lease financing arrangements	$	1,896	$	—
Offering costs included in accounts payable	$	20	$	—

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

ACLARIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

1. Organization and Nature of Business

Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012. In July 2015, Aclaris Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned subsidiary of Aclaris Therapeutics, Inc. In March 2016, Vixen Pharmaceuticals, Inc. (“Vixen”) became a wholly-owned subsidiary of Aclaris Therapeutics, Inc. In August 2017, Aclaris Life Sciences Inc. (formerly known as Confluence Life Sciences Inc.) (“Confluence”) was acquired by Aclaris Therapeutics, Inc. and became a wholly-owned subsidiary thereof (see Note 3). Aclaris Therapeutics, Inc., ATIL, Vixen and Confluence are referred to collectively as the “Company”. The Company is a dermatologist-led biopharmaceutical company focused on identifying, developing and commercializing innovative therapies to address significant unmet needs in medical and aesthetic dermatology and immunology. The Company’s lead drug, ESKATA (hydrogen peroxide) Topical Solution, 40% (w/w) (“ESKATA”), is a proprietary high‑concentration formulation of hydrogen peroxide that the Company is commercializing as an office-based prescription treatment for raised seborrheic keratosis (“SK”), a common non‑malignant skin tumor. The Company submitted a New Drug Application (“NDA”) for ESKATA to the U.S. Food and Drug Administration (“FDA”) in February 2017, and it was approved in December 2017. The Company launched ESKATA in May 2018.

Liquidity

The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. At June 30, 2018, the Company had cash, cash equivalents and marketable securities of $164,604 and an accumulated deficit of $220,882. Since inception, the Company has incurred net losses and negative cash flows from its operations. Prior to the acquisition of Confluence in August 2017, and the commercial launch of ESKATA in May 2018, the Company had never generated any revenue. There can be no assurance that profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing basis. In addition, development activities, clinical and preclinical testing of the Company’s drug candidates, and commercialization of the Company’s products will require significant additional financing. The future viability of the Company is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements of the Company include the accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, ATIL, Confluence and Vixen. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant

estimates and assumptions reflected in these financial statements include, but are not limited to, research and development expenses, contingent consideration and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2018, the condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2018 and 2017, the condensed consolidated statement of stockholders’ equity for the six months ended June 30, 2018, and the condensed consolidated statement of cash flows for the six months ended June 30, 2018 and 2017 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements contained in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2018 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of June 30, 2018, the results of its operations and comprehensive loss for the three and six months ended June 30, 2018 and 2017 and its cash flows for the six months ended June 30, 2018 and 2017. The condensed consolidated balance sheet data as of December 31, 2017 was derived from audited financial statements but does not include all disclosures required by GAAP. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2018 and 2017 are unaudited. The results for the three and six months ended June 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period. The unaudited interim financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K filed with the SEC on March 12, 2018.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K filed with the SEC on March 12, 2018. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies other than those noted below.

In February 2017, the Company paid a $2.0 million Prescription Drug User Fee Act (“PDUFA”) fee to the FDA in conjunction with the filing of its NDA for ESKATA. The Company requested a waiver and refund of this PDUFA fee, which was approved by the FDA in December 2017, and was received by the Company in January 2018.

Revenue Recognition

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

To determine revenue recognition in accordance with ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. At contract inception, the Company assesses the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct. The Company recognizes the revenue that is allocated to each distinct performance obligation when (or as) that

Contingent Consideration

The Company initially recorded the contingent consideration related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition. Changes in fair value reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. For example, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug, differ from the Company’s assumptions, then the fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent consideration, if any, will be recorded as income or expense in the Company’s condensed consolidated statement of operations.

