What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-25 compared with 2020-02-25 · 394 added, 479 removed, 579 unchanged (60% of the section changed)

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Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Stockholders’

Equity for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018

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We have audited the accompanying consolidated balance sheets of Aclaris Therapeutics, Inc.

and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, of stockholders’

equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Fair Value of Contingent Consideration Liability

As described in Notes 2 and 4 to the consolidated financial statements, 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.

Management evaluates fair value estimates of contingent consideration liabilities on a quarterly basis.

Management 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 to its present value using a risk-adjusted rate of return.

Management estimates the fair value of the contingent consideration liability for regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payments to their present values using a credit-risk-adjusted interest rate.

Changes in the fair value of the contingent consideration are recorded as income or expense in the Company’s consolidated statement of operations and comprehensive loss.

Significant assumptions used in management’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.

As of and for the year ended December 31, 2020, management recorded a contingent consideration liability of $4.1 million and expense of $2.4 million.

The principal considerations for our determination that performing procedures relating to the fair value of the contingent consideration liability is a critical audit matter are the significant judgment by management when developing the fair value estimate, which in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating the significant assumptions related to the probability of success of both achieving regulatory milestones and commencing commercialization.

Also, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, testing management’s process for developing the fair value of the contingent consideration liability and evaluating the reasonableness of the valuation model and assumptions related to the probability of success of both achieving regulatory milestones and commencing commercialization.

Evaluating management’s assumptions related to the probability of success of both achieving regulatory milestones and commencing commercialization involved assessing whether the assumptions used by management were reasonable considering the agreements associated with the transaction and the consistency with industry studies and the stage of product development.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s valuation model.

/s/ PricewaterhouseCoopers LLP

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February 25, 2021

We have served as the Company’s auditor since 2015.

ACLARIS THERAPEUTICS, INC.

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Current assets:

Cash, cash equivalents and restricted cash

Cash and cash equivalents

Restricted cash

Marketable securities

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Intangible assets

Discontinued operations - non-current assets

Liabilities and Stockholders’

Liabilities and Stockholders’ Equity

Current liabilities:

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Other liabilities

Long-term debt

Long-term debt, net

Contingent consideration

Deferred tax liability

Discontinued operations - non-current liabilities

Total liabilities

Stockholders’

Commitments and contingencies (Note 20)

Stockholders’ Equity:

Preferred stock, $ 0.00001 par value;

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45,109,314 and 41,485,638 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively

Additional paid‑in capital

Accumulated other comprehensive loss

Accumulated deficit

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

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(In thousands, except share and per share data)

Product sales, net

Contract research

Other revenue

Total revenue, net

Total revenue

Costs and expenses:

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Research and development

Sales and marketing

General and administrative

Goodwill impairment

Amortization of definite-lived intangible

Total costs and expenses

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Other income (expense), net

Loss from continuing operations before income taxes

Income tax benefit

Loss from continuing operations

Loss from discontinued operations

Loss before income taxes

Income (loss) from discontinued operations, net of tax

Net loss per share, basic and diluted

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Unrealized gain (loss) on marketable securities, net of tax of $ 0

Foreign currency translation adjustments

Total other comprehensive income

Foreign currency translation adjustment

Total other comprehensive income (loss)

Comprehensive loss

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ACLARIS THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

Paid‑in

Comprehensive

Stockholders’

Balance at December 31, 2017

Issuance of common stock under the at-the-market sales agreement, net of offering costs of $691

Issuance of common stock in connection with public offering, net of offering costs of $ 6,669

Issuance of common stock in connection with the acquisition of Confluence

Exercise of stock options and vesting of RSUs

Unrealized loss on marketable securities

Issuance of common stock in connection with the Confluence development milestone

Exercise of stock options and vesting of restricted stock units

Unrealized gain on marketable securities

Foreign currency translation adjustment

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Balance at December 31, 2018

Issuance of common stock in connection with public offering, net of offering costs of $6,669

Issuance of common stock in connection with the Confluence development milestone

Exercise of stock options and vesting of RSUs

Exercise of stock options and vesting of restricted stock units

Unrealized gain on marketable securities

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Balance at December 31, 2019

Exercise of stock options and vesting of RSUs

Unrealized gain on marketable securities

Exercise of stock options and vesting of restricted stock units

Issuance of common stock in connection with an equity purchase agreement, net of offering costs of $ 168

Fair value of warrants issued in connection with debt financing

Unrealized loss on marketable securities

Foreign currency translation adjustment

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Disposition of RHOFADE

Acquisition of Confluence, net of cash acquired

Purchases of marketable securities

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:

Proceeds from issuance of common stock in connection with public offering, net of issuance costs

Proceeds from issuance of common stock under the at-the-market sales agreement, net of issuance costs

Proceeds from debt financing, net of issuance costs

Proceeds from issuance of common stock in connection with an equity purchase agreement, net of issuance costs

Proceeds from debt financing (including warrants), net of issuance costs

Repayment of debt

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Finance lease payments

Proceeds from the exercise of employee stock options

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and cash equivalents

Deferred issuance costs

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

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

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Additions to property and equipment included in accounts payable

Operating lease asset recorded as a result of new accounting standard

Fair value of stock issued in connection with Confluence development milestone

Fair value of warrants issued in connection with debt financing

Property and equipment obtained pursuant to finance lease financing arrangements

Fair value of stock issued in connection with Confluence acquisition

Fair value of stock issued in connection with Confluence development milestone

Offering costs included in accounts payable

Operating lease asset recorded as a result of new accounting standard

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Organization and Nature of Business

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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., and in September 2018, Vixen was dissolved.

In August 2017, Confluence Life Sciences, Inc., now known as Aclaris Life Sciences, Inc.

(“Confluence”) was acquired by Aclaris Therapeutics, Inc.

(“Vixen”) became a wholly-owned subsidiary of Aclaris Therapeutics, Inc., and in September 2018, Vixen was dissolved.

In August 2017, Confluence Life Sciences, Inc.

(now known as Aclaris Life Sciences, Inc.) (“Confluence”) was acquired by Aclaris Therapeutics, Inc.

and became a wholly-owned subsidiary thereof.

Aclaris Therapeutics, Inc., ATIL, Vixen and Confluence are referred to collectively as the “Company”.

The Company is a physician-led biopharmaceutical company focused on immuno-inflammatory diseases.

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.

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

The Company plans 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 (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), the Company’s non-marketed FDA-approved product.

The Company’s 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 December 31, 2019, the Company had cash, cash equivalents and marketable securities of $75,015 and an accumulated deficit of $453,527.

Aclaris Therapeutics, Inc., ATIL, Vixen and Confluence are referred to collectively as the “Company.” The Company is a clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases.

In addition to developing its novel drug candidates, the Company is pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize its novel drug candidates.

As of December 31, 2020, the Company had cash, cash equivalents and marketable securities of $ 54.1 million and an accumulated deficit of $ 504.5 million.

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

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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, including clinical and preclinical testing of the Company’s drug candidates, will require significant additional financing.

The future viability of the Company is dependent on its ability to successfully develop its drug candidates and to generate revenue from identifying and consummating transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize its development assets or to raise additional capital to finance its operations.

The Company expects that it will require additional capital to complete the clinical development of ATI-450, 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.

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 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 consolidated financial statements.

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.

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, some of which are occurring through termination dates into 2020, which will result in lower operating costs in the future.

In October 2019, the Company sold the worldwide rights to RHOFADE to further its focus on its development programs and improve cash flow.

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 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 actively seek partners for its drug candidates and commercial products.

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 $ 11.0 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”).

As of December 31, 2020, the Company had sold 2,111,170 shares of common stock to Lincoln Park under the Purchase Agreement for net proceeds of $ 7.7 million.

The Company did not sell any additional shares prior to terminating the Purchase Agreement in January 2021 in connection with a public offering of common stock in which it sold 6,306,271 shares of its common stock for net proceeds of $ 103.5 million.

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) identification of 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, 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 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 potential 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 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 does not believe that substantial doubt exists about its ability to continue as a going concern.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).

The consolidated financial statements of the Company include the accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, Confluence, ATIL and Vixen.

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”).

The consolidated financial statements of the Company include the accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, Confluence, ATIL, and Vixen (for periods prior to its dissolution in 2018).

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 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 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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The Company also announced a plan to terminate 86 employees (see Note 17).

The accompanying consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to the Company’s commercial products as discontinued operations (see Note 18).

The accompanying consolidated financial statements are generally presented in conformity with the Company’s historical format, even in certain situations where reclassifications to discontinued operations have resulted in $0 values being presented.

The Company believes this format provides comparability with its previously filed financial statements.

Use of Estimates

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

Actual results could differ from the Company’s estimates.

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.

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.

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:

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Product Sales, net

The Company sold RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) and ESKATA (hydrogen peroxide) Topical Solution, 40% (w/w) (“ESKATA”) during the years ended December 31, 2019 and 2018 to a limited number of wholesalers in the United States (collectively, its “Customers”).

These Customers subsequently resold the Company’s products to pharmacies and health care providers.

