What changed in this filing

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Item 1. Financial Statements

2020-11-04 compared with 2020-08-07 · 184 added, 124 removed, 463 unchanged (40% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

September 30,

Current assets:

Cash and cash equivalents

Restricted cash

Marketable securities

19 unchanged sentences

Preferred stock, $ 0.00001 par value;

10,000,000 shares authorized and no shares issued or outstanding at June 30, 2020 and December 31, 2019

10,000,000 shares authorized and no shares issued or outstanding at September 30, 2020 and December 31, 2019

Common stock, $ 0.00001 par value;

100,000,000 shares authorized at June 30, 2020 and December 31, 2019;

42,691,114 and 41,485,638 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

100,000,000 shares authorized at September 30, 2020 and December 31, 2019;

42,916,387 and 41,485,638 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid‑in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive loss

Accumulated deficit

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Contract research

8 unchanged sentences

Loss from operations

Other income (expense), net

Other expense, net

Loss from continuing operations

27 unchanged sentences

Balance at June 30, 2020

Vesting of restricted stock units

Issuance of common stock in connection with equity purchase agreement

Unrealized loss on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at September 30, 2020

Comprehensive

12 unchanged sentences

Balance at June 30, 2019

Exercise of stock options and vesting of restricted stock units

Unrealized loss on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at September 30, 2019

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

2 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities :

4 unchanged sentences

Goodwill impairment charge

Intangible asset impairment charge

Changes in operating assets and liabilities:

8 unchanged sentences

Proceeds from sales and maturities of marketable securities

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash flows from financing activities:

1 unchanged sentence

Finance lease payments

Deferred issuance costs

Proceeds from exercise of employee stock options and the issuance of stock

Net cash provided by (used in) financing activities

Net decrease in cash and cash equivalents

Net decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

3 unchanged sentences

Operating lease asset recorded as a result of new accounting standard

Fair value of common stock issued in connection with equity purchase agreement

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

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Organization and Nature of Business

7 unchanged sentences

The Company currently has a pipeline of drug candidates focused on immuno-inflammatory diseases, as well as one product approved by the U.S.

Food and Drug Administration (“FDA”) that it is not currently distributing, marketing or selling, and other investigational drug candidates.

Food and Drug Administration (“FDA”) that it is not currently distributing, marketing or selling.

In September 2019, the Company announced the completion of a strategic review of its business, as a result of which it refocused its resources on its immuno-inflammatory development programs.

1 unchanged sentence

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.

As of June 30, 2020, the Company had cash, cash equivalents and restricted cash and marketable securities of $ 68,115 and an accumulated deficit of $ 480,710 .

As of September 30, 2020, the Company had cash, cash equivalents, restricted cash and marketable securities of $ 55.2 million and an accumulated deficit of $ 491.4 million.

Since inception, the Company has incurred net losses and negative cash flows from its operations.

4 unchanged sentences

The Company will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop its preclinical compounds, and to support its discovery efforts.

Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable the Company to continue to implement its long-term business strategy.

The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

If the Company is unable to raise sufficient additional capital or generate revenue from transactions with third-party partners for the development and/or commercialization of its drug candidates, it may need to substantially curtail planned operations.

The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that its consolidated financial statements are issued.

As of the report date, the Company believes the actions described below are probable of being implemented effectively and of alleviating the conditions or events that exist which raise substantial doubt about its ability to continue as a going concern within one year after the date of the issuance of these condensed consolidated financial statements.

The Company believes its existing

cash, cash equivalents and marketable securities are sufficient to fund its operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of these condensed consolidated financial statements.

The Company has taken a number of actions to support its operations and meet its liquidity needs.

In September 2019, the Company announced the completion of a strategic review and its decision to refocus its resources on its immuno-inflammatory development programs and to pursue strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA.

As a result of this decision, the Company restructured its operations and terminated employees, which lowered operating costs.

As a result of this decision, the Company restructured its operations and reduced its workforce, which lowered operating costs.

