What changed in this filing

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Item 1. Financial Statements

2023-05-08 compared with 2022-11-08 · 132 added, 207 removed, 313 unchanged (52% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

September 30,

Current assets:

21 unchanged sentences

Preferred stock, $ 0.00001 par value;

10,000,000 shares authorized and no shares issued or outstanding at September 30, 2022 and December 31, 2021

10,000,000 shares authorized and no shares issued or outstanding at March 31, 2023 and December 31, 2022

Common stock, $ 0.00001 par value;

100,000,000 shares authorized at September 30, 2022 and December 31, 2021;

66,679,641 and 61,228,446 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

100,000,000 shares authorized at March 31, 2023 and December 31, 2022;

67,206,025 and 66,688,647 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid‑in capital

8 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Contract research

7 unchanged sentences

Loss from operations

Other income (expense), net

Other income, net

Net loss per share, basic and diluted

Weighted average common shares outstanding, basic and diluted

Other comprehensive (loss) income:

Other comprehensive income (loss):

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

Foreign currency translation adjustment

Total other comprehensive (loss) income

Total other comprehensive income (loss)

Comprehensive loss

7 unchanged sentences

Balance at December 31, 2022

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

Unrealized loss on marketable securities

Stock-based compensation expense

Balance at March 31, 2022

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 June 30, 2022

Issuance of common stock in connection with vesting of restricted stock units

Unrealized loss on marketable securities

Unrealized gain on marketable securities

Stock-based compensation expense

Balance at September 30, 2022

Balance at March 31, 2023

Comprehensive

Stockholders’

Income (Loss)

Balance at December 31, 2021

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 $ 7,011

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

Unrealized loss on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at March 31, 2022

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

Issuance of common stock in connection with public offering, net of offering costs of $ 8,899

Unrealized gain on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at June 30, 2021

Issuance of common stock in connection with vesting of restricted stock units

Unrealized gain on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at September 30, 2021

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

2 unchanged sentences

(In thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities :

3 unchanged sentences

Revaluation of contingent consideration

Loss on extinguishment of debt

Changes in operating assets and liabilities:

8 unchanged sentences

Proceeds from sales and maturities of marketable securities

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash flows from financing activities:

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

Repayment of debt

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

Restricted stock unit employee tax withholdings

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

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

1 unchanged sentence

Supplemental disclosure of non-cash investing and financing activities:

Additions to property and equipment included in accounts payable

Additions to property and equipment included in accrued expenses

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

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

In 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 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.

The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business.

As of September 30, 2022, the Company had cash, cash equivalents and marketable securities of $ 248.1 million and an accumulated deficit of $ 654.7 million.

As of March 31, 2023, the Company had cash, cash equivalents and marketable securities of $ 204.4 million and an accumulated deficit of $ 710.5 million.

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

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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 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 the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions.

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, the closure of financial institutions 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.

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that its condensed 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 has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that its condensed 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.

2 unchanged sentences

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2022 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of September 30, 2022, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2022 and 2021, its changes in stockholders’ equity for the three and nine months ended September 30, 2022 and 2021 and its cash flows for the nine months ended September 30, 2022 and 2021.

The accompanying condensed consolidated balance sheet as of March 31, 2023, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2023 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of March 31, 2023, the results of its operations and comprehensive loss for the three months ended March 31, 2023 and 2022, its changes in stockholders’ equity for the three months ended March 31, 2023 and 2022 and its cash flows for the three months ended March 31, 2023 and 2022.

The condensed consolidated balance sheet data as of December 31, 2022 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles in the United States (“GAAP”).

The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2021 are unaudited.

The results for the three and nine months ended September 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period.

The financial data and other information disclosed in these notes related to the three months ended March 31, 2023 and 2022 are unaudited.

The results for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods, or any future year or period.

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

3 unchanged sentences

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP.

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

The condensed 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.

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

Concentration of Credit Risk and of Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities.

The Company holds all cash, cash equivalents and marketable securities balances at three accredited financial institutions, the majority of which are in amounts that exceed or are not subject to federally insured limits.