In addition to distribution agreements with Customers, the Company entered into, or was subject to, arrangements with third-party payors, including pharmacy benefit managers and government agencies, as well as group purchasing organizations (“GPOs”), which provided for government mandated or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s commercial products.

The Company sold RHOFADE and ESKATA (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), its non-marketed product approved by the U.S.

Food and Drug Administration, during the years ended December 31, 2019 and 2018 to a limited number of wholesalers in the United States (collectively, its “Customers”).

These Customers subsequently resold the Company’s products to pharmacies and health care providers.

The Company discontinued selling ESKATA in August 2019.

The Company sold the worldwide rights to RHOFADE in October 2019 (see Note 3).

Product sales, net has been reclassified to discontinued operations for all periods presented.

Product sales, net is presented in discontinued operations for all periods presented.

The Company recognized revenue from product sales at the point the Customer obtained control of the product, which generally occurred upon delivery.

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The Company estimated amounts for co-pay assistance based upon the number of claims and the cost per claim that the Company expected to receive associated with product that had been sold to Customers but remained in the distribution channel at the end of each reporting period.

Product Returns - Consistent with industry practice, the Company has a product returns policy for RHOFADE that provides Customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date.

The right of return lapses upon shipment of the product to a patient.

The Company recorded an estimate for the amount of its products which may be returned as a reduction of revenue in the period the related revenue was recognized.

The Company’s estimate for product returns was based upon available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.

The Company recorded an estimate for the amount of its products which may be returned as a reduction of revenue in the period the related revenue

was recognized.

The Company’s estimate for product returns was based upon available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.

There is no return liability associated with sales of ESKATA as the Company had a no returns policy for ESKATA when it was commercialized.

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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.

The Company has also received revenue from grants under the Small Business Innovation Research program of the National Institutes of Health (“NIH”).

During the year ended December 31, 2018, the Company had two active grants from NIH which were related to early-stage research.

As of December 31, 2019, there were no remaining funds available to the Company under the grants.

The Company recognizes revenue related to grants as amounts become reimbursable under each grant, which is generally when research is performed, and the related costs are incurred.

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.

The Company also received revenue from grants under the Small Business Innovation Research program of the National Institutes of Health, or NIH.

During the year ended December 31, 2018, the Company had two active grants from NIH related to early-stage research.

There are no remaining funds available under the grants.

Other Revenue

Licenses of Intellectual Property –

The Company recognizes revenue received from non-refundable, upfront fees related to the licensing of intellectual property when the intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the customer is able to use and benefit from the license.

Milestone Payments –

At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.

Licenses of Intellectual Property – The Company recognizes revenue received from non-refundable, upfront fees related to the licensing of intellectual property when the intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the customer is able to use and benefit from the license.

Milestone Payments – At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.

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.

Cash, Cash Equivalents and Restricted Cash

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 December 31, 2019 included $1,750 placed in escrow pursuant to the asset purchase agreement with EPI Health, LLC (“EPI Health”) (see Note 3).

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

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

Total cash, cash equivalents and restricted cash as shown in the consolidated statements of cash flows as of December 31, 2020 and 2019 includes $ 0 and $ 1.8 million, respectively, of restricted cash, consisting of funds in escrow pursuant to the asset purchase agreement with EPI Health, LLC (“EPI Health”) (see Note 15).

Marketable Securities

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The Company classifies all of its marketable securities as available-for-sale securities.

The Company’s marketable securities are measured and reported at fair value using quoted prices in markets that are not active for identical or similar securities.

Unrealized gains and losses are reported as a separate component of stockholders’

The cost of securities sold is determined on a specific identification basis, and realized gains and losses, if any, are included in other income, net within the consolidated statement of operations and comprehensive loss.

If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate the extent to which the decline is “other than temporary”

and reduces the investment to fair value through a charge to the statement of operations and comprehensive loss.

Inventory includes the third-party cost of manufacturing and assembly of finished product, quality control and other overhead costs.

Inventory is stated at the lower of cost or net realizable value.

Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon assumptions about future demand and market conditions.

The Company had $0 and $791 of inventory as of December 31, 2019 and 2018, respectively, which was comprised primarily of finished goods and has been reclassified to discontinued operations for all periods presented.

The Company’s marketable securities are measured and reported at fair value using either quoted prices in active markets for identical securities or quoted prices in markets that are not active for identical or similar securities.

Unrealized gains and losses are reported as a separate component of stockholders’ equity.

The cost of securities sold is determined on a specific identification basis, and realized gains and losses, if any, are included in other income (expense), net within the consolidated statement of operations and comprehensive loss.

If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate the extent to which the decline is “other than

temporary” and reduces the investment to fair value through a charge to the statement of operations and comprehensive loss.

Property and Equipment

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Expenditures for repairs and maintenance of assets are charged to expense as incurred.

Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.

Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from continuing operations.

Impairment of Long-Lived Assets

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

Definite-lived intangible assets consist of a drug discovery platform the Company acquired through the acquisition of Confluence, and prior to the disposition in 2019, also included the intellectual property rights related to RHOFADE.

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.

Prior to the disposition in 2019, definite-lived intangible assets also included the intellectual property rights related to RHOFADE.

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

IPR&D assets are considered indefinite-lived until the completion or abandonment of the associated research and development efforts.

The cost of IPR&D is either amortized over its estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned.

Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

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During the year ended December 31, 2019, the Company performed an impairment analysis of the RHOFADE intangible asset due to its decision to discontinue commercial operations and actively seek a commercialization partner for RHOFADE.

The Company’s impairment analysis, which primarily utilized a market-participant’s indication of fair value, resulted in a fair value for the RHOFADE intangible asset which was less than its carrying value.

As a result, the Company recorded an impairment charge of $27,638, which is included in discontinued operations on the consolidated statement of operations, to adjust the carrying value of the RHOFADE intangible asset to its net realizable value (see Note 3).

As a result, the Company recorded an impairment charge of $ 27.6 million, which is included in discontinued operations on the consolidated statement of operations, to adjust the carrying value of the RHOFADE intangible asset to its net realizable value (see Note 3).

During the years ended December 31, 2020 and 2019, the Company did not record an IPR&D impairment.

Goodwill is not amortized, but rather is subject to testing for impairment at least annually, which the Company performs either during the fourth quarter or when indicators of an impairment are present.

The Company considers each of its operating segments, therapeutics and contract research, to be a reporting unit since this is the lowest level for which discrete financial information is available.

The Company attributed the full amount of the goodwill acquired with Confluence, or $18,504, to the therapeutics segment.

The annual impairment test performed by the Company is a qualitative assessment based upon current facts and circumstances related to operations of the therapeutics segment.

The impairment test performed by the Company is a qualitative assessment based upon the then current facts and circumstances related to operations of the reporting unit.

If the qualitative assessment indicates an impairment may be present, the Company would perform the required quantitative analysis and an impairment charge would be recognized to the extent that the estimated fair value of the reporting unit is less than its carrying amount.

However, any loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.

During the year ended December 31, 2019, the Company performed an impairment analysis due to the decline in its stock price, which was considered a triggering event to evaluate goodwill for impairment.

The Company’s impairment analysis, using a market approach, noted that its stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value.

As a result, the Company recorded an impairment charge of $18,504, the full balance of goodwill.

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.

During the year ended December 31, 2019, the Company performed an impairment analysis due to a decline in its stock price, which was considered a triggering event to evaluate goodwill for impairment.

As a result, the Company recorded an impairment charge of $ 18.5 million.

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.

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The Company includes estimates for any residual value guarantee obligations under its leases in lease liabilities recorded on its consolidated balance sheet.

Right-of-use assets are included in other assets and property and equipment, net on the Company’s consolidated balance sheet for operating and finance leases, respectively.

Obligations for lease payments are included in current portion of lease liabilities and other liabilities on the Company’s consolidated balance sheet for both operating and finance leases.

Right-of-use assets are included in other assets and property and equipment, net on the Company’s consolidated balance sheet for operating and finance leases, respectively.

Obligations for lease payments are included in current portion of lease liabilities and other liabilities on the Company’s consolidated balance sheet for both operating and finance leases.

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 consolidated statement of operations.

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 credit-risk-adjusted interest rate.

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 risk-adjusted rate of return.

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 quarterly 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 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 consolidated statement of operations and comprehensive loss.

Research and Development Costs

Research and development costs are expensed as incurred.

Research and development expenses include salaries, stock-based compensation and benefits of employees, fees paid under licensing agreements, fees paid under a third party assignment agreement and other operational costs related to the Company’s research and development activities, including depreciation expenses and the cost of research and development contracts which the Company has entered into with outside vendors to conduct both preclinical studies and clinical trials.

Significant judgment and estimates are made in determining the amount of research and development costs recognized in each reporting period.

The Company analyzes the progress of its preclinical studies and clinical trials, completion of milestone events, invoices received and contracted costs when estimating research and development costs.

Actual results could differ from the Company’s estimates.

The Company’s historical estimates for research and development costs have not been materially different from the actual costs.

