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Item 8. Financial Statements and Supplementary Data

2022-02-24 compared with 2021-02-25 · 230 added, 299 removed, 674 unchanged (44% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Aclaris Therapeutics, Inc.

Opinion on the Financial Statements

To the Board of Directors and Stockholders of Aclaris Therapeutics, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

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

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, 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, 2021, 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.

We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting 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.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

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

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

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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.

Fair Value of the Contingent Consideration Liability related to zunsemetinib

As described in Notes 2 and 4 to the consolidated financial statements, the Company’s contingent consideration balance was $28.4 million as of December 31, 2021, of which a significant portion of the liability relates to zunsemetinib.

Management initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated future projected sales levels and the discount rates applied to calculate the present value of the potential payments.

Management evaluates fair value estimates of the contingent consideration liability on a quarterly basis using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payment.

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.

Significant assumptions used in management’s estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development and review of existing clinical data.

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

In addition, 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.

These procedures included testing the effectiveness of controls relating to management’s contingent consideration evaluation, including controls over the valuation of the Company’s contingent consideration liability related to zunsemetinib.

These procedures also included, among others, (i) testing management’s process for developing the fair value of the contingent consideration liability, (ii) evaluating the appropriateness of the probability-weighted expected payment and Monte Carlo simulation valuation models, (iii) testing the completeness and accuracy of the underlying data used in the models, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the probability of achieving regulatory milestones and commencing commercialization.

Evaluating management’s assumptions related to the probability of achieving regulatory milestones and commencing commercialization involved evaluating whether the assumptions were reasonable considering the agreements associated with the transaction as well as the consistency with industry information, the stage of product development and whether the assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s probability-weighted expected payment and Monte Carlo simulation valuation models.

/s/ PricewaterhouseCoopers LLP

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Cash and cash equivalents

Restricted cash

Marketable securities

Short-term marketable securities

Accounts receivable, net

Prepaid expenses and other current assets

Discontinued operations - current assets

Total current assets

Marketable securities

Property and equipment, net

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General and administrative

Revaluation of contingent consideration

Goodwill impairment

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Loss from operations

Other income (expense), net

Other expense, net

Loss from continuing operations before income taxes

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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 restricted stock units

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Balance at December 31, 2019

Exercise of stock options and vesting of restricted stock units

Unrealized gain on marketable securities

Issuance of common stock in connection with 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

Unrealized loss on marketable securities

Foreign currency translation adjustment

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Balance at December 31, 2020

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

Issuance of common stock in connection with exercise of stock options and warrants and vesting of restricted stock units

Issuance of common stock in connection with public offering, net of offering costs of $ 15,910

Unrealized loss on marketable securities

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Stock-based compensation expense

Change in fair value of contingent consideration

Revaluation of contingent consideration

Goodwill impairment charge

Intangible asset impairment charge

Payment of Confluence development milestone

Gain on sale of RHOFADE

Loss on extinguishment of debt

Deferred taxes

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Purchases of property and equipment

Acquisition of RHOFADE

Disposition of RHOFADE

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Proceeds from sales and maturities of marketable securities

Net cash provided by investing activities

Net cash provided by (used in) 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 in connection with public offerings, net of issuance costs

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

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Repayment of debt

Payment of Confluence development milestone

Restricted stock unit employee tax withholdings

Finance lease payments

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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 development milestone

Offering costs included in accounts payable

Operating lease asset recorded as a result of new accounting standard

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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.

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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 clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases.

Aclaris Therapeutics, Inc., ATIL 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.

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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 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 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) 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.

The Company will require additional capital to complete the clinical development of zunsemetinib (ATI-450), ATI-1777 and ATI-2138, 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.

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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.

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

All intercompany transactions have been eliminated.

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.

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

Significant estimates and assumptions reflected in these financial statements include, but are not limited to, research and development expenses, contingent consideration and the valuation of stock-based awards.

Significant estimates and assumptions reflected in these financial statements include, but are not limited to, contingent consideration and the valuation of stock-based awards.

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

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

Product Sales, net

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.

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 discontinued selling ESKATA in August 2019.

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

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.

The Company also included estimates of variable consideration in the same period revenue was recognized.

Components of variable consideration include trade discounts and allowances, product returns, government rebates, discounts and rebates, other incentives such as patient co-pay assistance, and other fee for service amounts.

Variable consideration was recorded on the consolidated balance sheet as either a reduction of accounts receivable, if payable to a Customer, or as a current liability, if payable to a third party other than a Customer.