The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on third-party manufacturers to supply drug product, including all underlying components, for its research and development activities, including preclinical and clinical testing.

These activities could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients or other components.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2023.

Except as set forth below, there have been no changes to the Company’s significant accounting policies from those disclosed in the annual report.

There have been no changes to the Company’s significant accounting policies from those disclosed in the annual report.

Contingent Consideration

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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 September 30, 2022.

Probability of success assumptions ranged between 10 % and 41 % at March 31, 2023.

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.

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.

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At contract inception, the Company assesses the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct.

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

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

performance obligation is satisfied.

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

Licensing Revenue

Contract Research

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.

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

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

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 royalties and commercial milestone payments as revenue when the sales occur or the milestones are achieved pursuant to the sales-based royalty exception under ASC 606 - 10-55-65.

The Company recognizes revenue from regulatory milestones when the regulatory milestone is achieved.

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.

Discontinued Operations

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.

As of March 31, 2023, and December 31, 2022, the Company had $ 2.2 million in accrued expenses reported as discontinued operations in the Company’s consolidated balance sheet.

Fair Value of Financial Assets and Liabilities

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

September 30, 2022

March 31, 2023

(In thousands)

9 unchanged sentences

Total liabilities

As of September 30, 2022 and December 31, 2021, the Company’s cash equivalents consisted of a money market fund, which was valued based upon Level 1 inputs.

The Company’s marketable securities as of September 30, 2022 and December 31, 2021 consisted of commercial paper, and asset-backed, U.S.

government, foreign government agency and corporate debt securities, which were all valued based upon Level 2 inputs.

Marketable securities also included U.S.

government agency debt securities as of September 30, 2022, which were valued based upon Level 2 inputs.

As of March 31, 2023 and December 31, 2022, the Company’s cash equivalents consisted of a money market fund, which was valued based upon Level 1 inputs.

The Company’s marketable securities as of March 31, 2023 consisted of commercial paper, treasury bills, and corporate debt, asset-backed debt and U.S.

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

The Company’s marketable securities as of December 31, 2022 consisted of commercial paper and corporate debt, asset-backed debt and U.S.

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

In determining the fair value of its Level 2 investments, the Company relies 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 three and nine months ended September 30, 2022 and 2021, there were no transfers into or out of Level 3.

The overall $ 2.4 million decrease in the fair value of the contingent consideration liability during the nine months ended September 30, 2022 was mainly due to higher discount rates, resulting from higher risk-free rates and wider credit spreads, being applied to potential payments relative to prior periods.

The decrease was partially offset by an increase in the contingent consideration liability as a result of the impact of the passage of time and other valuation model assumption modifications.

As of September 30, 2022 and December 31, 2021, the fair value of the Company’s available-for-sale marketable securities by type of security was as follows:

September 30, 2022

During the three months ended March 31, 2023 and 2022, there were no transfers into or out of Level 3.

The overall $ 0.8 million decrease in the fair value of the contingent consideration liability during the three months ended March 31, 2023 was due to the removal of estimated sales levels from zunsemetinib (ATI-450) for moderate to severe hidradenitis suppurativa following the Company’s decision to cease pursuing this indication.

This decrease was offset by increases in the fair value of the liability due to the passage of time and lower discount rates, resulting from lower risk-free rates and changes in credit spreads being applied to potential payments relative to prior periods.

As of March 31, 2023 and December 31, 2022, the fair value of the Company’s available-for-sale marketable securities by type of security was as follows:

March 31, 2023

(In thousands)

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Commercial paper

Treasury bills

Asset-backed debt securities (2)

Foreign government agency debt securities

government and agency debt securities

government and government agency debt securities (3)

Total marketable securities

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

(2) Included in Asset-backed debt securities is $ 19.3 million with maturity dates between two and four years.

(3) Included in U.S.

government and government agency debt securities is $ 5.1 million with maturity dates between one and two years.