Actual results could differ from the Company’s estimates.

The Company’s historical estimates for research and development costs have not been materially different from the actual costs.

Stock-Based Compensation

The Company measures the compensation expense of stock-based awards granted to employees and directors using the grant date fair value of the award.

The Company has issued stock options and restricted stock unit (“RSU”) awards with service-based vesting conditions, as well as with performance-based vesting conditions.

The Company has not issued awards that include market-based conditions.

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The impact of forfeitures is recognized in the period in which they occur.

The Company initially measures the compensation expense of stock-based awards granted to consultants using the grant date fair value of the award.

Compensation expense is recognized over the period during which services are rendered by such consultants.

At the end of each financial reporting period prior to completion of services being rendered, the compensation expense related to these awards is remeasured using the then current fair value of the Company’s common stock for RSUs, or based upon updated assumptions in the Black-Scholes option pricing model for stock option awards.

The Company classifies stock-based compensation expense in its statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’

service payments are classified.

The Company measures the compensation expense of stock-based awards granted to consultants using the grant date fair value of the award.

The Company recognizes compensation expense over the period during which services are rendered by the consultant.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

The Company estimates its expected stock volatility based on the historical volatility of a set of peer companies, which are publicly traded, and expects to continue to do so until it has adequate historical data regarding the volatility of its own publicly-traded stock price.

The expected term of the Company’s stock options has been determined using the “simplified”

method for awards that qualify as “plain vanilla”

The expected term of the Company’s stock options has been determined using the “simplified” method for awards that qualify as “plain vanilla” options.

The expected term of stock options granted to non-employees is equal to the contractual term of the option award.

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The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the future.

Prior to the Company’s initial public offering

in October 2015 (“IPO”), the Company valued its common stock using a hybrid method to estimate its enterprise value.

The hybrid method used was a probability-weighted expected return method which was a scenario-based methodology that estimated the fair value of the Company’s common stock based upon an analysis of future values for the Company assuming various outcomes.

The hybrid method used calculated equity values using an option pricing model in one or more of scenarios, and also considered the rights of each class of stock.

The fair value of each RSU is measured using the closing price of the Company’s common stock on the date of grant.

All patent related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure.

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The reporting currency of the Company is the U.S.

The functional currency of ATIL, the Company’s wholly-owned subsidiary, is the British Pound.

Assets and liabilities of ATIL are translated into U.S.

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Revenues and expenses are translated at average exchange rates during the reporting period.

Gains and losses arising from the translation of assets and liabilities are included as a component of accumulated other comprehensive loss within the Company’s consolidated balance sheet.

Gains and losses resulting from foreign currency transactions are reflected within the Company’s consolidated statement of operations.

Gains and losses arising from the translation of assets and liabilities are included as a component of accumulated other comprehensive loss within the Company’s consolidated balance sheet.

Gains and losses resulting from foreign currency transactions are reflected within the Company’s consolidated statement of operations.

The Company has not utilized foreign currency hedging strategies to mitigate the effect of its foreign currency exposure.

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns.

Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

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Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’

equity (deficit) that result from transactions and economic events other than those with stockholders.

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders.

Comprehensive loss is comprised of net loss, foreign currency translation adjustments and unrealized gains (losses) on marketable securities.

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Basic net loss per share is computed using the weighted average number of common shares outstanding during the period.

Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period, plus the weighted average number of potential shares of common stock from the assumed exercise of stock options, and the assumed vesting of RSUs and restricted stock granted by the Company upon its formation, if dilutive.

Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period, plus the weighted average number of potential shares of common stock from the assumed exercise of stock options and warrants and the assumed vesting of RSUs, if dilutive.

Since the Company was in a net loss position, basic and diluted net loss per share was the same for each of the periods presented.

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Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1 —

Quoted prices in active markets for identical assets or liabilities.

Level 2 —

Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

Level 3 —

Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s cash equivalents, marketable securities and contingent consideration are carried at fair value, determined according to the fair value hierarchy described above.

The carrying value of the Company’s accounts payable and accrued expenses approximate fair value due to the short-term nature of these liabilities.

● Level 1 — Quoted prices in active markets for identical assets or liabilities.

● Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

● Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s cash equivalents, marketable securities and contingent consideration are carried at fair value, determined according to the fair value hierarchy described above.

The carrying value of the Company’s accounts payable and accrued expenses approximate fair value due to the short-term nature of these liabilities.

The carrying value of the Company’s debt approximates fair value due to the debt bearing a variable interest rate which is reflective of current market rates.

Concentration of Credit Risk and of Significant Suppliers

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Operating segments are components of a company for which separate financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources.

The Company has two reportable segments, therapeutics and contract research, which are primarily based on its operating segments and operating results used to assess performance.

The therapeutics segment is focused on immuno-inflammatory diseases.

The contract research segment is focused on providing laboratory services to pharmaceutical and biotech companies looking to supplement their research and development efforts with difficult-to-execute specialty skills and programs.

The Company does not allocate assets by segment.

The Company has two reportable segments, therapeutics and contract research.

The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases.

The contract research segment earns revenue from the provision of laboratory services to clients through Confluence, the Company’s wholly-owned subsidiary.

Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis.

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.

Recently Issued Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, Collaborative Arrangements (Topic 808):

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.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40).

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 will be 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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The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements.

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 will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years.

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

In June 2018, the FASB issued 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.

The Company adopted the provisions of this standard as of January 1, 2019, the impact of which on its consolidated financial statements was not significant.

The Company adopted this standard as of January 1, 2019, the impact of which on its consolidated financial statements was not significant.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

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Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods.

The amendments in ASU 2016-02 must be applied to all leases existing at the date a company initially applies the standard.

The Company adopted the new standard as of January 1, 2019, using the effective date as the date of its initial application, and used the modified retrospective approach.

In addition, the Company elected the practical expedients permitted under the transition guidance within the new standard which, among other things, allowed the Company to carry forward the historical lease identification and classification.

The Company also elected the practical expedient to not separate lease and non-lease components, as well as the short-term lease practical expedient which allowed the Company

to not capitalize leases with terms less than 12 months that do not contain a reasonably certain purchase option.

The Company’s consolidated financial statements have not been restated, and disclosures required by the new standard have not been provided, for periods before January 1, 2019.

The adoption of ASU 2016-02 resulted in the Company recording additional assets and liabilities of $2,132 and $2,317, respectively, upon adoption on January 1, 2019.

The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statement of operations or cash flows.

The adoption of ASU 2016-02 resulted in the Company recording additional assets and liabilities of $ 2.1 million and $ 2.3 million, respectively, upon adoption on January 1, 2019.

The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statement of operations and comprehensive loss or cash flows.

Disposition - Asset Purchase Agreement with EPI Health, LLC

In October 2019, the Company entered into an asset purchase agreement with EPI Health pursuant to which the Company sold the worldwide rights to RHOFADE, which included the assignment of certain licenses for related intellectual property assets (the “Disposition”).

Pursuant to the asset purchase agreement , EPI Health paid the Company an upfront payment of $35,000 ($1,750 of which was placed in escrow) and $200 for inventory.

In addition, EPI Health has agreed to pay the Company (i) potential sales milestone payments of up to $20,000 in the aggregate upon the achievement of specified levels of net sales of products as defined in the asset purchase agreement, (ii) a specified high single-digit royalty calculated as a percentage of net sales, on a product-by-product and country-by-country basis, until the date that the patent rights related to a particular product, such as RHOFADE, have expired, provided, that with respect to sales of RHOFADE in any territory outside of the United States, such royalty shall be paid until the date that the RHOFADE patent rights in the particular country have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country and (iii) 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.

Finally, EPI Health agreed to assume the Company’s obligation to pay specified royalties and milestone payments under its existing agreements with Allergan Sales, LLC (“Allergan”), Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc.

Acquisition –

Asset Purchase Agreement with Allergan Sales, LLC

In November 2018, the Company acquired the worldwide rights to RHOFADE, which included an exclusive license to certain intellectual property, from Allergan pursuant to an asset purchase agreement.

The Company paid Allergan upfront cash consideration of $66,100.

In addition, the Company agreed to pay Allergan specified royalties, ranging from a mid-single digit percentage to a mid-teen percentage of net sales, subject to specified reductions, limitations and other adjustments, on a country-by-country basis until the date that the patent rights related RHOFADE have expired or, if later, November 30, 2028.

The Company also agreed to assume the obligation to pay specified royalties and milestone payments under agreements with Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc.

The acquisition of RHOFADE was accounted for as an asset acquisition in accordance with FASB ASC 805-50, rather than as a business combination.

As an asset acquisition, the cost to acquire a group of assets is allocated to the individual assets acquired or liabilities assumed based on their relative fair values.

The relative fair values of identifiable tangible and intangible assets assumed from the acquisition of RHOFADE were based on estimates of fair value using assumptions that the Company believes were reasonable.

The Company accounted for the acquisition of RHOFADE as an asset acquisition because substantially all of the fair value of the assets acquired was concentrated in a single asset, the RHOFADE product rights.