Recently Issued Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718). The amendments in this ASU expand the scope of Topic 718 to include stock-based compensation arrangements with nonemployees except for specific guidance on option pricing model inputs and cost attribution. ASU 2018-07 is effective for annual reporting periods beginning after December 31, 2018, including interim periods within that year, and early adoption is permitted. The Company is evaluating the impact of ASU 2018-07 on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations-Clarifying the Definition of a Business (Topic 805). The amendments in this ASU provide a screen to determine when a set of acquired assets and/or activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments in this ASU will reduce the number of transactions that meet the definition of a business. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years, and early adoption will be permitted. The Company adopted the provisions of this standard on January 1, 2018, the impact of which on its consolidated financial statements was not significant.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU, entities should recognize revenue in an amount that reflects the consideration to which they expect to be entitled to in exchange for goods and services provided. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted the provisions of this standard on January 1, 2018, using the modified retrospective transition method. The Company did not recognize any transition adjustments as a result of adopting ASU 2014-09 and, accordingly, comparative information has not been restated for the periods reported.

3. Acquisition of Confluence

In August 2017, the Company acquired Confluence, at which time, Confluence became a wholly-owned subsidiary of the Company. The Company gave aggregate consideration with a fair value of $24,322 to the equity holders of Confluence. The Company also agreed to pay the Confluence equity holders contingent consideration of up to $80,000, based upon the achievement of certain development, regulatory and commercial milestones, including $2,500 of which may be paid in shares of the Company’s common stock upon the achievement of a specified development milestone. In addition, the Company has agreed to pay the Confluence equity holders specified future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product.

The following table summarizes the fair value of total consideration given to the Confluence equity holders in connection with the acquisition:


Cash consideration paid	$	10,269
Aclaris common stock issued		9,675
Contingent consideration		4,378
Total fair value of consideration to Confluence equity holders	$	24,322

The Company accounted for the acquisition of Confluence as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the assets acquired and liabilities assumed in this transaction were recorded at their respective fair values on the date of acquisition using assumptions that are subject to change. The Company finalized the purchase price allocation for the acquisition of Confluence in the second quarter of 2018.

The following supplemental unaudited pro forma information presents the Company’s financial results, for the periods presented, as if the acquisition of Confluence had occurred on January 1, 2017. This supplemental unaudited pro forma financial information has been prepared for comparative purposes only, and is not necessarily indicative of what actual results would have been had the acquisition of Confluence occurred on January 1, 2017, nor is this information indicative of future results.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Revenue	$	3,676	$	1,067	$	4,794	$	2,303
Gross profit		995		243		1,146		805
Total operating expenses		32,973		16,133		64,072		29,449
Net loss		(31,218)		(15,432)		(61,447)		(28,106)

The supplemental unaudited pro forma financial results for the three and six months ended June 30, 2017 include adjustments to exclude $370 and $670, respectively, of revenue billed to the Company by Confluence. The supplemental unaudited pro forma financial results for the three and six months ended June 30, 2017 also include an adjustment for amortization expense related to the other intangible asset acquired.

4. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s assets and liabilities, which are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:


	June 30, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	33,722	$	11,182	$	—	$	44,904
Marketable securities		—		118,569		—		118,569
Total Assets	$	33,722	$	129,751	$	—	$	163,473


Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	5,244	$	5,244
Total liabilities	$	—	$	—	$	5,244	$	5,244


	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	19,339	$	—	$	—	$	19,339
Marketable securities		—		188,652		—		188,652
Total Assets	$	19,339	$	188,652	$	—	$	207,991


Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	4,378	$	4,378
Total liabilities	$	—	$	—	$	4,378	$	4,378

As of June 30, 2018 and December 31, 2017, the Company’s cash equivalents consisted of investments with maturities of less than three months and included a money market fund, which was valued based upon Level 1 inputs, and commercial paper which was valued based upon Level 2 inputs. In determining the fair value of its Level 2 investments the Company relied on quoted prices for identical securities in markets that are not active. These quoted prices were obtained by the Company with the assistance of a third-party pricing service based on available trade, bid and other observable market data for identical securities. On a quarterly basis, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of those quoted prices. The Company evaluates whether adjustments to third-party pricing is necessary and, historically, the Company has not made adjustments to the quoted prices obtained from the third-party pricing service. During the three and six months ended June 30, 2018 and the year ended December 31, 2017, there were no transfers between Level 1, Level 2 and Level 3. The change in contingent consideration related to acquisition of Confluence of $866 during the six months ended June 30, 2018 was the result of updates to the Company’s assumptions related to drug discovery research on the soft-JAK inhibitors, which progressed more quickly than originally planned.