December 31, 2022

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Asset-backed debt securities (2)

Foreign government agency debt securities

government 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 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 U.S.

government and government agency debt securities is $ 5.0 million with maturity dates between one and five years.

Property and Equipment, Net

Property and equipment, net consisted of the following:

September 30,

(In thousands)

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Property and equipment, net

Depreciation expense was $ 0.2 million for each of the three months ended September 30, 2022 and 2021, and $ 0.6 million for each of the nine months ended September 30, 2022 and 2021.

Depreciation expense was $ 0.2 million for each of the three months ended March 31, 2023 and 2022.

Intangible Assets

1 unchanged sentence

Accumulated Amortization

September 30,

(In thousands, except years)

2 unchanged sentences

Total intangible assets

Amortization expense was $ 19 thousand for each of the three months ended September 30, 2022 and 2021, and $ 56 thousand for each of the nine months ended September 30, 2022 and 2021.

As of September 30, 2022, estimated future amortization expense was as follows:

Amortization expense was $ 19 thousand for each of the three months ended March 31, 2023 and 2022.

As of March 31, 2023, estimated future amortization expense was as follows:

(In thousands)

1 unchanged sentence

Accrued expenses consisted of the following:

September 30,

(In thousands)

1 unchanged sentence

Research and development expenses

Litigation settlements (see Note 16)

Total accrued expenses

Loan and Security Agreement – Silicon Valley Bank

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

The Loan and Security Agreement 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 8).

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

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.

Stockholders’ Equity

Preferred Stock

As of September 30, 2022 and December 31, 2021, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock.

There were no shares of preferred stock outstanding as of September 30, 2022 or December 31, 2021.

As of September 30, 2022 and December 31, 2021, 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 66,679,641 and 61,228,446 shares of common stock issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.

As of March 31, 2023 and December 31, 2022, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock.

There were no shares of preferred stock outstanding as of March 31, 2023 or December 31, 2022.

As of March 31, 2023 and December 31, 2022, 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 67,206,025 and 66,688,647 shares of common stock issued and outstanding as of March 31, 2023 and December 31, 2022, respectively.

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

Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to any preferential dividend rights of any series of preferred stock that may be outstanding.

No dividends have been declared through September 30, 2022.

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

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

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

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

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.

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.

No dividends have been declared through March 31, 2023.

Stock-Based Awards

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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, restricted stock unit (“RSU”) awards, performance stock awards, cash-based awards and other stock-based awards.

stock-based awards.

The number of shares initially reserved for issuance under the 2015 Plan was 1,643,872 shares of common stock.

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As of January 1, 2023, the number of shares of common stock that may be issued under the 2015 Plan was automatically increased by 2,667,545 shares.

As of September 30, 2022, 3,019,432 shares remained available for grant under the 2015 Plan.

The Company had 4,343,087 stock options and 1,585,184 RSUs outstanding as of September 30, 2022 under the 2015 Plan.

As of March 31, 2023, 3,327,836 shares remained available for grant under the 2015 Plan.

The Company had 6,020,947 stock options and 1,740,081 RSUs outstanding as of March 31, 2023 under the 2015 Plan.

2017 Inducement Plan

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

The Company had 370,600 stock options outstanding as of September 30, 2022 under the 2017 Inducement Plan.

The Company had 370,600 stock options outstanding as of March 31, 2023 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 473,977 were outstanding as of September 30, 2022.

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 March 31, 2023.

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

Stock Option Valuation

The weighted average assumptions the Company used to estimate the fair value of stock options granted during the nine months ended September 30, 2022 and 2021 were as follows:

Nine Months Ended

September 30,

The weighted average assumptions the Company used to estimate the fair value of stock options granted during the three months ended March 31, 2023 and 2022 were as follows:

Three Months Ended

Risk-free interest rate

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Stock Options

The following table summarizes stock option activity for the nine months ended September 30, 2022:

The following table summarizes stock option activity for the three months ended March 31, 2023:

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

1 unchanged sentence

Forfeited and cancelled

Outstanding as of September 30, 2022

Options vested and expected to vest as of September 30, 2022

Options exercisable as of September 30, 2022

The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2022 was $ 9.83 per share.