ASC 805-10-55-5A, which sets forth a screen test, provides that if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the assets acquired are not considered to be a business.

Pursuant to the asset purchase agreement, EPI Health paid the Company an upfront payment of $ 35.2 million.

In addition, EPI Health agreed to pay the Company (i) potential sales milestone payments of up to $ 20.0 million in the aggregate upon the achievement of specified levels of net sales of products as defined in the asset purchase agreement, (ii) a specified high single-digit royalty calculated as a percentage of net sales, on a product-by-product and country-by-country basis, until the date that the patent rights related to a particular product, such as RHOFADE, have expired, provided, that with respect to sales of RHOFADE in any territory outside of the United States, such royalty shall be paid until the date that the RHOFADE patent rights in the particular country have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country and (iii) 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.

Finally, EPI Health agreed to assume the Company’s obligation to pay specified royalties and milestone payments under certain agreements with third parties.

Acquisition – Asset Purchase Agreement with Allergan Sales, LLC

In November 2018, the Company acquired the worldwide rights to RHOFADE, which included an exclusive license to certain intellectual property, from Allergan Sales, LLC (“Allergan”) pursuant to an asset purchase agreement.

The acquisition of RHOFADE was accounted for as an asset acquisition in accordance with FASB ASC 805-50.

The following table summarizes the fair value of assets acquired in the acquisition of RHOFADE:

(In thousands)

Intangible assets, net

Total assets acquired

The fair value of finished goods inventory acquired was estimated using net selling price less the costs of disposal and a reasonable profit for the disposal efforts.

Raw material was valued at current replacement cost, which approximated the seller’s carrying value.

The intangible asset for the RHOFADE product rights was being amortized on a straight-line basis over a period of 10 years.

Fair Value of Financial Assets and Liabilities

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 basis, and indicate the level of the fair value hierarchy utilized to determine such fair values:

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:

December 31, 2020

(In thousands)

Cash equivalents

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December 31, 2019

(In thousands)

Cash equivalents

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Total liabilities

As of December 31, 2019 and 2018, the Company’s cash equivalents consisted of investments with maturities of less than three months and included a money market fund and commercial paper, which were valued based upon Level 1 inputs.

As of December 31, 2019 and 2018, the Company’s marketable securities consisted of investments with maturities of more than three months and included commercial paper, corporate debt and government obligations, which were valued based upon Level 2 inputs.

As of December 31, 2020 and 2019, the Company’s cash equivalents included a money market fund, which was valued based upon Level 1 inputs.

Cash equivalents as of December 31, 2020 also included commercial paper, which was valued based upon Level 2 inputs.

The Company’s marketable securities as of December 31, 2020 and 2019 included U.S.

government agency debt securities, commercial paper and asset-backed debt securities, which were valued based upon Level 2 inputs.

Marketable securities as of December 31, 2019 also included corporate 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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Quarterly, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of the quoted prices provided.

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.

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

During the years ended December 31, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3.

The change in acquisition-related contingent consideration of $734 during the year ended December 31, 2019 was the result of updates to the Company’s assumptions as a result of the filing of an Investigational New Drug Application (“IND”) for ATI-450 during the year ended December 31, 2019.

As of December 31, 2019 and 2018, the fair value of the Company’s available-for-sale marketable securities by type of security was as follows:

The increase in contingent consideration of $ 2.4 million during the year ended December 31, 2020 was primarily due to updates to the Company’s assumptions resulting from the successful completion of a Phase 1 clinical trial for ATI-450 and the submission and allowance of an Investigational New Drug Application (“IND”) for ATI-1777.

The change in acquisition-related contingent consideration of $ 0.7 million during the year ended December 31, 2019 was the result of updates to the Company’s assumptions as a result of the submission and allowance of an IND for ATI-450.

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

December 31, 2020

(In thousands)

Marketable securities:

Corporate debt securities

Commercial paper

Asset-backed securities

Asset-backed debt securities

government agency debt securities

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December 31, 2019

(In thousands)

Marketable securities:

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Commercial paper

Asset-backed securities

Asset-backed debt securities

government agency debt securities

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Property and equipment, net consisted of the following:

(In thousands)

Computer equipment

Finance lease right-of-use assets

Manufacturing equipment

Lab equipment

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Property and equipment, net

Depreciation expense was $1,511, $1,248 and $370 for the years ended December 31, 2019, 2018 and 2017, respectively.

Depreciation expense was $ 1.1 million, $ 1.5 million and $ 1.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Intangible Assets

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Accumulated Amortization

(In thousands, except years)

Other intangible assets

Total definite-lived intangible assets

Total intangible assets

Amortization expense was $75, $75 and $31 for the years ended December 31, 2019, 2018 and 2017 respectively.

Amortization expense was $ 75 thousand for each of the years ended December 31, 2020, 2019 and 2018.

As of December 31, 2020, estimated future amortization expense is as follows:

Year Ending December 31,

(In thousands)

Accrued Expenses

Accrued expenses consisted of the following:

(In thousands)

Employee compensation expenses

Research and development expenses

Professional fees

Total accrued expenses

Loan and Security Agreement –

Oxford Finance LLC

In October 2018, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Oxford Finance LLC, a Delaware limited liability company (“Oxford”).

The Loan Agreement provided for up to $65,000 in term loans (the “Term Loan Facility”).

Of the $65,000, the Company borrowed $30,000 in October 2018.

In October 2019, the Company repaid in full the $30,000 that was outstanding under the Loan Agreement, together with all accrued and unpaid interest and fees.

The Loan Agreement provided for interest only payments through November 2021, followed by 24 consecutive equal monthly payments of principal and interest in arrears starting on November 2021 and continuing through the maturity date of October 2023.

The Loan Agreement provided for an annual interest rate equal to the greater of (i) 8.35% and (ii) the 30-day U.S.

LIBOR rate plus 6.25%.

The Loan Agreement also provided for a final payment fee equal to 5.75% of the original principal amount of the term loans drawn under the Term Loan Facility.

The carrying value of the Loan Agreement approximated fair value because the interest rate was a floating rate based on the 30-day U.S.

LIBOR rate and was therefore reflective of market rates.

Stockholders’

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 $ 11.0 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”) (see Note 9).

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

The term loan repayment schedule provides for interest only payments beginning April 1, 2020 and continuing through March 1, 2022, followed by 24 consecutive equal monthly installments of principal, plus monthly payments of accrued interest, starting on April 1, 2022 and continuing through the maturity date of March 1, 2024.

All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.

The Loan and Security Agreement provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2 % and (ii) 6.75 %.

The Loan and Security Agreement includes a final payment fee equal to 5 % of the original principal amount borrowed.

The Company has the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3 % of the original principal amount borrowed for any prepayment on or prior to the first anniversary of March 30, 2020, (ii) 2 % of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of March 30, 2020 or (iii) 1 % of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.

Loan and Security Agreement – Oxford Finance LLC

In October 2018, the Company entered into a Loan and Security Agreement with Oxford Finance LLC.

The Loan and Security Agreement provided for up to $ 65.0 million in term loans, of which the Company borrowed $ 30.0 million in October 2018.

In October 2019, the Company repaid in full the $ 30.0 million that was outstanding under the Loan and Security Agreement, together with all accrued and unpaid interest and fees.

Stockholders’ Equity

Preferred Stock

As of December 31, 2019 and 2018, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock.

As of December 31, 2020 and 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 December 31, 2020 and 2019.

As of December 31, 2019 and 2018, 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.

As of December 31, 2020 and 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 December 31, 2020.

At-The-Market Facility

In November 2016, the Company entered into a sales agreement with Cowen and Company, LLC (“Cowen”), pursuant to which Cowen acted as an agent in connection with sales of the Company’s common stock from time to time under an “at-the-market”

equity facility.

In April 2017, the Company sold 635,000 shares of common stock at a weighted average price per share of $31.50, for aggregate gross proceeds of $20,003.

The Company incurred expenses of $691 in connection with the shares issued under the at-the-market sales agreement.

In October 2018, the Company terminated the at-the-market sales agreement with Cowen without having sold any additional shares of common stock.

August 2017 Public Offering

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, 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 offering.

In addition, the Company incurred expenses of $176 in connection with the offering.

The net offering proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $80,918.

October 2018 Public Offering

In October 2018, the Company entered into an underwriting agreement pursuant to which the Company issued and sold 9,941,750 shares of common stock under registration statements on Form S-3, including the underwriters’

full exercise of their option to purchase additional shares.

The shares of common stock were sold to the public at a price of $10.75 per share, for gross proceeds of $106,874.

The Company paid underwriting discounts and commissions of $6,412 to the underwriters in connection with the offering.

In addition, the Company incurred expenses of $257 in connection with the offering.

The net offering proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $100,205.

The shares of common stock were sold to the public at a price of $ 10.75 per share, for gross proceeds of $ 106.9 million.

The Company paid underwriting discounts and commissions of $ 6.4 million to the underwriters in connection with the offering.

In addition, the Company incurred expenses of $ 0.3 million in connection with the offering.

The net offering proceeds received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $ 100.2 million.