The following tables present the fair value of the Company’s available for sale marketable securities by type of security:


	June 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	18,084	$	—	$	(59)	$	18,025
Commercial paper		53,626		—		—		53,626
Asset-backed securities		22,021		—		(16)		22,005
U.S. government agency debt securities		24,962		1		(50)		24,913
Total marketable securities	$	118,693	$	1	$	(125)	$	118,569


	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	37,401	$	—	$	(68)	$	37,333
Commercial paper		85,202		—		—		85,202
Asset-backed securities		16,708		—		(13)		16,695
U.S. government agency debt securities		49,511		—		(89)		49,422
Total marketable securities	$	188,822	$	—	$	(170)	$	188,652

5. Property and Equipment, Net

Property and equipment, net consisted of the following:


		June 30,		December 31,
	2018		2017
Computer equipment	$	1,276	$	650
Fleet vehicles		1,896		—
Manufacturing equipment		562		511
Lab equipment		838		721
Furniture and fixtures		523		327
Leasehold improvements		259		430
Property and equipment, gross		5,354		2,639
Accumulated depreciation		(979)		(480)
Property and equipment, net	$	4,375	$	2,159

Depreciation expense was $296 and $55 for the three months ended June 30, 2018 and 2017, respectively, and $499 and $105 for the six months ended June 30, 2018 and 2017, respectively.

6. Accrued Expenses

Accrued expenses consisted of the following:


		June 30,		December 31,
	2018		2017
Employee compensation expenses	$	3,922	$	3,010
Sales and marketing expenses		1,237		39
Research and development expenses		938		627
Capital leases, current portion		552		142
Professional fees		389		108
Payable to NST		—		590
Other		527		424
Total accrued expenses	$	7,565	$	4,940

7. Stockholders’ Equity

Preferred Stock

As of June 30, 2018 and December 31, 2017, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock. No shares of preferred stock were outstanding as of June 30, 2018 or December 31, 2017.

Common Stock

As of June 30, 2018 and December 31, 2017, the Company’s amended and restated certificate of incorporation authorized the Company to issue 100,000,000 shares of $0.00001 par value common stock.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to any preferential dividend rights of any series of preferred stock that may be outstanding. The Company did not declare any dividends through June 30, 2018.

At-The-Market Equity Offering

In November 2016, the Company entered into an at-the-market sales agreement with Cowen and Company, LLC to sell the Company’s securities under a shelf registration statement filed in November 2016. During the six months ended June 30, 2018, the Company did not issue any shares of common stock under the at-the-market sales agreement. As of June 30, 2018, the Company had issued and sold an aggregate of 635,000 shares of common stock under the at-the-market sales agreement at a weighted average price per share of $31.50, for aggregate gross proceeds of $20,003. The Company has incurred expenses of $691 in connection with the shares issued under the at-the-market sales agreement.

Public Offering of Common Stock

In August 2017, the Company entered into an underwriting agreement pursuant to which the Company issued and sold 3,747,602 shares of common stock under a registration statement on Form S-3 (the “Public Offering”), including the underwriters’ partial exercise of their option to purchase additional shares. The shares of common stock were sold to the public at a price of $23.02 per share, for gross proceeds of $86,270.

The Company paid underwriting discounts and commissions of $5,176 to the underwriters in connection with the Public Offering. In addition, the Company incurred expenses of $176 in connection with the Public Offering. The net offering proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $80,918.

8. Stock‑Based Awards

2017 Inducement Plan

In July 2017, the Company’s board of directors adopted the 2017 Inducement Plan (the “2017 Inducement Plan”). The 2017 Inducement Plan is a non-shareholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules. The only employees eligible to receive grants of awards under the 2017 Inducement Plan are individuals who satisfy the standards for inducement grants under Nasdaq listing rules, generally including individuals who were not previously an employee or director of the Company. Under the terms of the 2017 Inducement Plan upon adoption, the Company may grant up to 1,000,000 shares of common stock pursuant to nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit (“RSU”) awards, and other stock awards. The shares of common stock underlying any awards that expire, or are otherwise terminated, settled in cash or repurchased by the Company under the 2017 Inducement Plan will be added back to the shares of common stock available for issuance under the 2017 Inducement Plan. As of June 30, 2018, 112,224 shares of common stock were available for grant under the 2017 Inducement Plan.

