What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-27 compared with 2023-02-23 · 137 added, 144 removed, 645 unchanged (30% of the section changed)

39 unchanged sentences

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

Fair Value of the Contingent Consideration Liability related to zunsemetinib

As described in Notes 2 and 3 to the consolidated financial statements, the Company’s contingent consideration balance was $33.1 million as of December 31, 2022, of which a significant portion of the liability relates to zunsemetinib.

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

Fair Value of the Contingent Consideration Liability

As described in Notes 2 and 3 to the consolidated financial statements, the Company’s contingent consideration balance was $6.2 million as of December 31, 2023.

The Company records a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of 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.

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

1 unchanged sentence

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

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

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

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

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

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

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

33 unchanged sentences

Common stock, $ 0.00001 par value;

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

200,000,000 and 100,000,000 shares authorized at December 31, 2023 and December 31, 2022, respectively;

70,894,889 and 66,688,647 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively

15 unchanged sentences

Revaluation of contingent consideration

Intangible asset impairment

Total costs and expenses

1 unchanged sentence

Other income (expense), net

Loss from continuing operations before income taxes

Loss before income taxes

Income tax benefit

Loss from continuing operations

Income from discontinued operations, net of tax

Net loss per share, basic and diluted

Weighted average common shares outstanding, basic and diluted

Other comprehensive (loss) income:

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

Other comprehensive loss:

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

Foreign currency translation adjustment

Total other comprehensive loss

Total other comprehensive gain (loss)

Comprehensive loss

6 unchanged sentences

Balance at December 31, 2020

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

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

Unrealized loss on marketable securities

Foreign currency translation adjustment

Stock-based compensation expense

Balance at December 31, 2020

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

9 unchanged sentences

Balance at December 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 $ 826

Unrealized gain on marketable securities

Stock-based compensation expense

Balance at December 31, 2023

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

8 unchanged sentences

Loss on extinguishment of debt

Intangible asset impairment charge

Deferred taxes

13 unchanged sentences

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

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

Repayment of debt

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

Finance lease payments

Deferred issuance costs

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

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

2 unchanged sentences

Additions to property and equipment included in accounts payable

Fair value of warrants issued in connection with debt financing

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

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

8 unchanged sentences

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.

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.

The Company’s proprietary KINect drug discovery platform combined with its preclinical development capabilities allows the Company to identify and advance potential drug candidates that it may develop independently or in collaboration with third parties.

In addition to identifying and 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 also provides contract research services to third parties enabled by its early-stage research and development expertise.

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

5 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, ATI-2138 and ATI-2231, to develop its preclinical compounds, and to support its discovery efforts.

The Company will require additional capital to develop its drug candidates 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 caused by a variety of factors including geopolitical tensions, rising interest rates and inflationary pressures.

The Company's ability to raise additional capital may be adversely impacted by potentially 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.

8 unchanged sentences

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

3 unchanged sentences

As of December 31, 2023 and 2022, 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

16 unchanged sentences

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

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

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

and as such, recognizes revenue in the amount which it has the right to invoice.

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

6 unchanged sentences

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

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

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

Marketable Securities

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If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value.

An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount.

An impairment loss would be recognized

when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount.

The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.

4 unchanged sentences

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

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

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

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

3 unchanged sentences

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

During the years ended December 31, 2022, 2021 and 2020, the Company did not record an IPR&D impairment.

During the quarter ended December 31, 2023, the Company performed an impairment analysis on the IPR&D intangible asset due to the Company’s decision to discontinue further development of the drug candidate in immuno-inflammatory diseases.

The Company’s impairment analysis resulted in a fair value of the IPR&D intangible asset which was less than the carrying value.

As a result, the Company recorded an impairment charge of $ 6.6 million, the full balance of the IPR&D intangible asset.

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.

4 unchanged sentences

The Company recognizes assets and liabilities for leases at their inception based upon the present value of all payments due under the lease.

The Company uses an implicit interest rate to determine the present value of finance leases, and its incremental borrowing rate to determine the present value of operating leases.

The Company uses an incremental borrowing rate to determine the present value of operating leases.

The Company determines incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease.

The Company recognizes expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method.

The Company recognizes expense for operating leases on a straight-line basis over the term of each lease.

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

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

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

Right-of-use assets are included in other assets on the Company’s consolidated balance sheet for operating leases.

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

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.

