What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-23 compared with 2022-02-24 · 94 added, 209 removed, 695 unchanged (30% of the section changed)

32 unchanged sentences

(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.

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.

37 unchanged sentences

Current portion of lease liabilities

Discontinued operations - current liabilities

Discontinued operations

Total current liabilities

Other liabilities

Long-term debt, net

Contingent consideration

18 unchanged sentences

Contract research

Other revenue

Total revenue

4 unchanged sentences

Revaluation of contingent consideration

Goodwill impairment

Total costs and expenses

Loss from operations

Other expense, net

Other income (expense), net

Loss from continuing operations before income taxes

1 unchanged sentence

Loss from continuing operations

Income (loss) from discontinued operations, net of tax

Income from discontinued operations, net of tax

Net loss per share, basic and diluted

Weighted average common shares outstanding, basic and diluted

Other comprehensive income (loss):

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

Other comprehensive (loss) income:

Unrealized loss on marketable securities, net of tax of $ 0

Foreign currency translation adjustment

Total other comprehensive income (loss)

Total other comprehensive loss

Comprehensive loss

6 unchanged sentences

Balance at December 31, 2019

Exercise of stock options and vesting of restricted stock units

Unrealized gain on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at December 31, 2019

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

5 unchanged sentences

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

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

Unrealized loss on marketable securities

2 unchanged sentences

Balance at December 31, 2021

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

Issuance of common stock under at-the-market sales agreement, net of offering costs of $ 2,341

Unrealized loss on marketable securities

Stock-based compensation expense

Balance at December 31, 2022

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

7 unchanged sentences

Revaluation of contingent consideration

Goodwill impairment charge

Intangible asset impairment charge

Gain on sale of RHOFADE

Loss on extinguishment of debt

8 unchanged sentences

Purchases of property and equipment

Disposition of RHOFADE

Purchases of marketable securities

3 unchanged sentences

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

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

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

1 unchanged sentence

Repayment of debt

Restricted stock unit employee tax withholdings

Payments of employee withholding taxes related to restricted stock unit award vesting

Finance lease payments

1 unchanged sentence

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

Net cash provided by (used in) financing activities

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

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosure of non-cash investing and financing activities:

1 unchanged sentence

Fair value of warrants issued in connection with debt financing

Operating lease asset recorded as a result of new accounting standard

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

5 unchanged sentences

was incorporated under the laws of the State of Delaware in 2012.

In July 2015, Aclaris Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned subsidiary of Aclaris Therapeutics, Inc.

In August 2017, Confluence Life Sciences, Inc.

1 unchanged sentence

and became a wholly owned subsidiary thereof.

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.

Aclaris Therapeutics, Inc.

and its wholly owned subsidiaries 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.

6 unchanged sentences

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 zunsemetinib (ATI-450), ATI-1777 and ATI-2138, to develop its preclinical compounds, and to support its discovery efforts.

The Company will require additional capital to complete the clinical development of zunsemetinib (ATI-450), ATI-1777, ATI-2138 and ATI-2231, to develop its preclinical compounds, and to support its discovery efforts.

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

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

The Company's ability to raise additional capital may be adversely impacted by potential worsening global economic conditions caused by a variety of factors including geopolitical tensions, rising interest rates and inflationary pressures.

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

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

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

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

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

3 unchanged sentences

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, ATIL and Confluence.

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

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.

Based upon the Company’s revenue, the Company believes that gross profit does not

provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the consolidated statement of operations.

Reclassifications

2 unchanged sentences

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 commercial products.

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

As of December 31, 2022 and 2021, the Company had $ 2.2 million in accrued expenses reported as discontinued operations in the Company’s consolidated balance sheet.

During the year ended December 31, 2020, the Company reported $ 0.1 million as income from discontinued operations in the Company’s consolidated statements of operations and comprehensive loss.

Use of Estimates

2 unchanged sentences

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

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

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

1 unchanged sentence

Revenue Recognition

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

9 unchanged sentences

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.

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.

Licensing 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 and Royalty Payments – The Company considers any future potential milestones and sales-based royalties to be variable consideration.

The Company recognizes revenue from development, regulatory and anniversary milestone payments as they are achieved.

The Company recognizes revenue from commercial milestones and royalty payments as the sales occur.

Cash Equivalents

4 unchanged sentences

Marketable securities with remaining maturities of greater than one year from the balance sheet date are classified as long-term.

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

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

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

6 unchanged sentences

Computer equipment is depreciated over three years .

Laboratory equipment is depreciated over five years .