In October 2019, the Company sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) to further its focus on its development programs and improve cash flow.

In March 2020, the Company borrowed $ 11,000 under a term loan facility with Silicon Valley Bank.

The Company’s plans to further alleviate the substantial doubt about its going concern, which are probable of effectively being implemented and mitigating these conditions, primarily include its ability to control the timing and spending on its research and development programs.

In March 2020, the Company borrowed $ 11.0 million under a term loan facility with Silicon Valley Bank.

In August 2020, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $ 15.0 million of shares of its common stock over the 36-month term of the Purchase Agreement.

The Company’s plans to further address its liquidity needs primarily include its ability to control the timing and spending on its research and development programs.

The Company may also consider other plans to fund its operations including:

(1) raising additional capital through debt or equity financings;

(2) identifying third-party partners to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA, which may generate revenue and/or milestone payments;

(2) identifying third-party partners to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA, which may generate

revenue and/or milestone payments;

(3) reducing spending on one or more research and development programs by delaying or discontinuing development;

and/or (4) further restructuring its operations to change its overhead structure.

Finally, additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable the Company to continue to implement its long-term business strategy.

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.

As of the report date, the Company does not believe that substantial doubt exists about its ability to continue as a going concern.

The Company believes its existing cash, cash equivalents and marketable securities are sufficient to fund its operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of these condensed consolidated financial statements.

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 accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“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 and Confluence.

All significant intercompany transactions have been eliminated.

Based upon the revenue from contract research services, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations.

Based upon the Company’s revenue, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Discontinued Operations

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Estimates are periodically reviewed in light of changes in circumstances, facts and experience.

The COVID-19 pandemic has resulted in a global slowdown of economic activity.

As of the date of issuance of these financial statements, the Company is not aware of any specific event

or circumstance that would require an update to its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities.

The COVID-19 pandemic has resulted in a global slowdown in

economic activity.

As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities.

Actual results could differ from the Company’s estimates.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2020, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2020 and 2019, the condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 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 February 25, 2020 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of June 30, 2020, the results of its operations and comprehensive loss for the three and six months ended June 30, 2020 and 2019, its changes in stockholders’ equity for the three and six months ended June 30, 2020 and 2019 and its cash flows for the six months ended June 30, 2020 and 2019.

The accompanying condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 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 February 25, 2020 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of September 30, 2020, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, its changes in stockholders’ equity for the three and nine months ended September 30, 2020 and 2019 and its cash flows for the nine months ended September 30, 2020 and 2019.

The condensed consolidated balance sheet data as of December 31, 2019 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, 2020 and 2019 are unaudited.

The results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.

The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2020 and 2019 are unaudited.

The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.

The unaudited interim financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the SEC.

5 unchanged sentences

The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents.

Cash equivalents, which have consisted of money market accounts, commercial paper and corporate debt securities with original maturities of less than three months, are stated at fair value.

Restricted cash as of June 30, 2020 consisted of $ 1,753 placed in escrow pursuant to the asset purchase agreement with EPI Health, LLC (“EPI Health”) (see Note 13 for additional information).

Cash equivalents, which have consisted of money market accounts, commercial paper and corporate debt securities, are stated at fair value.

Total cash, cash equivalents and restricted cash as shown in the condensed consolidated statements of cashflows as of September 30, 2020 and 2019 includes $ 1.8 million and $ 0 , respectively, of restricted cash, consisting of funds in escrow pursuant to the asset purchase agreement with EPI Health, LLC (“EPI Health”) (see Note 13).

In October 2020, the cash in escrow was released to the Company in accordance with the asset purchase agreement.

Revenue Recognition

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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.

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

performance obligation is satisfied.

The Company recognizes the revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied.

The Company only recognizes revenue when collection of the consideration it is entitled to under a contract with a customer is probable.

3 unchanged sentences

Revenue related to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts.