The Company considered all relevant information when estimating variable consideration such as contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.

The amount of net revenue that can be recognized is constrained by estimates of variable consideration which are included in the transaction price.

Payment terms with Customers did not exceed one year and, therefore, the Company did not account for a financing component in its arrangements.

The Company expensed incremental costs of obtaining a contract with a Customer, including sales commissions, when incurred as the period of benefit was less than one year.

Trade Discounts and Allowances - The Company provided Customers with trade discounts, rebates, allowances and/or other incentives.

The Company recorded estimates for these items as a reduction of revenue in the same period the revenue was recognized.

Government and Payor Rebates - The Company contracted with, or was subject to arrangements with, certain third-party payors, including pharmacy benefit managers and government agencies, for the payment of rebates with respect to utilization of its commercial products.

The Company also entered into agreements with GPOs that provided for administrative fees and discounted pricing in the form of volume-based rebates.

The Company was also subject to discount and rebate obligations under state Medicaid programs and Medicare.

The Company recorded estimates for these discounts and rebates as a reduction of revenue in the same period the revenue was recognized.

Other Incentives - The Company maintained a co-pay assistance program which was intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by third-party payors.

The Company estimated and recorded accruals for these incentives as a reduction of revenue in the period the revenue was recognized.

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.

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

Contract Research

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

The Company earns contract research revenue from the provision of laboratory services.

Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered.

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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.

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 counterparty, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

Cash, Cash Equivalents and Restricted Cash

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.

Cash Equivalents

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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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.

The cost of securities sold is determined on a specific identification basis, and realized gains and losses, if any, are included in other 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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Computer equipment is depreciated over three years .

Manufacturing and laboratory equipment is depreciated over five years .

Laboratory equipment is depreciated over five years .

Furniture and fixtures are depreciated over five years .

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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 consist of a drug discovery platform the Company acquired through the acquisition of Confluence.

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

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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 or otherwise impaired.

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 or otherwise impaired.

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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The Company recognizes impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.

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 $ 27.6 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, 2021, 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 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.

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

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

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

If the qualitative assessment indicated an impairment was 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.

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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 $ 18.5 million.

As a result, the Company recorded an impairment charge equal to the full balance of goodwill 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.

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Contingent Consideration

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.

The Company initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated future sales levels

and the discount rates applied to calculate the present value of the potential payments.

Significant judgement was involved in determining the appropriateness of these assumptions.

These assumptions are considered Level 3 inputs.

Revaluation of the contingent consideration liability can result from changes to one or more of these assumptions.

The Company evaluates the fair value estimate of the contingent consideration liability on a quarterly basis with changes, if any, recorded as income or expense in the consolidated statement of operations.

The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments.

Significant assumptions used in the Company’s estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data.

Probability of success assumptions ranged between 10 % and 40 % at December 31, 2021.

Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value.

The discount rate ranged between 6.3 % and 8.0 % depending on the year of each potential payment.

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.

Research and development expenses include salaries, stock-based compensation and benefits of employees, fees paid under licensing agreements, 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.

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The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected

term of the award.

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.

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Amounts incurred are classified as general and administrative expenses.

Foreign Currency Translation

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.

Dollars based on exchange rates at the end of each reporting period.

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.

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.

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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.

Comprehensive loss is primarily comprised of net loss and unrealized gains (losses) on marketable securities.

Net Loss per Share

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Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

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:

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.

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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.

The contract research segment earns revenue from the provision of laboratory services.

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

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Recently Issued Accounting Pronouncements

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

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

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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 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.

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

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and 2018-11, Targeted Improvements, which included a number of technical corrections and improvements, including additional options for transition.

The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

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

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.

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 $ 35.2 million.

RHOFADE Disposition

In October 2019, the Company entered into an asset purchase agreement with EPI Health, LLC (“EPI Health”) pursuant to which the Company sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1 % (“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 closing consideration 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

Fair Value of Financial Assets and Liabilities

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Marketable securities

Acquisition-related contingent consideration

Contingent consideration

Total liabilities

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Marketable securities

Acquisition-related contingent consideration

Contingent consideration

Total liabilities

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.

As of December 31, 2021 and 2020, the Company’s cash equivalents consisted of a money market fund, which was valued based upon Level 1 inputs.

The Company’s 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, 2021 and 2020 consisted of commercial paper and asset-backed and U.S.

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

The Company’s marketable securities as of December 31, 2021 also included corporate debt securities and foreign government agency debt securities, which were valued based upon Level 2 inputs.