Laboratory equipment is depreciated over three to five years .

Furniture and fixtures are depreciated over five years .

16 unchanged sentences

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.

2 unchanged sentences

During the years ended December 31, 2022, 2021 and 2020, 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 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.

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

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 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.

11 unchanged sentences

Contingent Consideration

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.

2 unchanged sentences

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.

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.

4 unchanged sentences

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, 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, 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.

6 unchanged sentences

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

For service-based awards the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period.

For service-based awards the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period, which is typically four years .

For performance-based awards the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period beginning in the period that it becomes probable the performance conditions will occur.

6 unchanged sentences

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

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

Historically, the Company estimated expected volatility based on historical volatility of a set of peer companies, which are publicly traded.

Starting in 2022, the Company estimated expected volatility based on its stock price's historical volatility, as the Company determined that it had adequate historical data regarding the volatility of its own publicly-traded stock price.

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

1 unchanged sentence

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.

23 unchanged sentences

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

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:

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

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

3 unchanged sentences

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

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

Concentration of Credit Risk and of Significant Suppliers

22 unchanged sentences

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

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.

Fair Value of Financial Assets and Liabilities

13 unchanged sentences

As of December 31, 2022 and 2021, 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.

The Company’s marketable securities as of December 31, 2022 and 2021 consisted of commercial paper, and corporate debt, 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.

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

The Company’s marketable securities as of December 31, 2022 also included U.S.

government 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.

3 unchanged sentences

During the years ended December 31, 2022 and 2021, 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.

The increase in contingent consideration of $ 4.7 million during the year ended December 31, 2022 primarily resulted from an increase in future sales level assumptions for zunsemetinib and the passage of time.

As of December 31, 2022 and 2021, the fair value of the Company’s available-for-sale marketable securities by type of security was as follows:

5 unchanged sentences

Asset-backed debt securities (2)

Foreign government agency debt securities

government agency debt securities (2)

government and government agency debt securities (3)

Total marketable securities

(1) Included in Corporate debt securities is $ 4.8 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.

(2) Included in Asset-backed debt securities is $ 2.4 million with maturity dates between one and five years.

(3) Included in US government and government agency debt securities is $ 5.0 million with maturity dates between one and five years.

December 31, 2021

1 unchanged sentence

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 U.S.

government debt securities is $ 25.0 million with maturity dates between one and five years.

Property and Equipment, Net

33 unchanged sentences

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

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

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

In October 2019, the Company repaid in full the $ 30.0 million that was outstanding under the Loan and Security Agreement, together with all accrued and unpaid interest and fees as of the payoff date, for a total payment of $ 32.4 million.

Stockholders’ Equity

26 unchanged sentences

As a result, the net offering proceeds received by the Company, after deducting underwriting discounts, commissions and offering expenses, were $ 134.9 million.

Sales of Common Stock Pursuant to At-The-Market Facility

In April 2022, the Company sold 4,838,709 shares of its common stock at a weighted average price per share of $ 15.50 , for aggregate gross proceeds of $ 75.0 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated May 20, 2021.

The Company paid selling commissions and other fees of $ 2.2 million in connection with the sale.

Stock-Based Awards

13 unchanged sentences

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

The Company had 410,600 stock options and 7,313 RSUs outstanding as of December 31, 2021 under the 2017 Inducement Plan.

The Company had 370,600 stock options outstanding as of December 31, 2022 under the 2017 Inducement Plan.

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

1 unchanged sentence

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

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

The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which 473,977 were outstanding as of December 31, 2022.

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

12 unchanged sentences

Forfeited and cancelled

( 1,081,581 )

Outstanding as of December 31, 2020

2 unchanged sentences

Forfeited and cancelled

( 1,085,864 )

Outstanding as of December 31, 2022

6 unchanged sentences

Outstanding as of December 31, 2019

( 1,804,429 )

Forfeited and cancelled

3 unchanged sentences

Outstanding as of December 31, 2021

( 1,340,042 )

Forfeited and cancelled

35 unchanged sentences

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.

The sub-sublease was terminated in December 2022.

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.

13 unchanged sentences

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

The Company leased automobiles for its sales force and other field-based employees under the terms of a master lease agreement with a third party.

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

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:

4 unchanged sentences

Financing cash flows from finance leases

Leased assets obtained in exchange for new operating lease liabilities

Weighted-Average Remaining Lease Term (in years):

54 unchanged sentences

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.

Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2022 and 2021.

22 unchanged sentences

During the years ended December 31, 2022, 2021 and 2020, the Company invoiced Mallinckrodt for $ 0 , $ 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.