The Warrant issued to SVB in March 2020 had an initial exercise price of $ 0.956 per share, subject to adjustment as provided in the Warrant.

The Warrant became immediately exercisable in full upon the funding of the term loan facility.

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.

In January 2021, SVB net exercised the Warrant in full, and the Company issued to SVB 388,119 shares of common stock.

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

In August 2020, the Company entered into the Purchase Agreement with Lincoln Park which provided 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.

Through December 31, 2020, the Company sold 2,111,170 shares of its common stock to Lincoln Park under the Purchase Agreement for net proceeds of $ 7.7 million.

The Company terminated the Purchase Agreement in January 2021.

The Company did not sell any additional shares prior to terminating the Purchase Agreement in January 2021 in connection with the public offering of common stock described below (see Note 21).

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 rules, generally including individuals who were not previously an employee or director of the Company.

Under the terms of the 2017 Inducement Plan the Company was permitted to grant up to 1,000,000 shares of common stock pursuant to nonqualified stock options, stock appreciation rights, restricted stock awards, RSUs, and other stock awards.

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.

2015 Equity Incentive Plan

In September 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”), and the Company’s stockholders approved the 2015 Plan.

The 2015 Plan became effective in connection with the Company’s IPO.

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”).

In September 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”), and the Company’s stockholders approved the 2015 Plan.

The 2015 Plan became effective in connection with the Company’s initial public offering.

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 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 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.

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As of January 1, 2021, the number of shares of common stock that may be issued under the 2015 Plan was automatically increased by 1,804,372 shares.

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-stockholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules.

The Company had 443,000 stock options and 28,895 RSUs outstanding as of December 31, 2020 under the 2017 Inducement Plan.

2012 Equity Compensation Plan

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The Company granted a total of 1,140,524 stock options under the 2012 Plan, of which 549,561 and 745,735 were outstanding as of December 31, 2020 and 2019, 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 common shares as determined by the Company as of the date of grant.

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

Stock Option Valuation

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The following table summarizes stock option activity for the years ended December 31, 2020, 2019 and 2018:

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

Outstanding as of December 31, 2017

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Forfeited and cancelled

( 1,081,581 )

Outstanding as of December 31, 2019

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Options exercisable as of December 31, 2020

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 December 31, 2019.

The weighted average grant date fair value of stock options granted during the years ended December 31, 2020, 2019 and 2018 was $ 0.93 , $ 4.63 and $ 16.55 per share, respectively.

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The following table summarizes RSU activity for the years ended December 31, 2020, 2019 and 2018.

(In thousands, except share and per share data)

Outstanding as of December 31, 2017

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Outstanding as of December 31, 2019

( 1,804,429 )

Forfeited and cancelled

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Stock-based compensation expense included in total costs and expenses on the consolidated statement of operations included the following:

(In thousands)

Cost of revenue

Research and development

Sales and marketing

General and administrative

Total stock-based compensation expense

As of December 31, 2019, the Company had unrecognized stock‑based compensation expense for stock options and RSUs of $13,150 and $12,195, respectively, which is expected to be recognized over weighted average periods of 1.81 years and 2.35 years, respectively.

As of December 31, 2020, the Company had unrecognized stock-based compensation expense for stock options and RSUs of $ 4.2 million and $ 5.5 million, respectively, which is expected to be recognized over weighted average periods of 1.3 years and 1.8 years, respectively.

Net Loss per Share

Basic and diluted net loss per share is summarized in the following table:

Weighted average shares of common stock outstanding

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

Weighted average shares of common stock outstanding, basic and diluted

Net loss per share, basic and diluted

The Company’s potentially dilutive securities, which included stock options and RSUs, have been excluded from the computation of diluted net loss per share since the effect would be to reduce the net loss per share.

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

The Company’s potentially dilutive securities, which included stock options, RSUs and warrants, have been excluded from the computation of diluted net loss per share since the effect would be to reduce the net loss per share.

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 years ended December 31, 2020, 2019 and 2018.

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Total potential shares of common stock

The Company has operating leases for office space and laboratory facilities, and finance leases for its laboratory equipment.

As a result of the Company’s decision to actively seek partners for its commercial products (see Note 3), the Company terminated the finance leases for its fleet vehicles and recognized a loss on lease termination of $248 during the year ended December 31, 2019.

The Company has operating leases for office space and laboratory facilities, and had finance leases for its laboratory equipment.

As a result of the Company’s decision to actively seek partners for its commercial products, the

Company terminated the finance leases for its fleet vehicles and recognized a loss on lease termination of $ 0.2 million during the year ended December 31, 2019.

The components of lease expense were as follows:

(In thousands)

Operating lease expense

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Total finance lease expenses

Rent expense was $987, $886 and $946 for the years ended December 31, 2019, 2018 and 2017, respectively, which was recognized on a straight-line basis over the term of the lease.

Rent expense was $ 1.0 million, $ 1.0 million and $ 0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively, which was recognized on a straight-line basis over the term of the lease.

Operating Leases

Agreements for Office Space

In November 2017, the Company entered into a sublease agreement with Auxilium Pharmaceuticals, LLC (the “Sublandlord”) pursuant to which it subleases 33,019 square feet of office space for its headquarters in Wayne, Pennsylvania.

The Company has a sublease agreement with Auxilium Pharmaceuticals, LLC (the “Sublandlord”) pursuant to which it subleases 33,019 square feet of office space for its headquarters in Wayne, Pennsylvania.

The sublease has a term that runs through October 2023.

If for any reason the lease between Chesterbrook

Partners, LP (“Landlord”) and Sublandlord is terminated or expires prior to October 2023, the Company’s sublease will automatically terminate.

If for any reason the lease between Chesterbrook Partners, LP (“Landlord”) and Sublandlord is terminated or expires prior to October 2023, the Company’s sublease will automatically terminate.

In December 2020, the Company entered into a sub-sublease agreement under which it sub-subleased 8,115 square feet.

The sub-sublease term runs concurrent with the original sublease agreement.

In February 2019, the Company entered into a sublease agreement with a third party for 20,433 square feet of office and laboratory space in St.

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

(In thousands)

Operating Leases:

Accumulated amortization

Operating lease right-of-use assets

Other current liabilities

Current portion of lease liabilities

Other liabilities

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Laboratory Equipment

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.

The Company leased laboratory equipment which it 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, and which terms ended in October 2020 and December 2020, respectively.

Fleet Vehicles

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

(In thousands)

Finance Leases:

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Property and equipment, net

Other current liabilities

Current portion of lease liabilities

Other liabilities

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Supplemental information related to operating and finance leases is as follows:

(In thousands, except for years and percentages)

Supplemental Cash Flow Lease Information:

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Future minimum lease payments under operating and finance lease agreements are as follows:

(In thousands)

Year Ending December 31,

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Total lease liability

The undiscounted lease payments presented in the table above are consistent with the future minimum lease payments disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 18, 2019 under the prior lease guidance, with the exception of the undiscounted lease payments related to leased vehicles, which were returned during the year ended December 31, 2019.

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) was enacted on December 22, 2017 and became effective January 1, 2018.

The TCJA made significant changes to U.S.

tax law, including lowering U.S.

corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modifying the taxation of other income and expense items.

The TCJA reduced the U.S.

corporate income tax rate from 35% to 21%, effective January 1, 2018.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

As a result of the reduction in the U.S.

corporate income tax rate from 35% to 21% under the TCJA, the Company revalued its deferred tax liabilities, net as of December 31, 2017.

The impact of revaluation of the deferred tax liabilities, net was $18,507 of income tax expense, which was more than offset by a reduction in the valuation allowance of $20,344 resulting in a net impact of a $1,837 tax benefit.

The net tax benefit recorded was primarily the result of tax law changes which impacted the deferred tax liability the Company recorded for

IPR&D related to the acquisition of Confluence.

Under GAAP, IPR&D is an indefinite-lived intangible that is capitalized on the balance sheet, but which does not have a cost basis under U.S.

The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits.

The Company did not have consolidated accumulated earnings and profits attributable to its foreign subsidiary;

accordingly, the Company did not record any income tax expense related to the transition tax.

Due to the timing of the enactment of the TCJA, the Staff of the SEC issued SAB 118 which provided a measurement period to report the impact of the TCJA.

During the measurement period, provisional amounts for the effects of the law were able to be recorded to the extent a reasonable estimate can be made.

To the extent that all information necessary is not available, prepared or analyzed, companies were able to recognize provisional estimated amounts for a period of up to one year following enactment of the TCJA.

The Company completed its analysis during the year ended December 31, 2018, and made no adjustments as a result of TCJA under SAB 118.

During the years ended December 31, 2020, 2019 and 2018, the Company did not record an income tax benefit for net operating losses incurred in each year due to the uncertainty of realizing a benefit from those items.

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Year Ended December 31,

(In thousands)

Foreign operations

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A reconciliation of the U.S.

federal statutory income tax rate to the Company’s effective income tax rate is as follows:

Year Ended December 31,

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Permanent differences

Foreign rate differential

Change in deferred tax asset valuation allowance

Impact of U.S.