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

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The Company evaluates whether adjustments to third-party pricing 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 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.

During the years ended December 31, 2021 and 2020, there were no transfers into or out of Level 3.

The increase in contingent consideration of $ 24.3 million during the year ended December 31, 2021 primarily resulted from updates to the Company’s probability of achieving regulatory milestones and commencing commercialization and estimated future sales level assumptions as a result of the completion of a Phase 2a clinical trial of zunsemetinib in subjects with moderate to severe rheumatoid arthritis and the inclusion of estimated future sales of zunsemetinib for the potential treatment of moderate to severe psoriatic arthritis and moderate to severe hidradenitis suppurativa, which are additional planned indications for zunsemetinib, as well as a result of the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

As of December 31, 2021 and 2020, the fair value of the Company’s available-for-sale marketable securities by type of security was as follows:

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Marketable securities:

Corporate debt securities (1)

Commercial paper

Asset-backed debt securities

Foreign government agency debt securities

government agency debt securities (2)

Total marketable securities

(1) Included in Corporate debt securities is $ 9.2 million with maturity dates between one and five years.

(2) Included in US government agency debt securities is $ 25.0 million with maturity dates between one and five years.

December 31, 2020

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Marketable securities:

Corporate debt securities

Commercial paper

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Computer equipment

Finance lease right-of-use assets

Lab equipment

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Other intangible assets

In-process research and development

Total intangible assets

Amortization expense was $ 75 thousand for each of the years ended December 31, 2021, 2020 and 2019.

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

As of December 31, 2021, estimated future amortization expense was as follows:

(In thousands)

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Research and development expenses

Litigation settlements (see Note 20)

Total accrued expenses

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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.

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

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.

In July 2021, the Company repaid in full the $ 11.0 million that was outstanding under the Loan and Security Agreement, together with all accrued and unpaid interest and fees as of the payoff date, for a total payment of $ 11.7 million.

Following this repayment, all of the Company’s obligations under the Loan and Security Agreement are deemed to be terminated, except as set forth in the agreement.

Loan and Security Agreement – Oxford Finance LLC

1 unchanged sentence

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.

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 as of the payoff date, for a total payment of $ 32.4 million.

Stockholders’ Equity

3 unchanged sentences

As of December 31, 2021 and 2020, 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.

There were 61,228,446 and 45,109,314 shares of common stock issued and outstanding as of December 31, 2021 and 2020, respectively.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders.

1 unchanged sentence

No dividends have been declared through December 31, 2021.

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 $ 106.9 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.

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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.

In August 2020, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) which provided that, upon the terms and subject to the conditions and limitations set forth therein, the Company could 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.

1 unchanged sentence

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).

The Company terminated the Purchase Agreement in January 2021 in connection with the public offering of common stock described below.

The Company did not sell any additional shares prior to terminating the Purchase Agreement.

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 $ 0.4 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 $ 103.3 million.

June 2021 Public Offering

In June 2021, the Company closed a public offering in which it sold 8,098,592 shares of common stock at a price to the public of $ 17.75 per share, for aggregate gross proceeds of $ 143.8 million.

The Company paid underwriting discounts and commissions of $ 8.6 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 $ 134.9 million.

Stock-Based Awards

1 unchanged sentence

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

Beginning at the time the 2015 Plan became effective, no further grants may be made under the Company’s 2012 Equity Compensation Plan, as amended and restated (the “2012 Plan”).

The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock awards, cash-based awards and other stock-based awards.

4 unchanged sentences

As of January 1, 2022, the number of shares of common stock that may be issued under the 2015 Plan was automatically increased by 2,449,137 shares.

The Company had 2,897,705 stock options and 1,489,633 RSUs outstanding as of December 31, 2021 under the 2015 Plan.

2017 Inducement Plan

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Upon the 2015 Plan becoming effective, no further grants can be made under the 2012 Plan.

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 vested over four years and expire after ten years .

The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which 484,145 and 549,561 were outstanding as of December 31, 2021 and 2020, respectively.

Stock options granted under the 2012 Plan expire after ten years .

Stock Option Valuation

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The Company recognizes compensation expense for awards over their vesting period.

Compensation expense for awards includes the impact of forfeiture in the period when they occur.

Compensation expense for awards includes the impact of forfeitures in the period when they occur.

Stock Options

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Forfeited and cancelled

( 1,081,581 )

Outstanding as of December 31, 2019

Forfeited and cancelled

( 1,081,581 )

Outstanding as of December 31, 2020

10 unchanged sentences

Outstanding as of December 31, 2019

( 1,804,429 )

Forfeited and cancelled

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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.