Outstanding as of March 31, 2023

Options vested and expected to vest as of March 31, 2023

Options exercisable as of March 31, 2023

The weighted average grant date fair value of stock options granted during the three months ended March 31, 2023 was $ 11.92 per share.

Restricted Stock Units

The following table summarizes RSU activity for the nine months ended September 30, 2022:

The following table summarizes RSU activity for the three months ended March 31, 2023:

(In thousands, except share and per share data)

1 unchanged sentence

Forfeited and cancelled

Outstanding as of September 30, 2022

Outstanding as of March 31, 2023

Stock-Based Compensation

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

3 unchanged sentences

Total stock-based compensation expense

As of September 30, 2022, the Company had unrecognized stock-based compensation expense for stock options and RSUs of $ 25.5 million and $ 18.3 million, respectively, which is expected to be recognized over weighted average periods of 3.1 years and 2.9 years, respectively.

As of March 31, 2023, the Company had unrecognized stock-based compensation expense for stock options and RSUs of $ 40.3 million and $ 25.5 million, respectively, which is expected to be recognized over weighted average periods of 3.4 years and 3.2 years, respectively.

Net Loss per Share

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

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

3 unchanged sentences

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 three and nine months ended September 30, 2022 and 2021.

All share amounts presented in the table below represent the total number outstanding as of September 30, 2022 and 2021.

September 30,

The following table presents potential shares of common stock excluded from the calculation of diluted net loss per share for the three months ended March 31, 2023 and 2022.

All share amounts presented in the table below represent the total number outstanding as of March 31, 2023 and 2022.

Options to purchase common stock

3 unchanged sentences

Agreements for Office and Laboratory Space

The Company has a sublease agreement pursuant to which it subleases 33,019 square feet of office space for its headquarters in Wayne, Pennsylvania.

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

The sublease has a term that runs through October 2023.

If for any reason the lease between the landlord and sublandlord is terminated or expires prior to October 2023, the Company’s sublease will automatically terminate.

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

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

The sub-sublease was terminated in December 2022.

In February 2019, the Company entered into a sublease agreement pursuant to which it subleases 20,433 square feet of office and laboratory space in St.

Louis, Missouri.

The lease commenced in June 2019 and has a term that runs through June 2029.

In January 2023, the Company amended the sublease agreement to add an additional 6,261 square feet of office and laboratory space effective February 2023, which term runs concurrently with the existing term.

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

September 30,

(In thousands)

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Total operating lease liabilities

Amortization expense related to operating lease right-of-use assets and accretion of operating lease liabilities totaled $ 0.3 million for each of the three months ended September 30, 2022 and 2021 and $ 0.8 million for each of the nine months ended September 30, 2022 and 2021.

Amortization expense related to operating lease right-of-use assets and accretion of operating lease liabilities totaled $ 0.3 million for each of the three months ended March 31, 2023 and 2022.

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.

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.

The Company recorded licensing revenue under this agreement of $ 1.4 million during the three months ended March 31, 2023, of which $ 1.1 million was paid to third parties.

Asset Purchase Agreement – EPI Health, LLC

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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 $ 0.3 million and $ 0.2 million during the three months ended September 30, 2022 and 2021, respectively, and $ 0.8 million and $ 0.6 million during the nine months ended September 30, 2022 and 2021, respectively.

The Company recorded royalty income under the asset purchase agreement of $ 0.2 million during each of the three months ended March 31, 2023 and 2022.

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

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

payment received by EPI Health in connection with any license or sublicense of the assets transferred in the disposition in any territory outside of the United States, subject to specified exceptions.

Agreement and Plan of Merger – Confluence

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

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

Under the Confluence Agreement, the Company has 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 has 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 September 30, 2022 and December 31, 2021, the balance of the Company’s contingent consideration liability was $ 26.0 million and $ 28.4 million, respectively (see Note 3).