Under ASC Topic 606, the Company elected to apply the “right to invoice” practical expedient when recognizing contract research revenue.

The Company recognizes contract research revenue in the amount to which it has the right to invoice.

Under ASC Topic 606, the Company elected to apply the “right to invoice” practical expedient when recognizing contract research revenue and as such, recognizes revenue in the amount which it has the right to invoice.

ASC Topic 606 also provides an optional exemption, which the Company has elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.

Other Revenue

2 unchanged sentences

If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the amount allocated to the license of intellectual property.

Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

Milestone payments that are not within the control of the Company or the counterparty, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

Intangible Assets

Intangible assets include both definite-lived and indefinite-lived assets.

Definite-lived intangible assets consist of a drug discovery technology platform the Company acquired through the acquisition of Confluence.

Definite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up.

If that pattern cannot be reliably determined, the straight-line method of amortization is used.

Definite-lived intangible assets consist of a research technology platform the Company acquired through the acquisition of Confluence.

Indefinite-lived intangible assets consist of an in-process research and development (“IPR&D”) drug candidate acquired through the acquisition of Confluence.

5 unchanged sentences

Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets.

The Company evaluates leases at their inception to determine if they are an operating lease or a finance lease.

The Company evaluates leases at their inception to determine if they are an

operating lease or a finance lease.

A lease is accounted for as a finance lease if it meets one of the following five criteria:

the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the

underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term.

Leases that do not meet the finance lease criteria are accounted for as an operating lease.

7 unchanged sentences

Contingent Consideration

The Company initially recorded a contingent consideration liability related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition.

The Company initially recorded a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, at its estimated fair value on the date of acquisition.

The ultimate amount of future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones.

The Company estimates the fair value of the contingent consideration liability related to the achievement of regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return.

The Company estimates the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate.

Significant assumptions used in the Company’s estimates include the probability of success of achieving regulatory and sales milestones, which are based upon an asset’s current stage of development and ranged between 4 % and 15 %.

The Company estimates the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payments to their present values using a credit-risk-adjusted interest rate.

Significant assumptions used in the Company’s estimates include the probability of success of both achieving regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development and ranged between 4 % and 15 %.

The Company evaluates fair value estimates of contingent consideration liabilities on a periodic basis.

Any change in fair value reflects 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.

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 candidate, 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.

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Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant.

1 unchanged sentence

ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years.

The Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant.

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This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements.

The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years.

The Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant.

1 unchanged sentence

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

June 30, 2020

September 30, 2020

(In thousands)

Cash equivalents

3 unchanged sentences

December 31, 2019

(In thousands)

Cash equivalents

2 unchanged sentences

Total liabilities

As of June 30, 2020 and December 31, 2019, the Company’s cash equivalents consisted of investments with maturities of less than three months and included a money market fund, which was valued based upon Level 1 inputs, and the Company’s marketable securities consisted of investments with maturities of more than three months and included commercial paper, corporate debt, asset-backed securities and government obligations, which were valued based upon Level 2 inputs.

As of September 30, 2020 and December 31, 2019, the Company’s cash equivalents consisted of a money market fund, which was valued based upon Level 1 inputs, and corporate debt securities, which were valued based upon Level 2 inputs.

The Company’s marketable securities consisted of investments with maturities of more than three months and included commercial paper and corporate debt, asset-backed and U.S.

government agency debt securities, which were valued based upon Level 2 inputs.

In determining the fair value of its Level 2 investments, the Company relied on quoted prices for identical securities in markets that are not active.

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The Company evaluates whether adjustments to third-party pricing is necessary and, historically, the Company has not made adjustments to quoted prices obtained from the third-party pricing service.

During the six months ended June 30, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3.

The increase in contingent consideration of $ 1,767 during the six months ended June 30, 2020 was the result of updates to the Company’s assumptions as a result of the successful completion of a Phase 1 clinical trial for ATI-450.