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

The following table presents potential shares of common stock excluded from the calculation of diluted net loss per share for the years ended December 31, 2021, 2020 and 2019.

All share amounts presented in the table below represent the total number outstanding as of December 31 of each year.

2 unchanged sentences

Total potential shares of common stock

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

The components of lease expense were as follows:

5 unchanged sentences

Total finance lease expenses

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.

Rent expense was $ 1.0 million for each of the years ended December 31, 2021, 2020 and 2019, which was recognized on a straight-line basis over the term of the lease.

Operating Leases

Agreements for Office Space

Agreements for Office and Laboratory Space

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.

1 unchanged sentence

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

The sub-sublease term runs concurrently 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.

8 unchanged sentences

Total operating lease liabilities

Amortization expense related to operating lease right-of-use assets and accretion of operating lease liabilities totaled $ 1.0 million for each of the years ended December 31, 2021, 2020 and 2019.

Finance Leases

1 unchanged sentence

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.

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

Fleet Vehicles

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The lease term for each automobile began on the date the Company took delivery and continued for a period of four years .

The Company returned all leased vehicles during the year ended December 31, 2019.

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

(In thousands)

Finance Leases:

Property and equipment, gross

Accumulated depreciation

Property and equipment, net

Current portion of lease liabilities

Other liabilities

Total finance lease liabilities

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.

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

7 unchanged sentences

Operating leases

Finance leases

Weighted-Average Discount Rate:

Operating leases

Finance leases

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

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

(In thousands)

3 unchanged sentences

Total lease liability

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.

During the years ended December 31, 2021, 2020 and 2019, the Company did no t record an income tax benefit for net operating losses incurred in each year due to the uncertainty of realizing a benefit from those items.

Loss before income taxes is allocated as follows:

9 unchanged sentences

Research and development tax credits

Excess equity compensation tax benefit net of officer limitation

Revaluation of contingent consideration

Permanent differences

25 unchanged sentences

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 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.

The Company has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through December 31, 2021.

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 after December 31, 2021.

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.

The Company considered its history of cumulative net losses incurred since inception, its lack of substantial revenue generated to date, and its forecasted future operating losses and concluded that it is more likely than not that the Company will not realize the benefits of its deferred tax assets.

Company will not realize the benefits of its deferred tax assets.

Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2021 and 2020.

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Reasons became the Chief Financial Officer of Mallinckrodt plc.

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 joining Mallinckrodt plc, the Company entered into a master services agreement with a subsidiary of Mallinckrodt plc, pursuant to which Confluence provides laboratory services to a 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, 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.

During the years ended December 31, 2021 and 2020, the Company invoiced Mallinckrodt for $ 24 thousand and $ 0.3 million, respectively, under the master services agreement.

As of December 31, 2021 and 2020, the Company had $ 0 and $ 24 thousand of outstanding accounts receivable balances from Mallinckrodt.

Reasons had no financial interest in these transactions.

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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.

The Company recorded royalty income under the asset purchase agreement of $ 0.8 million and $ 0.7 million during the years ended December 31, 2021 and 2020, respectively.

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

1 unchanged sentence

Asset Purchase Agreement – Allergan Sales, LLC

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

In November 2018, the Company acquired RHOFADE from Allergan Sales, LLC (“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.

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.

Company incurred royalties earned by Allergan under the asset purchase agreement of $ 0 , $ 0 and $ 1.4 million during the years ended December 31, 2021, 2020 and 2019, 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, 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.

Under the Confluence Agreement, the Company 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 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.

As of December 31, 2021 and December 31, 2020, the balance of the Company’s contingent consideration liability was $ 28.4 million and $ 4.1 million, respectively (see Note 4).

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.

(“Rigel”) for the development and commercialization of products containing two specified JAK inhibitors.

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.

The Company terminated the license and collaboration with Rigel effective as of April 2021.

Retirement Savings Plan

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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.

The Company has elected to match 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 $ 0.3 million, $ 0.4 million and $ 0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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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 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.

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Discontinued Operations

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

Significant Accounting Policies

Revenue Recognition

Product Sales, net

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

The Company also included estimates of variable consideration in the same period revenue was recognized.

Variable consideration was recorded on the consolidated balance sheet as either a reduction of accounts receivable, if payable to a customer, or as a current liability, if payable to a third party other than a customer.

The amount of net revenue that can be recognized is constrained by estimates of variable consideration which are included in the transaction price.