Effective income tax rate

Deferred tax liabilities, net consisted of the following:

(In thousands)

Deferred tax assets:

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Capitalized research and development expense

Stock‑based compensation expense

Accrued compensation

Lease liabilities

Total deferred tax assets

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Intangible asset

Section 481(a) adjustment

Right-to-use assets

Total deferred tax liabilities

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Deferred tax liabilities, net

As of December 31, 2019, the Company had federal and state net operating loss (“NOL”) carryforwards of $326,113 and $338,822, respectively, which will begin to expire in 2032.

As of December 31, 2019, the Company also had federal research and development tax credit carryforwards of $7,323 which will begin to expire in 2032, and state research and development tax credit carryforwards of $118 which will begin to expire in 2022.

The Company also has $1,675 of loss carryforwards in the United Kingdom which can be carried forward indefinitely.

As of December 31, 2020, the Company had federal and state net operating loss (“NOL”) carryforwards of $ 367.6 million and $ 369.6 million, respectively, which will begin to expire in 2032.

As of December 31, 2020, the Company also had federal research and development tax credit carryforwards of $ 8.6 million which will begin to expire in 2032, and state research and development tax credit carryforwards of $ 0.1 million which will begin to expire in 2022.

The Company also has $ 0.2 million of loss carryforwards in the United Kingdom which can be carried forward indefinitely.

Utilization of the NOLs and research and development tax credit carryforwards in the United States may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that may have occurred previously or that could occur in the future.

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In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period.

The Company has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through December 31, 2018.

Although the Company has experienced Section 382 ownership changes since 2012, the Company has concluded that it should have sufficient ability to utilize NOLs accumulated during the periods tested.

The Company has not yet determined if a Section 382 ownership change has occurred during the year ended December 31, 2019, or for Confluence prior to the acquisition.

In addition, the Company may experience ownership changes in the future as a result of subsequent shifts in its stock ownership, some of which may be outside of the Company’s control.

The Company has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through July 20, 2020.

Although the Company has experienced Section 382 ownership changes since 2012, the Company has concluded that it should have sufficient ability to utilize NOLs accumulated during the periods

The Company has not yet determined if a Section 382 ownership change has occurred after July 20, 2020.

In addition, the Company may experience ownership changes in the future as a result of subsequent shifts in its stock ownership, some of which may be outside of the Company’s control.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets.

4 unchanged sentences

Year Ended December 31,

(In thousands)

Valuation allowance at beginning of year

Decreases recorded as benefit to income tax provision

Increases resulting from the acquisition of Confluence

Decreases recorded to opening balance sheet

Increases recorded to income tax provision

Valuation allowance as of end of year

During the year ended December 31, 2017, the Company recorded uncertain tax benefits related to tax positions from the acquired Confluence business, which were settled during the year ended December 31, 2018.

The following table summarizes the changes in the Company’s unrecognized tax benefits:

Year ended December 31,

Unrecognized tax benefits at beginning of year

Increases related to prior year tax provisions

Decreases related to prior year tax provisions

Increases related to current year tax provisions

Unrecognized tax benefits as of end of year

The total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were $0 as of December 31, 2019 and 2018.

The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statement of operations and comprehensive loss.

During each of the years ended December 31, 2019, 2018 and 2017, the Company recognized expense (benefit) of $0, $0 and $3, respectively, related to interest and penalties.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates.

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There are currently no pending income tax examinations.

The Company’s tax years are still open under statute from 2012 to the present.

The Company’s tax years are still open under statute from 2017 to the present.

All open years may be examined to the extent that tax credit or NOLs are used in future periods.

The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.

Related Party Transactions

NeXeption, Inc.

In August 2013, the Company entered into a sublease agreement with NeXeption, Inc.

("NeXeption"), which was subsequently assigned to NST Consulting, LLC, a wholly-owned subsidiary of NST, LLC.

In November 2017, the Company terminated the sublease with NST Consulting, LLC effective March 31, 2018.

The Company paid $590 to NST Consulting, LLC, which amount represented accelerated rent payments.

The Company recorded a one-time charge of $506 in the year ended December 31, 2017 which is included in general and administrative expenses in the consolidated statement of operations.

Total payments made under the sublease during the years ended December 31, 2019, 2018 and 2017, were $0, $570 and $318, respectively.

In February 2014, the Company entered into a services agreement with NST, LLC (the “NST Services Agreement”), pursuant to which NST, LLC provided certain pharmaceutical development, management and other administrative services to the Company.

The NST Services agreement was subsequently assigned by NST, LLC to NST Consulting, LLC.

Under the same agreement the Company also provided services to another company under common control with the Company and NST Consulting, LLC and was reimbursed by NST, LLC for those services.

In November 2017, the Company terminated the NST Services Agreement effective December 31, 2017.

During the years ended December 31, 2019, 2018 and 2017, the Company incurred $0, $0 and $208 of net expenses for services provided by NST Consulting, LLC under the NST Services Agreement.

The Company had no amounts payable to NST Consulting, LLC under the NST Services Agreement as of either December 31, 2019 or 2018.

Stephen Tullman, the former chairman of the Company’s board of directors, is an executive officer of NeXeption and is also the manager of NST Consulting, LLC and NST, LLC, and certain of the Company’s executive officers are and have been members of entities affiliated with NST, LLC.

Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc.

In November 2018, the Company acquired RHOFADE, including an exclusive license to certain intellectual property for RHOFADE as well as additional intellectual property, from Allergan pursuant to the terms of an asset purchase agreement.

Pursuant to the asset purchase agreement, the Company agreed to assume the obligation to pay specified royalties and milestone payments under agreements with Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc.

Certain current and former members of the Company’s management team and board of directors are former holders of equity interests in Vicept Therapeutics, Inc.

and Aspect Pharmaceuticals, LLC .

In such capacities, these individuals may have been entitled to receive a portion of the potential future payments payable by the Company.

In October 2019, the Company sold the worldwide rights to RHOFADE to EPI Health, who agreed to assume the Company’s obligation to pay the royalties and milestone payments under its existing agreements with Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc.

The Company incurred an aggregate expense of $611, $51 and $0 related to royalty payments under these agreements during the years ended December 31, 2019, 2018 and 2017, respectively (see Note 3).

Mallinckrodt plc

In April 2018, Bryan Reasons was appointed to the Company’s board of directors.

Subsequently, in March 2019, Mr.

Reasons became the Chief Financial Officer of Mallinckrodt plc.

Reasons joining Mallinckrodt plc, the Company entered into a master services agreement with Mallinckrodt, LLC, a subsidiary of Mallinckrodt plc, in November 2018, pursuant to which Confluence provides laboratory services to Mallinckrodt in the ordinary course of business.

Reasons joining Mallinckrodt plc, in November 2018 the Company entered into a master services agreement with a subsidiary of Mallinckrodt plc pursuant to which Confluence provides laboratory services to the subsidiary (“Mallinckrodt”) in the ordinary course of business.

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.

During the years ended December 31, 2019 and 2018, the Company recorded revenue of $97 and $0, respectively, from Mallinckrodt under the master services agreement.

Reasons had no financial interest in this transaction.

During the years ended December 31, 2020 and 2019, the Company invoiced Mallinckrodt for $ 0.3 million and $ 0.1 million, respectively, under the master services agreement.

As of December 31, 2020 and 2019, the Company had $ 0 of outstanding accounts receivable balances from Mallinckrodt.

Reasons had no financial interest in these transactions.

Agreements Related to Intellectual Property

Asset Purchase Agreement –

Allergan Sales, LLC

Asset Purchase Agreement – EPI Health, LLC

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, 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 $ 0.7 million and $ 0 during the years ended December 31, 2020 and 2019, respectively.

Royalty income is included in other revenue on the 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.

Asset Purchase Agreement – Allergan Sales, LLC

In November 2018, the Company acquired RHOFADE from Allergan pursuant to an asset purchase agreement.

The Company agreed to pay Allergan specified royalties, ranging from a mid-single digit percentage to a mid-teen percentage of net sales, subject to specified reductions, limitations and other adjustments, on a country-by-country basis until the date that the patent rights related to RHOFADE have expired or, if later, November 30, 2028.

The Company incurred royalties earned by Allergan under the asset purchase agreement of $1,359 , $114 and $0 during the years ended December 31, 2019, 2018 and 2017, respectively.

The Company also agreed to pay Allergan a one-time payment of $5,000 upon the achievement of a specified development milestone related to the potential development of an additional dermatology product.

In October 2019, the Company sold the worldwide rights to RHOFADE to EPI Health, which agreed to assume the obligation to pay the royalties and milestone payments under the asset purchase agreement (see Note 3).

The Company incurred royalties earned by Allergan under the asset purchase agreement of $ 0 , $ 1.4 million and $ 0.1 million during the years ended December 31, 2020, 2019 and 2018, respectively.

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 which was comprised of $2,500 in cash and 253,208 shares of its common stock with a fair value of $2,200.

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 set forth in the Confluence Agreement.