As of June 30, 2020 and December 31, 2019, the fair value of the Company’s available for sale marketable securities by type of security was as follows:

June 30, 2020

During the nine months ended September 30, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3.

The increase in contingent consideration of $ 2.4 million during the nine months ended September 30, 2020 was primarily due to updates to the Company’s assumptions as a result of the successful completion of a Phase 1 clinical trial for ATI-450 and the submission and allowance of an Investigational New Drug Application for ATI-1777.

As of September 30, 2020 and December 31, 2019, the fair value of the Company’s available for sale marketable securities by type of security was as follows:

September 30, 2020

(In thousands)

Marketable securities:

5 unchanged sentences

December 31, 2019

(In thousands)

Marketable securities:

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Property and equipment, net consisted of the following:

September 30,

(In thousands)

Computer equipment

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Property and equipment, net

Depreciation expense was $ 297 and $ 393 for the three months ended June 30, 2020 and 2019, respectively, and $ 595 and $ 795 for the six months ended June 30, 2020 and 2019, respectively.

Depreciation expense was $ 0.3 million for each of the three months ended September 30, 2020 and 2019, and $ 0.9 million for each of the nine months ended September 30, 2020 and 2019.

Intangible Assets

1 unchanged sentence

Accumulated Amortization

September 30,

(In thousands, except years)

Other intangible assets

Total definite-lived intangible assets

Total intangible assets

As of June 30, 2020, estimated future amortization expense is as follows:

Year Ending December 31,

As of September 30, 2020, estimated future amortization expense is as follows:

(In thousands)

Accrued Expenses

Accrued expenses consisted of the following:

September 30,

(In thousands)

Employee compensation expenses

Research and development expenses

Professional fees

Payable to EPI Health

Total accrued expenses

Payable to EPI Health

As of June 30, 2020, the Company had $ 4,950 payable to EPI Health (see Note 15 for additional information).

Loan and Security Agreement – Silicon Valley Bank

In March 2020, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”).

The Loan and Security Agreement provides for $ 11,000 in term loans, of which the Company borrowed the entire amount on March 30, 2020.

The Loan and Security Agreement provides for $ 11.0 million in term loans, of which the Company borrowed the entire amount on March 30, 2020.

The Loan and Security Agreement is secured by substantially all of the assets of the Company other than intellectual property.

In connection with the Loan and Security Agreement, the Company issued to SVB a warrant to purchase up to 460,251 shares of common stock (the “Warrant”).

In connection with the Loan and Security Agreement, the Company issued to SVB a warrant to purchase up to 460,251 shares of common stock (the “Warrant”) (see Note 8).

The proceeds of the Loan and Security Agreement were allocated to the term loan and Warrant using a relative fair value approach.

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Preferred Stock

As of June 30, 2020 and December 31, 2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock.

There were no shares of preferred stock outstanding as of June 30, 2020 or December 31, 2019.

As of June 30, 2020 and December 31, 2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 100,000,000 shares of $ 0.00001 par value common stock.

As of September 30, 2020 and December 31, 2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock.

There were no shares of preferred stock outstanding as of September 30, 2020 or December 31, 2019.

As of September 30, 2020 and December 31, 2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 100,000,000 shares of $ 0.00001 par value common stock.

Each share of common stock entitles the holder to 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.

No dividends have been declared through June 30, 2020.

No dividends have been declared through September 30, 2020.

In connection with the Loan and Security Agreement with SVB, the Company issued the Warrant to SVB.

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The Warrant will terminate, if not earlier exercised, on the earlier of March 29, 2030 and the closing of certain merger or other transactions in which the consideration is cash, stock of a publicly-traded acquirer or a combination thereof.

The Company assigned a fair value of

$ 378 to the Warrant using a Black-Scholes valuation methodology, and also concluded that the Warrant was indexed to its own stock and therefore classified the Warrant as an equity instrument.

The Company assigned a fair value of $ 0.4 million to the Warrant using a Black-Scholes valuation methodology, and also concluded that the Warrant was indexed to its own stock and therefore classified the Warrant as an equity instrument.