Payment terms with customers did not exceed one year and, therefore, the Company did not account for a financing component in its arrangements.

The Company expensed incremental costs of obtaining a contract with a customer, including sales commissions, when incurred as the period of benefit was less than one year.

Trade Discounts and Allowances - The Company provided customers with trade discounts, rebates, allowances and/or other incentives.

The Company recorded estimates for these items as a reduction of revenue in the same period the revenue was recognized.

The Company also entered into agreements with group purchasing organizations that provided for administrative fees and discounted pricing in the form of volume-based rebates.

The Company was also subject to discount and rebate obligations under state Medicaid programs and Medicare.

The Company recorded estimates for these discounts and rebates as a reduction of revenue in the same period the revenue was recognized.

The Company estimated and recorded accruals for these incentives as a reduction of revenue in the period the revenue was recognized.

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 had a product returns policy for RHOFADE that provided 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.

There is no return liability associated with sales of ESKATA (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), as the Company had a no returns policy for ESKATA when it was commercialized.

Intangible Assets

Financial Information

The components of income (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)

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Other income, net

Income (loss) from discontinued operations before income taxes

Income tax benefit

Net income (loss) from discontinued operations

Income (loss) from discontinued operations

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

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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:

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

(In thousands)

Accounts receivable, net

Discontinued operations - current assets

Accounts payable

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Discontinued operations - current liabilities

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

Stock-based compensation expense

Intangible asset impairment charge

Loss on disposal of property and equipment

Gain on sale of RHOFADE

Total non-cash items

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.

The contract research segment earns revenue from the provision of laboratory services.

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

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General and administrative

Revaluation of contingent consideration

Loss from operations

Income (loss) from discontinued operations

(In thousands)

Year Ended December 31, 2020

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General and administrative

Goodwill impairment

Revaluation of contingent consideration

Loss from operations

Loss from discontinued operations

Income (loss) from discontinued operations

(In thousands)

Year Ended December 31, 2019

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Research and development

Revaluation of contingent consideration

Goodwill impairment

General and administrative

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

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

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.

The complaint alleged 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 sought 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.

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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 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.

The defendants filed a motion to dismiss the consolidated amended complaint on April 17, 2020.

Following briefing and oral argument on February 25, 2021, the motion was granted in part and denied in part on March 29, 2021, and the issues in dispute significantly narrowed.

The defendants filed an answer to the remaining aspects of the consolidated amended complaint on April 19, 2021.

In June 2021, the defendants and the plaintiffs agreed to settle the Consolidated Securities Action.

The parties signed and filed a settlement agreement in July 2021.

On August 18, 2021, the court preliminarily approved the proposed settlement, directed that notice be given to the putative class and scheduled the final approval settlement hearing for November 30, 2021.

Notice was subsequently given to the putative class.

The court granted final approval of the settlement on December 9, 2021.

The Company had $ 2.65 million accrued as of December 31, 2021 for its financial obligation.

The Company’s financial obligation was within the limits of its insurance coverage and accordingly a receivable for an insurance recovery equal to the settlement amount was recorded.

The insurance recovery receivable and the litigation settlement liability are recorded in prepaid expenses and other current assets and accrued expenses, respectively, in the consolidated balance sheet.

Stockholder Derivative Action

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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.

The complaint alleged 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 sought, 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.

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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.

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

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

On May 18, 2021, the court extended the stay – subject to certain conditions – until the resolution of a motion for summary judgment in the Consolidated Securities Action, which defendants in that action intended to file had the parties to the Consolidated Securities Action not reached an agreement to settle.

In June 2021, the defendants and the plaintiffs agreed to settle the Consolidated Derivative Action.

The agreed terms require the Company to implement certain policies and for attorneys’ fees to be paid to plaintiff’s counsel.

The parties signed and filed a settlement agreement in July 2021.

On August 18, 2021, the court preliminarily approved the proposed settlement, directed that notice be given to the Company’s stockholders and scheduled the final approval settlement hearing for November 30, 2021.

Notice was subsequently given to the Company’s stockholders.

The court granted final approval of the settlement on December 9, 2021.

The Company’s financial obligation under the settlement was $ 425 thousand which was within the limits of its insurance coverage.

Product Liability Lawsuit

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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.

The amended complaint sought unspecified compensatory and punitive damages.

The Company filed a motion to dismiss the amended complaint on March 15, 2021.

The Company’s motion to dismiss was granted on July 9, 2021.

The Court dismissed the majority of claims against the Company with prejudice.

All remaining claims against the Company were dismissed without prejudice.

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