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, a development milestone specified in the Confluence Agreement was achieved, as a result of which the Company paid the former Confluence equity holders $ 2.5 million in cash and issued 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 set forth in the Confluence Agreement.

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.

In addition, if the Company sells, licenses or transfers any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, the Company will be obligated to pay the former Confluence equity holders a portion of any incremental consideration (in excess of the development and milestone payments described above) received from such sale, license or transfer in specified circumstances.

License and Collaboration Agreement –

Rigel Pharmaceuticals, Inc.

In addition to the payments described above, if the Company sells, licenses or transfers any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, the Company will be obligated to pay the former Confluence equity holders a portion of any consideration received from such sale, license or transfer in specified circumstances.

License and Collaboration Agreement – Rigel Pharmaceuticals, Inc.

In August 2015, the Company entered into an exclusive, worldwide license and collaboration agreement with Rigel Pharmaceuticals, Inc.

(“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.

During the year ended December 31, 2019, the Company made a milestone payment of $4,000 to Rigel upon the achievement of a specified development milestone which is included in research and development expenses on the Company’s consolidated statement of operations.

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 the amendment of the agreement in October 2019, the Company agreed to pay Rigel an amendment fee of $1,500 in three installments of $500 in January 2020, April 2020 and July 2020, which is included in accrued expenses on the Company’s consolidated balance sheet as of December 31, 2019.

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.

License, Development and Commercialization Agreement - Cipher Pharmaceuticals Inc.

In April 2018, the Company entered into an exclusive license agreement with Cipher Pharmaceuticals Inc.

(“Cipher”) for the rights to obtain regulatory approval of and commercialize A-101 40% Topical Solution , which the Company marketed under the brand name ESKATA in the United States, in Canada for the treatment of seborrheic keratosis .

The Company received an upfront payment of $1,000 upon signing of the agreement with Cipher and $500 upon the achievement of a specified regulatory milestone, both of which are included in other revenue in the Company’s consolidated statement of operations for the year ended December 31, 2018.

In September 2019, the Company and Cipher mutually terminated the exclusive license agreement.

Assignment Agreement - Estate of Mickey Miller and

Finder’s Services Agreement - KPT Consulting, LLC

In August 2012, the Company entered into an assignment agreement with the Estate of Mickey Miller (the “Miller Estate”) under which the Company acquired some of the intellectual property rights covering A-101 45% Topical Solution and ESKATA.

In connection with obtaining the assignment of the intellectual property from the Miller Estate, the Company also entered into a separate finder’s services agreement with KPT Consulting, LLC.

Under the terms of the finder’s services agreement, the Company made a milestone payment of $1,000 upon the achievement of a specified regulatory milestone in April 2017, and a milestone payment of $1,500 upon the achievement of a specified commercial milestone in May 2018.

The payments were recorded as general and administrative expenses in the Company’s consolidated statement of operations.

Under the finder’s services agreement the Company is obligated to make an additional milestone payment of $3,000 upon the achievement of a specified commercial milestone.

Under each of the assignment agreement and the finder’s services agreement, the Company is obligated to pay royalties on sales of ESKATA and any related products, at low single-digit percentages of net sales, subject to reduction in specified circumstances.

The Company incurred an aggregate expense of $14, $112 and $0 related to royalty payments under these agreements during the years ended December 31, 2019, 2018 and 2017, respectively.

Both agreements will terminate upon the expiration of the last pending, viable patent claim of the patents acquired under the assignment agreement, but no sooner than 15 years from the effective date of the agreements.

Stock Purchase Agreement - Vixen Pharmaceuticals, Inc.

and License Agreement - Columbia University

In March 2016, the Company entered into a stock purchase agreement (the “Vixen Agreement”) with Vixen, JAK1, LLC, JAK2, LLC and JAK3, LLC (together, the “Selling Stockholders”) and Shareholder Representative Services LLC, solely in its capacity as the representative of the Selling Stockholders.

Pursuant to the Vixen Agreement, the Company acquired all shares of Vixen’s capital stock from the Selling Stockholders.

Following the acquisition of Vixen, Vixen became a wholly-owned subsidiary of the Company.

The Company is obligated to make annual payments of $100 each year through March 2022, with such amounts being creditable against specified future payments that may be paid under the Vixen Agreement.

The Company is obligated to make aggregate payments of up to $18,000 to the Selling Stockholders upon the achievement of specified pre-commercialization milestones for three products covered by the Vixen patent rights in the United States, the European Union and Japan, and aggregate payments of up to $22,500 upon the achievement of specified commercial milestones for products covered by the Vixen patent rights.

With respect to any covered products that the Company commercializes under the Vixen Agreement, the Company is obligated to pay low single-digit royalties on 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.

If the Company sublicenses any of Vixen’s patent rights and know-how acquired pursuant to the Vixen Agreement, the Company will be obligated to pay a portion of any consideration the Company receives from such sublicenses in specified circumstances.

As a result of the transaction with Vixen, the Company became party to the Exclusive License Agreement, by and between Vixen and the Trustees of Columbia University in the City of New York (“Columbia”), dated as of December 31, 2015 (as amended, the “License Agreement”).

Under the License Agreement, the Company is obligated to pay Columbia an annual license fee of $10, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under the License Agreement.

The Company is also obligated to pay up to an aggregate of $11,600 upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments.

If the Company sublicenses any of Columbia’s patent rights and know-how acquired pursuant to the License Agreement, it will be obligated to pay Columbia a portion of any consideration received from such sublicenses in specified circumstances.

The royalties, as determined on a country-by-country and product-by-product basis, are payable until the date that all of the patent rights for that product have expired, the expiration of any market exclusivity period granted by a regulatory body or, in specified circumstances, ten years from the first commercial sale of such product.

The License Agreement terminates on the date of expiration of all royalty obligations thereunder unless earlier terminated by either party for a

material breach, subject to a specified cure period.

The Company may also terminate the License Agreement without cause at any time upon advance written notice to Columbia.

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

During the year ended December 31, 2019, the Company made a milestone payment of $ 4.0 million to Rigel upon the achievement of a specified development milestone which is included in research and development expenses on the Company’s consolidated statement of operations.

In connection with an amendment of the agreement with Rigel in October 2019, the Company paid Rigel an amendment fee of $ 1.5 million during the year ended December 31, 2020.

Retirement Savings Plan

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This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis.

Company contributions to the plan may be made at the discretion of the Company’s board of directors.

The Company has elected to match 100% of employee contributions to the 401(k) Plan up to 4% of the employee’s earnings, subject to certain limitations.

Company contributions under the 401(k) Plan were $740, $662, and $270 for the years ended December 31, 2019, 2018 and 2017, respectively.

Company contributions to the plan may be made at the discretion of the Company’s board of directors.

The Company has elected to match 100 % of employee contributions to the 401(k) Plan up to 4 % of the employee’s earnings, subject to certain limitations.

Company contributions under the 401(k) Plan were $ 0.4 million, $ 0.7 million and $ 0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Restructuring Charges

In September 2019, the Company announced the completion of a strategic review and its decision to refocus on its immuno-inflammatory development programs and to actively seek partners for its commercial products.

As a result, the Company terminated 63 employees (“terminated employees”) and gave notice to an additional 23 employees (“noticed employees”) who were asked to provide transition services through termination dates ranging between 4 to 10 months from the date notice was given.

The terminated employees were entitled to receive cash severance payments as well as cash payments in lieu of sixty days’

notice required by the Worker Adjustment and Retraining Notification Act (the “WARN Act”).

The noticed employees are entitled to receive one-time cash severance payments which are not contingent upon providing additional services to the Company.

In addition, certain noticed employees can earn retention bonuses if they continue to be employed by the Company through certain termination dates.

The Company recorded a restructuring charge for the one-time severance and WARN Act payments, which was triggered immediately upon either terminating or giving notice to the impacted employees.

The Company is expensing the cost of retention bonuses for noticed employees over their respective service terms.

During the year ended December 31, 2019, the Company recognized aggregate expenses of $2,748 and made payments of $2,316 related to termination benefits for employees explained above.

The Company committed to paying up to $339 for contingent retention bonuses, of which $208 was accrued, as of December 31, 2019.

The terminated employees were entitled to receive cash severance payments as well as cash payments in lieu of sixty days’ notice required by the Worker Adjustment and Retraining Notification Act (the “WARN Act”).

The noticed employees were entitled to receive one-time cash severance payments which were not contingent upon providing additional services to the Company.

In addition, certain noticed employees earned retention bonuses if they continued to be employed by the Company through certain termination dates.

The Company recorded a restructuring charge for the one-time severance and WARN Act payments, which was triggered immediately upon either

terminating or giving notice to the impacted employees.

The Company expensed the cost of retention bonuses for noticed employees over their respective service terms.

During the year ended December 31, 2020, the Company recognized aggregate expenses of $ 0.1 million and made payments of $ 0.3 million related to termination benefits for employees.

During the year ended December 31, 2019, the Company recognized aggregate expenses of $ 2.7 million and made payments of $ 2.3 million related to termination benefits for employees.