Agreements Related to Intellectual Property

License Agreement – Pediatrix Therapeutics, Inc.

In November 2022, the Company entered into a license agreement with Pediatrix Therapeutics, Inc.

(“Pediatrix”), under which the Company granted Pediatrix the exclusive rights to develop, manufacture and commercialize ATI-1777 in Greater China.

Pediatrix has agreed to pay the Company an upfront payment, development, regulatory and commercial milestone payments, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of ATI-1777 by Pediatrix in Greater China.

A portion of consideration received from Pediatrix is payable to the former Confluence equity holders as described below.

Upon execution of the agreement, the Company received an upfront payment of $ 5.0 million from Pediatrix, a portion of which was payable to the former Confluence equity holders as described below.

License Agreement – Eli Lilly and Company

In August 2022, the Company entered into a non-exclusive patent license agreement with Eli Lilly and Company (“Lilly”).

Under the license agreement, the Company granted Lilly non-exclusive rights under certain patents and patent applications that the Company exclusively licenses from a third party.

The patents and patent applications relate to the use of baricitinib, Lilly’s JAK inhibitor, to treat alopecia areata.

Under the license agreement, Lilly has agreed to pay the Company an upfront payment, regulatory and commercial milestone payments, anniversary payments, and a low single-digit royalty calculated as a percentage of Lilly’s net sales of baricitinib for the treatment of alopecia areata.

The Company has separate contractual obligations under which the Company has agreed to pay to third parties an amount equal to any regulatory and commercial milestone payments it receives under the Lilly license agreement, as well as a portion of the upfront consideration and a portion of the royalties it may receive under the license agreement.

During the year ended December 31, 2022, the Company received $ 17.8 million from Lilly, a portion of which represented payments for regulatory and commercial milestones that were deemed to have been achieved as of the execution of the license agreement.

The Company recognized the payments received during the year ended December 31, 2022 as licensing revenue on its consolidated statements of operations and comprehensive loss.

During the year ended December 31, 2022, the Company recorded amounts paid to third parties of $ 7.4 million as licensing expense on its consolidated statements of operations and comprehensive loss.

Asset Purchase Agreement – EPI Health, LLC

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

In October 2019, the Company sold RHOFADE (oxymetazoline hydrochloride) cream, 1 % (“RHOFADE”) to EPI Health, LLC (“EPI Health”) pursuant to an asset purchase agreement.

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

The Company recorded royalty income under the asset purchase agreement of $ 0.8 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.

The Company recorded royalty income under the asset purchase agreement of $ 1.0 million, $ 0.8 million and $ 0.7 million during the years ended December 31, 2022, 2021 and 2020, respectively.

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

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

Asset Purchase Agreement – Allergan Sales, LLC

In November 2018, the Company acquired RHOFADE from Allergan 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.

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

7 unchanged sentences

(“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.

6 unchanged sentences

Company contributions under the 401(k) Plan were $ 0.5 million, $ 0.3 million and $ 0.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Restructuring Charges

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

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

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

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

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

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

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

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

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

Discontinued Operations

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.

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 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.

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 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

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).

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)

Product sales, net

Total revenue, net

Costs and expenses:

Cost of revenue (excludes amortization)

Research and development

Sales and marketing

General and administrative

Intangible asset impairment

Amortization of definite-lived intangible

Total costs and expenses

Income (loss) from operations

Other income, net

Income (loss) from discontinued operations

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

Weighted average common shares outstanding, basic and diluted

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

(In thousands)

Total product sales, net

The 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 liabilities reported as discontinued operations in the Company’s consolidated balance sheet:

(In thousands)

Accounts payable

Accrued expenses

Discontinued operations - current liabilities

Segment Information

22 unchanged sentences

Loss from operations

Income (loss) from discontinued operations

(In thousands)

Year Ended December 31, 2020

Total revenue

Cost of revenue

Research and development

Revaluation of contingent consideration

Goodwill impairment

General and administrative

Revaluation of contingent consideration

Loss from operations

Loss from discontinued operations

Income (loss) from discontinued operations

Intersegment Revenue

6 unchanged sentences

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

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.

2 unchanged sentences

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

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

The defendants 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

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

Walker et al.

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

The complaint 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.

Walker et al.

in the same court against the same defendants.

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

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

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

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

Aclaris Therapeutics, Inc.

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

The amended complaint 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.

December 31, 2021, the Company’s financial obligation under the settlement was $ 2.7 million, which was within the limits of its insurance coverage.

The settlement was paid in January 2022.

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