2015 Equity Incentive Plan

In September 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”), and on September 16, 2015, the Company’s stockholders approved the 2015 Plan. The 2015 Plan became effective in connection with the Company’s initial public offering in October 2015. Beginning at the time the 2015 Plan became effective, no further grants may be made under the Company’s 2012 Equity Compensation Plan, as amended and restated (the “2012 Plan”). The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock awards, cash-based awards and other stock-based awards. The number of shares initially reserved for issuance under the 2015 Plan was 1,643,872 shares of common stock. The number of shares of common stock that may be issued under the 2015 Plan will automatically increase on January 1 of each year, beginning on January 1, 2016 and ending on January 1, 2025, in an amount equal to the lesser of (i) 4.0% of the shares of the Company’s common stock outstanding on December 31 of the preceding calendar year or (ii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that

expire, are otherwise terminated, settled in cash or repurchased by the Company under the 2015 Plan and the 2012 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. As of January 1, 2018, the number of shares of common stock that may be issued under the 2015 Plan was automatically increased by 1,234,260 shares. As of June 30, 2018, 1,671,239 shares remained available for grant under the 2015 Plan.

2012 Equity Compensation Plan

Upon the 2015 Plan becoming effective, no further grants can be made under the 2012 Plan. The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which 957,013 and 984,720 were outstanding as of June 30, 2018 and December 31, 2017, respectively. Stock options granted under the 2012 Plan vest over four years and expire after ten years. As required, the exercise price for the stock options granted under the 2012 Plan was not less than the fair value of the shares of common stock underlying the awards as determined by the Company as of the date of grant.

Stock Option Valuation

The weighted average assumptions the Company used to estimate the fair value of stock options granted were as follows:


	Six Months Ended
	June 30,
	2018		2017
Risk-free interest rate	2.63	%	1.93	%
Expected term (in years)	6.3		6.0
Expected volatility	95.78	%	94.09	%
Expected dividend yield	0	%	0	%

The Company recognizes compensation expense for awards over their vesting period. Compensation expense for awards includes the impact of forfeitures in the period when they occur.

Stock Options

The following table summarizes stock option activity from January 1, 2018 through June 30, 2018:


					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number		Exercise		Contractual	Intrinsic
	of Shares		Price		Term	Value
					(in years)
Outstanding as of December 31, 2017	3,328,757		$	20.69	8.28	$	19,812
Granted	1,215,000			21.70
Exercised	(46,700)			8.43
Forfeited and cancelled	(181,115)			24.79
Outstanding as of June 30, 2018	4,315,942		$	20.93	8.34	$	13,650
Options vested and expected to vest as of June 30, 2018	4,315,942		$	20.93	8.34	$	13,650
Options exercisable as of June 30, 2018	1,377,080	(1)	$	15.25	7.21	$	10,725

(1)

All options granted under the 2012 Plan are exercisable immediately, subject to a repurchase right in the Company’s favor that lapses as the option vests. This amount reflects the number of shares under options that were vested, as opposed to exercisable, as of June 30, 2018.

The weighted average grant date fair value of stock options granted during the six months ended June 30, 2018 was $17.04 per share.

The intrinsic value of a stock option is calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock, and cannot be less than zero.

Restricted Stock Units

The following table summarizes RSU activity from January 1, 2018 through June 30, 2018:


		Weighted
		Average
		Grant Date
	Number	Fair Value
	of Shares	Per Share
Outstanding as of December 31, 2017	283,553	$	27.02
Granted	357,360		21.62
Vested	(87,357)		27.13
Forfeited and cancelled	(20,800)		23.70
Outstanding as of June 30, 2018	532,756	$	23.51

Stock‑Based Compensation

The following table summarizes stock‑based compensation expense recorded by the Company:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Cost of revenue	$	190	$	—	$	366


			PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements			2

Unaudited Condensed Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017			2

Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017			3

Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2018			4

Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2018 and 2017			5

Notes to Unaudited Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21

Item 3. Quantitative and Qualitative Disclosures about Market Risk			39

Item 4. Controls and Procedures			40

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			41

Item 1A. Risk Factors			41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41

Item 6. Exhibits			42

Signatures			43