Discontinued Operations

The components of loss from discontinued operations as reported in the Company’s consolidated statement of operations were as follows:

(In thousands, except share and per share data)

Product sales, net

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Total costs and expenses

Loss from discontinued operations

Income (loss) from operations

Other income, net

Net loss from discontinued operations

Net loss from discontinued operations per share, basic and diluted

Income (loss) from discontinued operations before income taxes

Income tax benefit

Net income (loss) from discontinued operations

Net income (loss) from discontinued operations per share, basic and diluted

Weighted average common shares outstanding, basic and diluted

The following table presents the details of product sales, net included in discontinued operations:

(In thousands)

Total product sales, net

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

The Company recorded $ 0.4 million of RHOFADE product sales, net during the year ended December 31, 2020 due to a reversal of previously accrued product sales-related reserves.

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

(In thousands)

Accounts receivable, net

Prepaid expenses and other current assets

Intangible asset held for sale

Discontinued operations - current assets

Property and equipment, net

Intangible assets, net of accumulated amortization

Discontinued operations - non-current assets

Accounts payable

Accrued expenses

Current portion of lease liabilities

Discontinued operations - current liabilities

Other liabilities

Discontinued operations - non- current liabilities

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

The Company relied on Allergan to distribute RHOFADE on its behalf pursuant to the terms of a transition services agreement.

Accounts receivable, net as of December 31, 2019 included $ 5.0 million 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 consolidated statement of cash flows:

(In thousands)

Depreciation and amortization

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Gain on sale of RHOFADE

Non-cash items, net

The Company relied on Allergan to distribute RHOFADE on its behalf pursuant to the terms of a transition services agreement.

Accounts receivable, net as of December 31, 2019 and 2018 included $4,966 and $3,838, respectively, related to amounts invoiced by Allergan for sales of RHOFADE.

As a result of the Company’s decision to actively seek partners for its commercial products, the Company terminated the finance leases for its fleet vehicles and recognized a loss on lease termination of $248 in the year ended December 31, 2019, which is included in other income, net in the Company’s consolidated statement of operations.

Total non-cash items

As a result of the Company’s decision to actively seek partners for its commercial products, the Company terminated the finance leases for its fleet vehicles and recognized a loss on lease termination of $ 0.2 million in the year ended December 31, 2019, which is included in other income, net in the Company’s consolidated statement of operations.

The Company’s impairment analysis, which primarily utilized a third-party indication of fair value, resulted in a fair value for the RHOFADE intangible asset which was less than its carrying value.

As a result, the Company recorded an impairment charge of $27,638 to adjust the carrying value of the RHOFADE intangible asset to its net realizable value.

The Company’s impairment analysis, which primarily utilized a third-party indication of fair value, resulted in a fair value for the RHOFADE intangible asset which was less than its carrying value.

As a result, the Company recorded an impairment charge of $ 27.6 million to adjust the carrying value of the RHOFADE intangible asset to its net realizable value.

Segment Information

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The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases.

The contract research segment earns revenue from the provision of laboratory services to clients through Confluence, the Company’s wholly-owned subsidiary.

Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis.

Corporate and other includes general and administrative expenses as well as eliminations of intercompany transactions.

The Company’s results of operations by segment for the years ended December 31, 2019, 2018 and 2017 are summarized in the tables below:

The Company’s results of operations by segment for the years ended December 31, 2020, 2019 and 2018 are summarized in the tables below:

(In thousands)

Year Ended December 31, 2020

Cost of revenue (excludes amortization)

Total revenue

Cost of revenue

Research and development

Sales and marketing

General and administrative

Goodwill impairment

Loss from operations

Loss from discontinued operations

Income (loss) from discontinued operations

Year Ended December 31, 2019

Total revenue

Cost of revenue

Research and development

Sales and marketing

General and administrative

Goodwill impairment

Loss from operations

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Research and development

Sales and marketing

General and administrative

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Intersegment Revenue

Revenue for the contract research segment included $12,597, $8,484 and $1,519 for services performed on behalf of the therapeutics segment for the years ended December 31, 2019, 2018 and 2017, respectively.

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

Revenue for the contract research segment included $ 7.5 million, $ 12.6 million and $ 8.5 million for services performed on behalf of the therapeutics segment for the years ended December 31, 2020, 2019 and 2018, respectively.

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

Legal Proceedings

Securities Class Action

On July 30, 2019, plaintiff Linda Rosi (“Rosi”) filed a putative class action complaint captioned Rosi v.

Aclaris Therapeutics, Inc., et al.

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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.

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.

On September 5, 2019, an additional plaintiff, Robert Fulcher (“Fulcher”), filed a substantially identical putative class action complaint captioned Fulcher v.

Aclaris Therapeutics, Inc., et al.

in the same court against the same defendants.

On November 6, 2019, the court consolidated the Rosi and Fulcher actions (together, the “Consolidated Securities Action”) and appointed Fulcher “lead plaintiff”

for the putative class.

On January 24, 2020, Fulcher filed a consolidated amended complaint in the Consolidated Securities Action, naming two additional executive officers as defendants, extending the putative class period to August 12, 2019, and adding allegations concerning, among other things, alleged statements and omissions throughout the putative class period concerning ESKATA’s risks, tolerability and effectiveness.

The defendants’

deadline to answer, move against or otherwise respond to the consolidated amended complaint is March 27, 2020.

The Company and the other defendants dispute plaintiffs’

claims in the Consolidated Securities Action and intend to defend the matter vigorously.

On November 6, 2019, the court consolidated the Rosi and Fulcher actions (together, the “Consolidated Securities Action”) and appointed Fulcher “lead plaintiff” for the putative class.

The defendants filed a motion to dismiss the consolidated

amended complaint on April 17, 2020.

Fulcher filed an opposition to the defendants’ motion on June 15, 2020, and the defendants filed a reply to such opposition on August 4, 2020.

Oral argument on the pending motion to dismiss is scheduled for February 25, 2021.

The motion remains under judicial consideration.

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 potential loss, if any, that could result from this matter.

Stockholder Derivative Action

On November 15, 2019, plaintiff Keith Allred (“Allred”) filed a derivative stockholder complaint captioned Allred v.

Walker et al.

District Court for the Southern District of New York against certain of the Company’s directors and executive officers.

The complaint alleges that the defendants, among other things, breached their fiduciary duties as directors and/or officers in connection with the claims alleged in the Consolidated Securities Action.

The complaint seeks, among other things, unspecified compensatory damages on behalf of the Company.

On November 25, 2019, an additional plaintiff, Bruce Brown (“Brown”), filed a substantially identical complaint captioned Brown v.

Walker et al.

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On December 12, 2019, the court consolidated the Allred and Brown actions under the caption In re Aclaris Therapeutics, Inc.

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.

The defendants dispute plaintiffs’

claims in the Consolidated Derivative Action and intend to defend the matter vigorously.

Patent Infringement

On October 8, 2019, the Company, together with Allergan, Inc., filed a patent infringement lawsuit in the U.S.

District Court for the District of Delaware against Taro Pharmaceuticals, Inc.

(“Taro”), related to an Abbreviated New Drug Application (“ANDA”) that Taro filed with the FDA to market a generic version of RHOFADE.

The lawsuit claims infringement of U.S.

7,812,049, 8,420,688, 8,815,929, 9,974,773 and 10,335,391, which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, for RHOFADE.

The Company received a Paragraph IV Notice Letter from Taro dated August 28, 2019, advising that Taro had submitted an ANDA to the FDA seeking approval from the FDA to manufacture and market a generic version of RHOFADE prior to the expiration of the Orange Book-listed patents.

Under the agreement with EPI Health for the purchase of RHOFADE, EPI Health agreed to file a motion to be substituted for the Company as a plaintiff party and has agreed to reimburse the Company for its reasonable fees and expenses so long as it remained a plaintiff party.

On December 3, 2019, EPI Health was substituted for the Company as a plaintiff party.

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.

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 potential loss, if any, that could result from this matter.

Product Liability Lawsuit

On December 18, 2020, plaintiff Daurie Mancini filed an amended complaint under the caption Daurie Mancini v.

Aclaris Therapeutics, Inc.

et al in the Superior Court of New Jersey Ocean County against the Company and certain third parties alleging injuries as a result of the plaintiff’s alleged treatment with ESKATA in 2019.

The amended complaint seeks unspecified compensatory and punitive damages.

On January 19, 2021, the Company’s deadline to answer, move against or otherwise respond to the amended complaint was extended until March 15, 2021.

The Company disputes plaintiff’s claims and intends to defend the matter vigorously.

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

Subsequent Events

January 2021 Public Offering

In January 2021, the Company closed a public offering in which it sold 6,306,271 shares of common stock at a price to the public of $ 17.50 per share, for aggregate gross proceeds of $ 110.4 million.

The Company paid underwriting discounts and commissions of $ 6.6 million, and also incurred expenses of $ 0.3 million in connection with the offering.

As a result, the net offering proceeds received by the Company, after deducting underwriting discounts, commissions and offering expenses, were $ 103.5 million.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data