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

In August 2020, the Company entered into the Purchase Agreement with Lincoln Park which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park, at its discretion, up to $ 15.0 million of shares of its common stock over the 36-month term of the Purchase Agreement.

U pon execution of the Purchase Agreement, the Company issued 121,584 shares of its common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement.

The commitment shares were valued using the closing price of the Company’s common stock on the effective date of the Purchase Agreement resulting in an aggregate fair value of $ 0.3 million.

As of September 30, 2020, the Company had not sold any shares of its common stock to Lincoln Park under the Purchase Agreement.

Stock-Based Awards

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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 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 number of shares of common stock that may be issued under the 2015 Plan will automatically increase on January 1 of each year 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 31st 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, 2020, the number of shares of common stock that may be issued under the 2015 Plan was increased by 1,451,997 shares.

As of June 30, 2020, 1,922,147 shares remained available for grant under the 2015 Plan.

As of September 30, 2020, 2,212,858 shares remained available for grant under the 2015 Plan.

2017 Inducement Plan

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The 2017 Inducement Plan is a non-stockholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules.

The Company had 443,000 stock options and 44,390 RSUs outstanding as of June 30, 2020 under the 2017 Inducement Plan.

The Company had 443,000 stock options and 29,062 RSUs outstanding as of September 30, 2020 under the 2017 Inducement Plan.

All shares of common stock that were eligible for issuance under the 2017 Inducement Plan after October 1, 2018, including any shares underlying any awards that expire or are otherwise terminated, reacquired to satisfy tax withholding obligations, settled in cash or repurchased by the Company in the future that would have been eligible for re-issuance under the 2017 Inducement Plan, were retired.

1 unchanged sentence

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 609,628 and 745,735 were outstanding as of June 30, 2020 and December 31, 2019, respectively.

The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which 609,628 and 745,735 were outstanding as of September 30, 2020 and December 31, 2019, respectively.

Stock options granted under the 2012 Plan vested over four years and expire after ten years .

Stock Option Valuation

The weighted average assumptions the Company used to estimate the fair value of stock options granted during the six months ended June 30, 2020 and 2019 were as follows:

Six Months Ended

The weighted average assumptions the Company used to estimate the fair value of stock options granted during the nine months ended September 30, 2020 and 2019 were as follows:

Nine Months Ended

September 30,

Risk-free interest rate

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Stock Options

The following table summarizes stock option activity for the six months ended June 30, 2020:

The following table summarizes stock option activity for the nine months ended September 30, 2020:

(In thousands, except share and per share data and years)

Outstanding as of December 31, 2019

Forfeited and cancelled

Outstanding as of June 30, 2020

Options vested and expected to vest as of June 30, 2020

Options exercisable as of June 30, 2020

The weighted average grant date fair value of stock options granted during the six months ended June 30, 2020 was $ 0.93 per share.

Outstanding as of September 30, 2020

Options vested and expected to vest as of September 30, 2020

Options exercisable as of September 30, 2020

The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2020 was $ 0.93 per share.

Restricted Stock Units

The following table summarizes RSU activity for the six months ended June 30, 2020:

The following table summarizes RSU activity for the nine months ended September 30, 2020:

(In thousands, except share and per share data)

Outstanding as of December 31, 2019

1 unchanged sentence

Forfeited and cancelled

Outstanding as of June 30, 2020

Outstanding as of September 30, 2020

Stock-Based Compensation

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

Cost of revenue

2 unchanged sentences

Total stock-based compensation expense

As of June 30, 2020, the Company had unrecognized stock-based compensation expense for stock options and RSUs of $ 8,195 and $ 8,604 , respectively, which is expected to be recognized over weighted average periods of 1.52 years and 2.13 years, respectively.

As of September 30, 2020, the Company had unrecognized stock-based compensation expense for stock options and RSUs of $ 5.6 million and $ 6.7 million, respectively, which is expected to be recognized over weighted average periods of 1.4 years and 2.0 years, respectively.