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.

The Company accounts for the Lilly license agreement under ASC Topic 606 and identified the non-exclusive license as a distinct performance obligation, since Lilly can benefit from the license on its own by developing and commercializing the underlying product using its own resources.

The Company determined that the license was a right to use the intellectual property and that the Company had provided all necessary information to Lilly to benefit from the license.

During the three months ended September 30, 2022, the Company received $ 17.6 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 remains eligible to receive future milestone payments, all of which will be paid by the Company to third parties following receipt as described above.

The Company recognized the upfront payment and milestone payments received during the three months ended September 30, 2022, and will recognize future anniversary payments, milestone payments and royalties that may be received from Lilly under the license agreement, as licensing revenue on its condensed consolidated statements of operations and comprehensive loss.

During each of the three and nine months ended September 30, 2022, the Company recorded amounts paid to third parties of $ 7.3 million, and will record amounts it pays out to third parties under its contractual obligations in the future, as licensing expense on its condensed consolidated statements of operations and comprehensive loss.

The Company considers any future potential milestones and the sales-based royalty to be variable consideration.

The Company expects that the royalties and commercial milestone payments will be recognized as revenue when the sales occur or the milestones are achieved pursuant to the sales-based royalty exception under ASC Subtopic 606-10-55-65 because the license is the predominant item to which the royalty or sales-based milestones relate.

The Company did no t record a federal or state income tax benefit for losses incurred during the three and nine months ended September 30, 2022 and 2021.

As of March 31, 2023 and December 31, 2022, the balance of the Company’s contingent consideration liability was $ 32.3 million and $ 33.1 million, respectively (see Note 3).

The Company did no t record a federal or state income tax benefit for losses incurred during the three months ended March 31, 2023 and 2022.

The Company concluded that it is more likely than not that its deferred tax assets will not be realized which resulted in recording a full valuation allowance during those periods.

Discontinued Operations

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

September 30,

(In thousands)

Accrued expenses

Discontinued operations - current liabilities

Segment Information

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

The Company’s results of operations by segment for the three and nine months ended September 30, 2022 and 2021 are summarized in the tables below:

(In thousands)

Three Months Ended September 30, 2022

Total revenue

Cost of revenue

Research and development expense

General and administrative expense

Licensing expense

Revaluation of contingent consideration

Loss from operations

(In thousands)

Three Months Ended September 30, 2021

Total revenue

Cost of revenue

Research and development expense

General and administrative expense

Revaluation of contingent consideration

Loss from operations

The Company’s results of operations by segment for the three months ended March 31, 2023 and 2022 are summarized in the tables below:

(In thousands)

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Total revenue

Cost of revenue

Research and development expense

General and administrative expense

Licensing expense

Research and development

General and administrative

Revaluation of contingent consideration

1 unchanged sentence

(In thousands)

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Total revenue

Cost of revenue

Research and development expense

General and administrative expense

Research and development

General and administrative

Revaluation of contingent consideration

1 unchanged sentence

Intersegment Revenue

Revenue for the contract research segment included $ 3.2 million and $ 1.9 million for services performed on behalf of the therapeutics segment for the three months ended September 30, 2022 and 2021, respectively, and $ 9.3 million and $ 5.5 million for the nine months ended September 30, 2022 and 2021, respectively.

Revenue for the contract research segment included $ 4.0 million and $ 2.9 million for services performed on behalf of the therapeutics segment for the three months ended March 31, 2023 and 2022, respectively.

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

4 unchanged sentences

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

The complaint 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 (hydrogen peroxide) topical solution, 40% (w/w) (“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’s financial obligation under the settlement was $ 2.7 million, which was within the limits of its insurance coverage.

As of 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.

Subsequent Events

In March 2023, the Company issued a placement notice to sell 3.4 million shares of its common stock for aggregate gross proceeds of $ 27.5 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023.

The Company paid selling commissions of $ 0.8 million in connection with the sale.

The transaction closed in April 2023.

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

What changed 10-Q

Item 1. Financial Statements