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

These assumptions are considered Level 3 inputs.

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

Revaluation of the contingent consideration liability can

result from changes to one or more of these assumptions.

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

then applying a risk-adjusted discount rate to calculate the present value of the potential payments.

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

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

Probability of success assumptions ranged between 10 % and 40 % at December 31, 2022.

The probability of success assumption was 35 % at December 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.

39 unchanged sentences

The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

The provision for income taxes includes the effects of any resulting tax reserves and unrecognized tax benefits that are considered appropriate, as well as the related net interest and penalties.

Comprehensive Loss

9 unchanged sentences

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

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

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

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

5 unchanged sentences

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 one accredited financial institution, in amounts that exceed federally insured limits.

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.

6 unchanged sentences

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

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

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

Recently Issued Accounting Pronouncements

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

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

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

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

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

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).

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

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

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

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” This standard requires disclosure of significant segment expenses and other segment items by reportable segment.

This ASU becomes effective for annual periods beginning in 2024 and interim periods in 2025.

The Company is assessing the impact of this ASU and upon adoption expects that any impact would be limited to additional segment expense disclosures in the footnotes to the Company’s consolidated financial statements.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” This standard enhances disclosures related to income taxes, including the rate reconciliation and information on income taxes paid.

This ASU becomes effective January 1, 2025.

The Company is currently assessing the impact of this ASU.

Fair Value of Financial Assets and Liabilities

13 unchanged sentences

As of December 31, 2023 and 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 December 31, 2022 and 2021 consisted of commercial paper, and corporate debt, asset-backed and U.S.

The Company’s marketable securities as of December 31, 2023 consisted of commercial paper and corporate debt, asset-backed debt, foreign government agency debt 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 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.

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 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.

These quoted prices were obtained by the Company with the assistance of a third-party pricing service based on available trade, bid and other observable market data for identical securities.

Quarterly, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of the quoted prices provided.

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

During the years ended December 31, 2023 and 2022, there were no transfers into or out of Level 3.

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.

The decrease in contingent consideration of $ 26.9 million during the year ended December 31, 2023 primarily resulted from the removal of estimated sales of zunsemetinib for moderate to severe rheumatoid arthritis, moderate to severe hidradenitis suppurativa and moderate to severe psoriatic arthritis, following the Company’s decision to discontinue further development of its MK2 inhibitor programs in immuno-inflammatory diseases.

This decrease was partially offset by lower discount rates resulting from lower risk-free rates and changes in credit spreads, as well as the passage of time.

As of December 31, 2023 and 2022, 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 (3)

government and government agency debt securities (4)

Total marketable securities

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

(1) Included in Corporate debt securities is $ 28.0 million with maturity dates between one and two years .

(2) Included in Asset-backed debt securities is $ 6.2 million with maturity dates between one and three years .

(3) Included in Foreign government agency debt securities is $ 4.7 million with a maturity date between one and two years .

(4) Included in U.S.

government and government agency debt securities is $ 23.9 million with maturity dates between one and two years .

December 31, 2022

4 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 Asset-backed debt securities is $ 2.4 million with maturity dates between one and five years .

(3) Included in U.S.

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

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

Property and Equipment, Net

24 unchanged sentences

Research and development expenses

Litigation settlements (see Note 17)

Licensing expenses

Restructuring expenses (Note 15)

Total accrued expenses

8 unchanged sentences

Preferred Stock

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

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

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

As of December 31, 2022 and 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.

On June 1, 2023, at the 2023 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to the Charter to increase the authorized number of shares of common stock from 100,000,000 shares to 200,000,000 shares.

On June 1, 2023, the Company filed a Certificate of Amendment to the Charter with the Secretary of State of the State of Delaware, which became effective upon filing.

As of December 31, 2023 and 2022, the Company’s Charter authorized the Company to issue 200,000,000 and 100,000,000 shares, respectively, of $ 0.00001 par value common stock.

There were 70,894,889 and 66,688,647 shares of common stock issued and outstanding as of December 31, 2023 and 2022, respectively.

6 unchanged sentences

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

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

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

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

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

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

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

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

January 2021 Public Offering

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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.

In April 2022, the Company sold 4.8 million shares of its common stock 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 $ 2.3 million in connection with the sale.

In April 2023, the Company sold 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.