Net Loss per Share

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except for share and per share data)

Weighted average shares of common stock outstanding

2 unchanged sentences

Therefore, the weighted average number of shares of common stock outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same.

The following table presents potential shares of common stock excluded from the calculation of diluted net loss per share attributable to common stockholders for the three and six months ended June 30, 2020 and 2019.

All share amounts presented in the table below represent the total number outstanding as of June 30, 2020 and 2019.

The following table presents potential shares of common stock excluded from the calculation of diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2020 and 2019.

All share amounts presented in the table below represent the total number outstanding as of September 30, 2020 and 2019.

September 30,

Options to purchase common stock

11 unchanged sentences

Supplemental balance sheet information related to operating leases is as follows:

September 30,

(In thousands)

Operating Leases:

Accumulated amortization

Other current liabilities

Current portion of lease liabilities

Other liabilities

Total operating lease liabilities

Amortization expense related to operating lease right-of-use assets and liabilities was $ 253 and $ 143 for the three months ended June 30, 2020 and 2019, respectively, and $ 510 and $ 286 for the six months ended June 30, 2020 and 2019, respectively.

Amortization expense related to operating lease right-of-use assets and accretion of operating lease liabilities totaled $ 0.3 million for each of the three months ended September 30, 2020 and 2019, and $ 0.8 million and $ 0.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Finance Leases

1 unchanged sentence

The Company leases laboratory equipment which is used in its laboratory space in St.

Louis, Missouri under two finance lease financing arrangements which the Company entered into in August 2017 and October 2017.

The leases have terms which end in October 2020 and December 2020, respectively.

Louis, Missouri under two finance lease financing arrangements which the Company entered into in August 2017 and October 2017, and which terms ended in October 2020 and ends in December 2020, respectively.

Related Party Transactions

5 unchanged sentences

Reasons was not involved in the negotiation or execution of the agreement, but may be deemed to have an interest in the ongoing transactions based on his employment as an executive officer of Mallinckrodt plc.

As of June 30, 2020 and December 31, 2019, the Company had invoiced Mallinckrodt for $ 292 and $ 57 , respectively, under the master services agreement.

During the nine months ended September 30, 2020 and 2019, the Company invoiced Mallinckrodt for $ 0.3 million and $ 0.1 million, respectively, under

the master services agreement.

As of September 30, 2020, the Company had no outstanding accounts receivable balance from Mallinckrodt.

Reasons had no financial interest in these transactions.

2 unchanged sentences

In October 2019, the Company sold RHOFADE to EPI Health pursuant to an asset purchase agreement.

EPI Health agreed to pay the Company a high single-digit royalty calculated as a percentage of net sales on a country-by-country basis until the date that the patent rights related to RHOFADE have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country.

The Company recorded royalty income under the asset purchase agreement of $ 411 and $ 0 during the six months ended June 30, 2020 and 2019, respectively.

EPI Health has also agreed to pay the Company potential sales milestone payments of up to $ 20,000 in the aggregate upon the achievement of specified levels of net sales of products covered by the asset purchase agreement, and 25 % of any upfront, license, milestone, maintenance or fixed payment received by EPI Health in connection with any license or sublicense of the assets transferred in the disposition in any territory outside of the United States, subject to specified exceptions.

EPI Health agreed to pay the Company a high single-digit royalty calculated as a percentage of net sales on a country-by-country basis until the date that the patent rights related to RHOFADE have expired or, if later, ten years from the date of the first commercial sale of RHOFADE in such country.

The Company recorded royalty income under the asset purchase agreement of $ 0.5 million and $ 0 during the nine months ended September 30, 2020 and 2019, respectively.

Royalty income is included in other revenue on the condensed consolidated statements of operations and comprehensive loss.