Stock-Based Awards

16 unchanged sentences

2012 Equity Compensation Plan

In August 2012, the Company’s board of directors adopted the 2012 Equity Incentive Plan (“2012 Plan”), and the Company’s stockholders approved the 2012 Plan.

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 December 31, 2022.

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

The Company had 380,792 stock options outstanding as of December 31, 2023 under the 2012 Plan.

Stock Option Valuation

13 unchanged sentences

Forfeited and cancelled

( 1,085,864 )

Outstanding as of December 31, 2022

Forfeited and cancelled

( 1,085,864 )

Outstanding as of December 31, 2023

9 unchanged sentences

Outstanding as of December 31, 2021

( 1,340,042 )

Forfeited and cancelled

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Net loss per share, basic and diluted

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

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

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

4 unchanged sentences

Total potential shares of common stock

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

The Company has operating leases for office space and laboratory facilities.

The components of lease expense were as follows:

1 unchanged sentence

Operating lease expense

Finance Leases:

Amortization of right-to-use assets

Interest expense

Total finance lease expenses

Rent expense was $ 1.0 million for each of the years ended December 31, 2022, 2021 and 2020, which was recognized on a straight-line basis over the term of the lease.

Rent expense was $ 1.1 million for the year ended December 31, 2023, and $ 1.0 million for each of the years ended December 31, 2022 and 2021, which was recognized on a straight-line basis over the term of the lease.

Operating Leases

Agreements for Office and Laboratory Space

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

The sublease has a term that runs through October 2023.

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

The Company had a sublease agreement pursuant to which it subleased 33,019 square feet of office space for its headquarters in Wayne, Pennsylvania, which expired on October 31, 2023.

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 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.

In May 2023, the Company entered into a new lease agreement pursuant to which it leases 11,564 square feet of office space for its headquarters in Wayne, Pennsylvania.

The lease commenced on November 1, 2023 and has a term that runs through February 2029.

In February 2019, the Company entered into a sublease agreement for 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:

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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 $ 1.0 million for each of the years ended December 31, 2022, 2021 and 2020.

Finance Leases

Laboratory Equipment

The Company leased laboratory equipment which it used in its laboratory space in St.

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

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

Amortization expense related to operating lease right-of-use assets and accretion of operating lease liabilities totaled $ 0.8 million for the year ended December 31, 2023, and $ 1.0 million for each of the years ended December 31, 2022 and 2021.

Supplemental information related to operating leases is as follows:

(In thousands, except for years and percentages)

1 unchanged sentence

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Leased assets obtained in exchange for new operating lease liabilities

Weighted-Average Remaining Lease Term (in years):

19 unchanged sentences

State taxes, net of federal benefit

Impact of state rate changes

Research and development tax credits

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Revaluation of contingent consideration

Permanent differences

Non-deductible royalty payments

Change in deferred tax asset valuation allowance

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Research and development tax credit carryforwards

Section 174 research and development capitalization

Capitalized research and development expense

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As of December 31, 2023, the Company also had federal research and development tax credit carryforwards of $ 20.4 million which will begin to expire in 2032, and state research and development tax credit carryforwards of $ 0.1 million which will begin to expire in 2022.

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

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

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The Company has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through December 31, 2023.

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

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

The Company has not yet determined if a Section 382 ownership change has occurred after December 31, 2023.

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The Company evaluates positive and negative evidence of its ability to realize deferred tax assets at each reporting period.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2022, 2021 and 2020 related primarily to the increases in NOLs, capitalized start-up costs, and research and development tax credit carryforwards and were as follows:

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2023, 2022 and 2021, which related primarily to the increases in NOLs, capitalized research and development costs, and research and development tax credit carryforwards, were as follows:

Year Ended December 31,

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Decreases recorded as benefit to income tax provision

Decreases recorded to opening balance sheet

Increases recorded to income tax provision

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

Related Party Transactions

Mallinckrodt plc

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

Subsequently, in March 2019, Mr.

Reasons became the Chief Financial Officer of Mallinckrodt plc.

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

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

During the years ended December 31, 2022, 2021 and 2020, the Company invoiced Mallinckrodt for $ 0 , $ 24 thousand and $ 0.3 million, respectively, under the master services agreement.

Reasons had no financial interest in these transactions.

The Company has no t recorded any amounts for unrecognized tax benefits as of December 31, 2023 and 2022.

Agreements Related to Intellectual Property

License Agreement – Sun Pharmaceutical Industries, Inc.

In December 2023, the Company entered into an exclusive patent license agreement with Sun Pharmaceutical Industries, Inc.

(“Sun Pharma”).

Under the license agreement, the Company granted Sun Pharma exclusive rights under certain patents that the Company exclusively licenses from a third party.

The patents relate to the use of deuruxolitinib, Sun Pharma’s Janus kinase (“JAK”) inhibitor, or other isotopic forms of ruxolitinib, to treat alopecia areata or androgenetic alopecia.

Under the license agreement, Sun Pharma has agreed to pay the Company an upfront payment, regulatory and commercial milestone payments, and a mid single-digit tiered royalty calculated as a percentage of Sun Pharma’s net sales.

The Company has separate contractual obligations under which the Company has agreed to pay to third parties a portion of the consideration it may receive under the license agreement.

Upon execution of the agreement, the Company received an upfront payment of $ 15.0 million from Sun Pharma, a portion of which was payable to third parties.

License Agreement – Pediatrix Therapeutics, Inc.

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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.

During the years ended December 31, 2023 and 2022, the Company recorded licensing revenue under this agreement of $ 12.7 million and $ 17.8 million, respectively, from Lilly, a portion of which was payable to third parties.

Asset Purchase Agreement – EPI Health, LLC

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 $ 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.

In July 2023, EPI Health filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.

Through the bankruptcy process, EPI Health and its parent company, Novan, Inc., sold the RHOFADE assets to a third party, which excluded the Company’s asset

purchase agreement with EPI Health and the outstanding amounts due.

The sale was approved by the bankruptcy court in September 2023.

As a result of the bankruptcy proceedings, the Company recorded an allowance for doubtful accounts resulting in $ 1.3 million of bad debt expense for the year ended December 31, 2023, representing all amounts that were due and outstanding by EPI Health.

Agreement and Plan of Merger – Confluence

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As of December 31, 2023 and December 31, 2022, the balance of the Company’s contingent consideration liability was $ 6.2 million and $ 33.1 million, respectively (see Note 3).

License and Collaboration Agreement – Rigel Pharmaceuticals, Inc.

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

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

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

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

Retirement Savings Plan

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Company contributions under the 401(k) Plan were $ 0.7 million, $ 0.5 million and $ 0.3 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Restructuring Charges

In December 2023, the Company’s board of directors approved a reduction of the Company’s workforce by approximately 46%, which the Company expects to be substantially completed by June 2024.

This action was taken in order to streamline operations, reduce costs and preserve capital.

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

The terminated employees were entitled to receive cash severance payments and other benefits.

The noticed employees are entitled to receive cash severance payments and other benefits, which are contingent upon providing additional services to the Company.

During the year ended December 31, 2023, the Company recorded a restructuring charge of $ 3.1 million which represents a one-time termination benefit for impacted employees with retention periods less than the sixty-day minimum retention period, which was triggered immediately upon either terminating or giving notice to the impacted employees.

Of the $ 3.1 million of expenses incurred during the year ended December 31, 2023, $ 2.2 million, $ 0.9 million and $ 19 thousand were recorded in research and development expense, general and administrative expense and cost of revenue, respectively, in the consolidated statement of operations and comprehensive loss.

The Company is expensing the cost of cash severance payments, other benefits and annual bonus payments for noticed employees with retention periods more than the minimum retention period over their respective service terms.

Segment Information

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

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

The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases and earns revenue through licensing of the Company’s intellectual property.

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

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

All intersegment revenue has been eliminated in the Company’s

consolidated statement of operations.

All customers and revenue pertaining to the Company’s segments are based in the United States.

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

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Year Ended December 31, 2023

Total revenue

Revenue from external customers

Intercompany revenue

Cost of revenue

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Revaluation of contingent consideration

Intangible asset impairment

Restructuring expense

Loss from operations

1 unchanged sentence

Year Ended December 31, 2022

Total revenue

Revenue from external customers

Intercompany revenue

Cost of revenue

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Year Ended December 31, 2021

Total revenue

Revenue from external customers

Intercompany revenue

Cost of revenue

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Loss from operations

Income (loss) from discontinued operations

Intersegment Revenue

Revenue for the contract research segment included $ 12.6 million, $ 7.6 million and $ 7.5 million for services performed on behalf of the therapeutics segment for the years ended December 31, 2022, 2021 and 2020, respectively.

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

Legal Proceedings

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

December 31, 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.

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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