EPI Health has also agreed to pay the Company potential sales milestone payments of up to $ 20.0 million in the aggregate upon the achievement of specified levels of net sales of products covered by the asset purchase agreement, and 25 % of any upfront, license, milestone, maintenance or fixed payment received by EPI Health in connection with any license or sublicense of the assets transferred in the disposition in any territory outside of the United States, subject to specified exceptions.

Agreement and Plan of Merger – Confluence

In August 2017, the Company entered into an Agreement and Plan of Merger, pursuant to which it acquired Confluence (the “Confluence Agreement”).

In November 2018, the Company achieved a development milestone specified in the Confluence Agreement, as a result of which the Company paid the former Confluence equity holders $ 2,500 in cash and issued them 253,208 shares of its common stock with a fair value of $ 2,200 .

Under the Confluence Agreement, the Company also agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $ 75,000 based upon the achievement of specified regulatory and commercial milestones.

In November 2018, the Company achieved a development milestone specified in the Confluence Agreement, as a result of which the Company paid the former Confluence equity holders $ 2.5 million in cash and issued them 253,208 shares of its common stock with a fair value of $ 2.2 million.

Under the Confluence Agreement, the Company also agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $ 75.0 million based upon the achievement of specified regulatory and commercial milestones.

In addition, the Company agreed to pay the former Confluence equity holders 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.

3 unchanged sentences

(“Rigel”) for the development and commercialization of products containing two specified JAK inhibitors, which the Company refers to as ATI-501 and ATI-502.

Under the agreement, the Company agreed to make aggregate payments of up to $ 80,000 upon the achievement of specified development milestones.

In September 2019, the Company made a milestone payment of $ 4,000 to Rigel upon the achievement of a specified development milestone.

Under the agreement, the Company agreed to make aggregate payments of up to $ 80.0 million upon the achievement of specified development milestones.

In September 2019, the Company made a milestone payment of $ 4.0 million to Rigel upon the achievement of a specified development milestone.

With respect to any products the Company commercializes under the agreement, the Company will pay Rigel quarterly tiered royalties on its annual net sales of each product at a high single-digit percentage of annual net sales, subject to specified reductions, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified countries under specified circumstances, ten years from the first commercial sale of such product.

In connection with an amendment of the agreement with Rigel in October 2019, the Company paid Rigel an amendment fee of $ 1,500 in three installments of $ 500 in each of January 2020, April 2020 and July 2020.

In addition, the parties modified certain other development milestones, and the Company agreed to increase the potential payments payable upon the achievement of such milestones from $ 10,000 to $ 10,500 in the aggregate.

The Company did not record a federal or state income tax benefit for losses incurred during the six months ended June 30, 2020 and 2019 due to the Company’s conclusion that a valuation allowance was required for those periods.

In connection with an amendment of the agreement with Rigel in October 2019, the Company paid Rigel an amendment fee of $ 1.5 million in three installments of $ 0.5 million in each of January 2020, April 2020 and July 2020.

The Company did not record a federal or state income tax benefit for losses incurred during the nine months ended September 30, 2020 and 2019 due to the Company’s conclusion that a valuation allowance was required for those periods.

Discontinued Operations

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

Product sales, net

5 unchanged sentences

General and administrative

Intangible asset impairment

Amortization of definite-lived intangible

1 unchanged sentence

Loss from discontinued operations

Other expense, net

Net loss from discontinued operations

Net loss from discontinued operations per share, basic and diluted

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

Total product sales, net

The following table presents information related to assets and liabilities reported as discontinued operations in the Company’s condensed consolidated balance sheet:

September 30,

(In thousands)

Accounts receivable, net

3 unchanged sentences

Discontinued operations - current liabilities

The Company relied on Allergan Sales, LLC (“Allergan”) to distribute RHOFADE on its behalf during 2019 pursuant to the terms of a transition services agreement.

Accounts receivable, net as of December 31, 2019 related to amounts invoiced by Allergan for sales of RHOFADE.

The following table presents certain non-cash items related to discontinued operations, which are included in the Company’s condensed consolidated statement of cash flows:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

Depreciation and amortization

Stock-based compensation expense

Intangible asset impairment charge

Loss on disposal of property and equipment

Total non-cash items

The Company relied on Allergan Sales, LLC (“Allergan”) to distribute RHOFADE on its behalf pursuant to the terms of a transition services agreement.

Accounts receivable, net as of June 30, 2020 and December 31, 2019 included $ 0 and $ 4,966 , respectively, related to amounts invoiced by Allergan for sales of RHOFADE.

In addition, during the three months ended June 30, 2020, in accordance with the asset purchase agreement with EPI Health (see Note 13 for additional information), the Company received cash from Allergan related to sales of RHOFADE that occurred after the date the Company sold RHOFADE to EPI Health.

Accordingly, the Company had $ 4,950 payable to EPI Health, which is included in accrued expenses on the Company’s condensed consolidated balance sheet as of June 30, 2020.

Segment Information

5 unchanged sentences

The Company does not report balance sheet information by segment since it is not reviewed by the chief operating decision maker, and all of the Company’s tangible assets are held in the United States.

The Company’s results of operations by segment for the three and six months ended June 30, 2020 and 2019 are summarized in the tables below:

Three Months Ended June 30, 2020

The Company’s results of operations by segment for the three and nine months ended September 30, 2020 and 2019 are summarized in the tables below:

(In thousands)

Three Months Ended September 30, 2020

Total revenue

4 unchanged sentences

Loss from discontinued operations

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Total revenue

2 unchanged sentences

General and administrative

Goodwill impairment

Loss from operations

Loss from discontinued operations

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Total revenue

4 unchanged sentences

Loss from discontinued operations

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Total revenue

6 unchanged sentences

Intersegment Revenue

Revenue for the contract research segment included $ 4,022 and $ 6,846 for services performed on behalf of the therapeutics segment for the six months ended June 30, 2020 and 2019, respectively.

Revenue for the contract research segment included $ 1.7 million and $ 2.0 million for services performed on behalf of the therapeutics segment for the three months ended September 30, 2020 and 2019, respectively, and $ 5.7 million and $ 8.8 million for the nine months ended September 30, 2020 and 2019, respectively.

All intersegment revenue has been eliminated in the Company’s condensed consolidated statement of operations.

4 unchanged sentences

District Court for the Southern District of New York against the Company and certain of its executive officers.

The complaint alleges that the defendants violated federal securities laws by, among other things, failing to disclose an alleged likelihood that regulators would scrutinize advertising materials related to ESKATA and find that the materials minimized the risks or overstated the efficacy of the product.

that the materials minimized the risks or overstated the efficacy of the product.

The complaint seeks unspecified compensatory damages on behalf of Rosi and all other persons and entities that purchased or otherwise acquired the Company’s securities between May 8, 2018 and June 20, 2019.

8 unchanged sentences

The Company and the other defendants dispute plaintiffs’ claims in the Consolidated Securities Action and intend to defend the matter vigorously.

At this time, the Company cannot reasonably predict the outcome or estimate potential losses, if any, that could result from this matter.

Stockholder Derivative Action

9 unchanged sentences

Derivative Litigation (the “Consolidated Derivative Action”) and directed that future derivative cases filed in or transferred to the court arising out of substantially the same transactions or events be similarly consolidated.

Thereafter, on January 11, 2020, the court stayed – subject to certain conditions – all deadlines in the Consolidated Derivative Action pending resolution of the defendants’ anticipated motion to dismiss the Consolidated Securities Action.

Thereafter, on January 11, 2020, the court stayed – subject to certain conditions – all deadlines in the Consolidated Derivative Action pending resolution of the defendants’ then-anticipated motion to dismiss the Consolidated Securities Action.

The defendants dispute plaintiffs’ claims in the Consolidated Derivative Action and intend to defend the matter vigorously.

At this time, the Company cannot reasonably predict the outcome or estimate potential losses, if any, that could result from this matter.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements