Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, ~~2016~~2021 included in the Company’s ~~annual report~~Annual Report on Form 10-K filed with the SEC on ~~March 15, 2017. Since the date of such financial statements,~~February 24, 2022. Except as set forth below, there have been no changes to the Company’s significant accounting policies ~~other than~~from those ~~noted below.~~

In February 2017, the Company paid a $2.0 million PDUFA fee to the FDA in conjunction with the filing of its NDA for A-101 40% Topical Solution. The Company has requested a waiver and refund of this PDUFA fee from the FDA, and the amount has been recorded in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.

~~Revenue Recognition~~

~~The Company recognizes revenue when the earnings process is complete, which under SEC Staff Accounting~~

Bulletin No. 104, Topic No. 13, “Revenue Recognition,” is when revenue is realized or realizable and earned, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

The Company earns revenue from the provision of laboratory services to clients through Confluence, its wholly-owned subsidiary. Laboratory service 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 specifieddisclosed in the ~~contracts.~~ annual report.

~~Table of Contents~~

The Company also receives revenue from grants under the Small Business Innovation Research program of the National Institutes of Health (“NIH”). The Company, through its Confluence subsidiary, currently has two active grants from NIH which are related to early-stage research. The Company recognizes revenue related to these grants as amounts become reimbursable under each grant, which is generally when research is performed and the related costs are incurred.

~~Intangible Assets~~

Intangible assets include both finite lived and indefinite lived assets. Finite lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Indefinite lived intangible assets are not amortized. In-process research and development (“IPR&D”) assets acquired in a business combination are considered indefinite lived until the completion or abandonment of the associated research and development efforts. The Company tests intangible assets for impairment at least annually, or if indicators of impairment are present. 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.

Contingent Consideration

The Company initially recorded ~~the~~a contingent consideration liability at fair value on the date of acquisition related to future potential payments ~~based upon the achievement of certain development, regulatory and commercial milestones,~~ resulting from the acquisition of Confluence ~~at its~~based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated ~~fair~~future sales levels and the discount rates applied to calculate the present value ~~on the date of acquisition. Changes in fair value reflect new information about the likelihood~~ of the ~~payment~~potential payments. Significant judgement was involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of the contingent consideration ~~and the passage~~liability can result from changes to one or more of ~~time. Future changes in~~these assumptions. The Company evaluates the fair value estimate of the contingent consideration liability on a quarterly basis with changes, if any, ~~will be~~ recorded as income or expense in the ~~Company’s~~condensed consolidated statement of operations.

~~Recently Issued Accounting Pronouncements~~

~~In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01,~~ ~~Business Combinations-Clarifying the Definition of a Business (Topic 805).~~ The ~~amendments in this ASU provide a screen to determine when a set of acquired assets and/or activities is not a business. The screen requires that when substantially all of 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 ~~gross assets acquired, or disposed~~present value of ~~is concentrated~~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 ~~single identifiable asset or a group~~review of ~~similar identifiable assets,~~existing clinical data. Probability of success assumptions ranged between 10% and 40% at September 30, 2022. Additionally, estimated future sales levels and the ~~set is not a business.~~risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value. The ~~amendments in this ASU will reduce~~discount rate ranged between 10.9% and 11.6% depending on the ~~number~~year of transactions that meet the definition of a business. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years, and early adoption will be permitted. each potential payment.

Revenue Recognition

The Company ~~is assessing the potential impact of ASU 2017-01 on its consolidated financial statements.~~

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other-Simplifying the Test~~accounts for ~~Goodwill Impairment (Topic 350). Under the amendments~~revenue in ~~this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit~~accordance with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company is assessing the potential impact of ASU 2017-04 on its consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-09,~~ Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with ~~Customers~~(Customers. Under ASC Topic ~~606).~~ ~~Under this ASU, entities should recognize~~606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which ~~they expect~~the Company expects to be entitled to in exchange for those goods or services.

To determine revenue recognition in accordance with ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. At contract inception, the Company assesses the goods or services ~~provided. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017.~~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 ~~assessing~~allocated to each distinct performance obligation when (or as) that performance obligation is satisfied. The Company only recognizes revenue when collection of the ~~potential impact~~consideration it is entitled to under a contract with a customer is probable.

Licensing Revenue

Licenses of ~~ASU 2014-09 on its consolidated financial statements.~~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.

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~~3. Acquisition of Confluence~~

~~On August 3, 2017, the Company entered into an Agreement~~Milestone and Plan of Merger with Confluence, Aclaris Life Sciences, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Merger Sub”), and Fortis Advisors LLC, as representative of the holders of Confluence equity (the “Agreement and Plan of Merger”). Pursuant to the terms of the Agreement and Plan of Merger, the Merger Sub merged with and into Confluence, with Confluence surviving as a wholly-owned subsidiary of the Company, resulting in the Company’s acquisition of 100% of the outstanding shares of Confluence. Pursuant to the terms of the Agreement and Plan of Merger, the Company gave aggregate consideration with a fair value of $24,322 to the equity holders of Confluence, subject to a customary post-closing working capital adjustment. Confluence was a privately held biotechnology company focused on the discovery and development of kinase inhibitors to treat inflammatory and immunological disorders and cancer. Confluence also provides laboratory services under contract research arrangements to pharmaceutical and biotech companies looking to supplement their research and development efforts with difficult-to-execute specialty skills and programs. The acquisition of Confluence will add small molecule drug discovery and preclinical development capabilities, which the Company expects will allow it to bring early-stage research and development activities in-house that the Company currently outsources to third parties.

Royalty Payments – The Company ~~has also agreed~~considers any future potential milestones and sales-based royalties to ~~pay the Confluence equity holders contingent consideration of up to $80,000, based upon the achievement of certain development, regulatory~~be variable consideration. The Company recognizes royalties and commercial milestone payments as revenue when the sales occur or the milestones set forth in the Agreement and Plan of Merger. Of the contingent consideration, $2,500 may be paid in shares of the Company’s common stock upon the achievement of a specified development milestone. In addition, the Company has agreed to pay the Confluence equity holders specified future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition, if the Company sells, licenses or transfers any of the intellectual property acquired from Confluenceare achieved pursuant to the Agreement and Plan of Merger to a third party, the Company will be obligated to pay the Confluence equity holders a portion of any incremental consideration (in excess of the development and milestone payments described above) that the Company receives from such sales, licenses or transfers in specified circumstances.

~~The following table summarizes the fair value of total consideration given to the Confluence equity holders pursuant to the Agreement and Plan of Merger:~~

Cash consideration paid

$
10,269
Aclaris common stock issued

9,675
Contingent consideration

4,378
Total fair value of consideration to Confluence equity holders

$
24,322

sales-based royalty exception under ASC 606 - 10-55-65. The Company ~~funded~~recognizes revenue from regulatory milestones when the ~~acquisition and transaction expenses with cash on hand.~~ regulatory milestone is achieved.

The Company accounted for this transaction as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the assets acquired and liabilities assumed in this transaction were recorded at their respective fair values on the date of acquisition using assumptions that are subject to change. The Company expects to finalize its allocation of the purchase price upon the finalization of valuations for the identified intangible assets, final resolution of the post-closing working capital adjustment and certain tax accounts that are based on the best estimates of management. The completion and filing of federal and state tax returns for the acquired entity may result in adjustments to the carrying value of assets and liabilities.

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~~The following table summarizes the preliminary fair value of assets acquired and liabilities assumed in the acquisition of Confluence as of the acquisition date:~~

Cash and cash equivalents

$
622
Accounts receivable, net

574
Other current assets

89
Property and equipment

268
Other intangible assets

751
IPR&D

6,629
Goodwill

18,504
Total assets acquired

27,437

Accounts payable and accrued expenses

656
Deferred tax liability

2,386
Other liabilities

73
Total liabilities assumed

3,115

Total net assets acquired

$
24,322

The estimated fair value of the IPR&D, and other identified intangibles, acquired was determined using a replacement cost method which estimates the cost that would be required to rebuild the intangible assets identified in the acquisition of Confluence. The acquisition of Confluence resulted in the recognition of goodwill in the amount $18,504 which represents the value of new products and technologies to be developed in the future as well as the value of the employee workforce acquired.

The following supplemental unaudited pro forma information presents the Company’s financial results, for the periods presented, as if the acquisition of Confluence had occurred on January 1, 2016. This supplemental unaudited pro forma financial information has been prepared for comparative purposes only, and is not necessarily indicative of what actual results would have been had the acquisition of Confluence occurred on January 1, 2016, nor is this information indicative of future results.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016


Revenue

$
1,063

$
937

$
3,366

$
2,617

Gross profit

384

452

1,102

1,184

Total operating expenses

18,822

11,464

48,122

39,273

Net loss

(17,875)

(10,891)

(45,627)

(37,769)

The supplemental unaudited pro forma financial results for the three and nine months ended September 30, 2017 include adjustments to exclude $997 and $1,351, respectively, of acquisition-related expenses, as well as $217 and $888, respectively, to exclude revenue billed to the Company by Confluence. The supplemental unaudited pro forma financial results for the three and nine months ended September 30, 2017 includes an adjustment for amortization expense related to the other intangible assets acquired.

There were no acquisition-related expenses incurred, or revenue billed to the Company by Confluence, for the three and nine months ended September 30, 2016, and accordingly, no adjustments are necessary for these items in the supplemental pro forma financial results for those time periods. The supplemental unaudited pro forma financial results

~~Table of Contents~~

~~for the three and nine months ended September 30, 2016 includes an adjustment for amortization expense related to the other intangible assets acquired.~~

4.3. 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, 2017
	Level 1		Level 2		Level 3		Total

									September 30, 2022
(In thousands)									Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	44,670	$	13,983	$	—	$	58,653	$	46,713	$	—	$	—	$	46,713
Marketable securities		—		167,793		—		167,793		—		186,409		—		186,409
Total Assets	$	44,670	$	181,776	$	—	$	226,446


Total assets									$	46,713	$	186,409	$	—	$	233,122


Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	4,378	$	4,378
Contingent consideration									$	—	$	—	$	26,000	$	26,000
Total liabilities	$	—	$	—	$	4,378	$	4,378	$	—	$	—	$	26,000	$	26,000


	December 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	21,678	$	—	$	—	$	21,678
Marketable securities		—		198,307		—		198,307
Total assets	$	21,678	$	198,307	$	—	$	219,985


Liabilities:
Contingent consideration	$	—	$	—	$	28,400	$	28,400
Total liabilities	$	—	$	—	$	28,400	$	28,400

December 31, 2016


Level 1

Level 2

Level 3

Total

Assets:













Cash equivalents

$
11,522

$
12,691

$
—

$
24,213

Marketable securities

—

143,963

—

143,963

Total

$
11,522

$
156,654

$
—

$
168,176

As of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the Company’s cash equivalents consisted of ~~investments with maturities of less than three months and included~~ a money market fund, which was valued based upon Level 1 ~~inputs,~~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.

In determining the fair value of its Level 2 investments, the Company ~~relied~~relies on quoted prices for identical securities in markets that are not active. These quoted prices ~~were~~are 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. ~~On a quarterly basis, the~~The Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of ~~those~~the quoted ~~prices.~~prices provided. The Company evaluates whether adjustments to third-party pricing isare necessary and, historically, the Company has not made adjustments to ~~the~~ quoted prices obtained from the third-party pricing service. During the three and nine months ended September 30, ~~2017~~2022 and ~~the year ended December 31, 2016,~~2021, there were no transfers ~~between~~into or out of Level ~~1, Level 2 and Level~~ 3.

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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, ~~2017~~2022 and December 31, ~~2016,~~2021, the fair value of the Company’s ~~available for sale~~available-for-sale marketable securities by type of security was as follows:


	September 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value


									September 30, 2022
											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
(In thousands)									Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	39,432	$	—	$	(9)	$	39,423	$	47,270	$	—	$	(472)	$	46,798
Commercial paper		76,130		—		—		76,130		59,659		—		—		59,659
Asset-backed securities		20,752		—		(3)		20,749
U.S. government agency debt securities		31,521		—		(30)		31,491
Asset-backed debt securities										21,366		—		(176)		21,190
Foreign government agency debt securities										4,039		—		(27)		4,012
U.S. government and agency debt securities										55,542		—		(792)		54,750
Total marketable securities	$	167,835	$	—	$	(42)	$	167,793	$	187,876	$	—	$	(1,467)	$	186,409


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities⁽¹⁾	$	40,993	$	6	$	(50)	$	40,949
Commercial paper		71,837		—		—		71,837
Asset-backed debt securities		36,166		—		(43)		36,123
Foreign government agency debt securities		4,073		—		(13)		4,060
U.S. government debt securities⁽²⁾		45,465		—		(127)		45,338
Total marketable securities	$	198,534	$	6	$	(233)	$	198,307
⁽¹⁾ Included in Corporate debt securities is $9.2 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.

December 31, 2016

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

Loss

Value

Marketable securities:













Corporate debt securities

$
51,352

$
—

$
(59)

$
51,293

Commercial paper

20,463

—

—

20,463

Asset-backed securities

28,692

6

(1)

28,697

U.S. government agency debt securities

43,505

8

(3)

43,510

Total marketable securities

$
144,012

$
14

$
(63)

$
143,963

5.4. Property and Equipment, Net

Property and equipment, net consisted of the following:


		September 30,		December 31,
	2017		2016

						September 30,		December 31,
(In thousands)					2022		2021
Computer equipment	$	593	$	310	$	1,381	$	1,380
Manufacturing equipment		518		149
Lab equipment		265		—		1,886		1,605
Furniture and fixtures		125		115		620		620
Leasehold improvements		33		33		1,123		1,123
Property and equipment, gross		1,534		607		5,010		4,728
Accumulated depreciation		(331)		(126)		(3,865)		(3,393)
Property and equipment, net	$	1,203	$	481	$	1,145	$	1,335

Depreciation expense was ~~$103 and $32~~$0.2 million for each of the three months ended September 30, ~~2017~~2022 and ~~2016, respectively,~~2021, and ~~$208 and $80~~$0.6 million for each of the nine months ended September 30, ~~2017~~2022 and ~~2016, respectively.~~ 2021.

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Table of Contents

5. Intangible Assets

Intangible assets consisted of the following:


		Gross Cost				Accumulated Amortization
	Remaining		September 30,		December 31,		September 30,		December 31,
(In thousands, except years)	Life (years)	2022		2021		2022		2021
Other intangible assets	4.8	$	751	$	751	$	388	$	332
In-process research and development	n/a		6,629		6,629		—		—
Total intangible assets		$	7,380	$	7,380	$	388	$	332

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:


		Year Ending
(In thousands)		December 31,
2022	$	18
2023		75
2024		75
2025		75
2026		75
Thereafter		45
Total	$	363

6. Accrued Expenses

Accrued expenses consisted of the following:


		September 30,		December 31,
	2017		2016

					September 30,		December 31,
(In thousands)					2022		2021
Employee compensation expenses					$	3,830	$	4,389
Research and development expenses	$	866	$	1,166		3,587		1,278
Employee compensation expenses		1,899		1,732
Commercial expenses		322		—
Vixen contract payable		100		100
Litigation settlements (see Note 16)						—		2,650
Other		323		380		1,737		1,734
Total accrued expenses	$	3,510	$	3,378	$	9,154	$	10,051

7. Debt

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.

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Stock Options

The following table summarizes stock option activity ~~from January 1, 2017 through~~for the nine months ended September 30, ~~2017:~~2022:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic
(In thousands, except share and per share data and years)	of Shares	Price		Term	Value
				(in years)
Outstanding as of December 31, 2021	3,792,450	$	17.50	6.8	$	13,710
Granted	2,334,750		14.27
Exercised	(85,672)		1.40			1,115
Forfeited and cancelled	(853,864)		18.70
Outstanding as of September 30, 2022	5,187,664	$	16.11	7.4	$	15,376
Options vested and expected to vest as of September 30, 2022	5,187,664	$	16.11	7.4	$	15,376
Options exercisable as of September 30, 2022	2,307,984	$	17.35	5.2	$	9,345

Weighted


Weighted

Average

Average

Remaining

Aggregate

Number

Exercise

Contractual

Intrinsic

of Shares

Price

Term

Value

(in years)

Outstanding as of December 31, 2016

2,702,350

$
18.94

9.05

$
24,434

Granted

617,500

26.47

Exercised

(36,738)

6.40

Forfeited and cancelled

(40,281)

21.09

Outstanding as of September 30, 2017

3,242,831

$
20.49

8.60

$
21,704

Options vested and expected to vest as of September 30, 2017

3,242,831

$
20.49

8.60

$
21,704

Options exercisable as of September 30, 2017

828,823
(1)
$
10.95

7.73

$
12,666

~~(1)~~

All options granted under the 2012 Plan are exercisable immediately, subject to a repurchase right in the Company’s favor that lapses as the option vests. This amount reflects the number of shares under options that were vested, as opposed to exercisable, as of September 30, 2017.

The weighted average grant date fair value of stock options granted during the nine months ended September 30, ~~2017~~2022 was ~~$20.41~~$9.83 per share.

~~The intrinsic value of a stock option is calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock, and cannot be less than zero.~~

~~Table of Contents~~

Restricted Stock Units

The following table summarizes RSU activity ~~from January 1, 2017 through~~for the nine months ended September 30, ~~2017:~~2022:

Weighted

Average

Grant Date

Number

Fair Value

of Shares

Per Share

Outstanding as of December 31, 2016

219,614

$
27.43

Granted

88,547

26.59

Vested

(9,299)

20.32

Forfeited and cancelled

(4,531)

27.05

Outstanding as of September 30, 2017

294,331

$
27.41

~~Stock‑Based~~


		Weighted
		Average
		Grant Date		Aggregate
	Number	Fair Value		Intrinsic
(In thousands, except share and per share data)	of Shares	Per Share		Value
Outstanding as of December 31, 2021	1,496,946	$	12.75
Granted	867,707		14.33
Vested	(526,706)		11.55	$	7,839
Forfeited and cancelled	(252,763)		12.30
Outstanding as of September 30, 2022	1,585,184	$	14.09

Stock-Based Compensation

~~The following table summarizes stock‑based~~Stock-based compensation expense ~~recorded by~~included in total costs and expenses on the ~~Company:~~condensed consolidated statement of operations included the following:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									Three Months Ended				Nine Months Ended
									September 30,				September 30,
(In thousands)									2022		2021		2022		2021
Cost of revenue	$	130	$	—	$	130	$	—	$	307	$	206	$	837	$	787
Research and development		1,332		623		3,853		1,577		1,400		939		2,228		2,969
General and administrative		2,211		995		6,147		2,617		2,481		2,557		7,161		6,453
Total stock-based compensation expense	$	3,673	$	1,618	$	10,130	$	4,194	$	4,188	$	3,702	$	10,226	$	10,209

As of September 30, ~~2017,~~2022, the Company had unrecognized ~~stock‑based~~stock-based compensation expense for stock options and RSUs of ~~$37,674~~$25.5 million and ~~$6,090,~~$18.3 million, respectively, which is expected to be recognized over weighted average periods of ~~3.06~~3.1 years and ~~2.93~~2.9 years, respectively.

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10. Net Loss per Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									Three Months Ended				Nine Months Ended
									September 30,				September 30,
(In thousands, except for share and per share data)									2022		2021		2022		2021
Numerator:
Net loss	$	(18,192)	$	(10,694)	$	(45,589)	$	(36,604)	$	(19,952)	$	(21,146)	$	(59,273)	$	(68,061)
Denominator:
Weighted average shares of common stock outstanding		28,834,808		21,415,871		27,180,244		20,752,590
Weighted average shares of common stock outstanding, basic and diluted										66,675,337		61,219,321		64,718,008		55,215,037
Net loss per share, basic and diluted	$	(0.63)	$	(0.50)	$	(1.68)	$	(1.76)	$	(0.30)	$	(0.35)	$	(0.92)	$	(1.23)

The Company’s potentially dilutive securities, which ~~included~~include 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 ~~shares~~stock outstanding used to calculate both basic and diluted net loss per share is the same. The following table presents potential shares of common ~~shares~~stock excluded from the calculation of diluted net loss per

~~Table of Contents~~

share for ~~both~~ the three and nine months ended September 30, ~~2017~~2022 and ~~2016.~~2021. All share amounts presented in the table below represent the total number outstanding as of September 30, ~~2017~~2022 and ~~2016.~~2021.



	September 30,
	2017	2016



			September 30,
			2022	2021
Options to purchase common stock	3,242,831	1,913,419	5,187,664	3,743,725
Restricted stock unit awards	294,331	85,000	1,585,184	1,465,963
Total potential common shares	3,537,162	1,998,419
Total potential shares of common stock			6,772,848	5,209,688

~~10. Commitments and Contingencies~~

11. Leases

Operating Leases

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 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. 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 ~~August 2013,~~February 2019, the Company entered into a sublease agreement with a related party (see Note 11) for office space which is its corporate headquarters. The sublease was subsequently amended and restated in March 2014, for its office space with a term ending on November 30, 2016. The Company further amended the terms of this sublease agreement in December 2014, August 2015, February 2016, October 2016 and July 2017 to increase the square footage of the space being subleased and/or agree to new sublease terms. The August 2015 amendment extended the term of the lease to November 2019.

~~In November 2016, the Company entered into a lease agreement with a~~ third party for ~~additional office space in the same building as its headquarters with a term beginning in February 2017 and ending in November 2019.~~

~~Confluence occupies~~20,433 square feet of office and laboratory space in St. Louis, ~~Missouri under the terms~~Missouri. The lease commenced in June 2019 and has a term that runs through June 2029.

Table of ~~an agreement which it entered into in March 2017~~Contents

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


		September 30,		December 31,
(In thousands)	2022		2021
Operating Leases:
Gross cost	$	5,240	$	5,240
Accumulated amortization		(2,364)		(1,803)
Other assets	$	2,876	$	3,437

Current portion of lease liabilities	$	766	$	693
Other liabilities		1,617		2,151
Total operating lease liabilities	$	2,383	$	2,844

Amortization expense related to operating lease right-of-use assets and ~~which expires in December 2017.~~

~~Rent expense was $110 and $66~~accretion of operating lease liabilities totaled $0.3 million for each of the three months ended September 30, ~~2017~~2022 and ~~2016, respectively,~~2021 and ~~$284 and $178~~$0.8 million for each of the nine months ended September 30, ~~2017~~2022 and ~~2016, respectively. The Company recognizes rent expense on a straight-line basis over the term of the lease and has accrued for rent expense incurred but not yet paid.~~ 2021.

~~As of September 30, 2017, future minimum lease payments under these agreements were as follows:~~

12.Agreements Related to Intellectual Property

Year Ending December 31,

2017

$
114

2018

394

2019

368

2020

—

2021

—

Thereafter

—

Total

$
876

Asset Purchase Agreement – EPI Health, LLC

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~~11. Related Party Transactions~~

In ~~August 2013,~~October 2019, the Company ~~entered into a sublease agreement with NeXeption, Inc. ("NeXeption"~~sold RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”)~~, which was subsequently amended and restated in March 2014 and further amended in December 2014. In August 2015,~~ to EPI Health, LLC (“EPI Health”) pursuant to an ~~Assignment and Assumption Agreement, NeXeption, Inc. assigned all interests,~~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 ~~duties and obligations~~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 ~~sublease to NST Consulting, LLC, a wholly-owned subsidiary~~asset purchase agreement of ~~NST, LLC. Following the Assignment~~$0.3 million and Assumption Agreement, the sublease was further amended in August 2015, February 2016, October 2016 and July 2017. Mr. Stephen Tullman, the chairman of the Company’s board of directors, was an executive officer of NeXeption and is also the manager of NST Consulting, LLC and NST, LLC. Total payments made under the sublease$0.2 million during the three months ended September 30, ~~2017~~2022 and ~~2016 were $106~~2021, respectively, and ~~$64, respectively,~~$0.8 million and $0.6 million during the nine months ended September 30, ~~2017~~2022 and ~~2016 were $231 and $179,~~2021, respectively.

In February 2014, the Company entered into a services agreement with NST, LLC (the “NST Services Agreement”), pursuant to which NST, LLC provided certain pharmaceutical development, management and other administrative services to the Company. Under the same agreement, the Company also provided services to another company under common control with the Company and NST, LLC and was reimbursed by NST, LLC for those services. In addition to Mr. Tullman’s role as manager of NST, LLC, several of the Company’s executive officers are members of NST, LLC.

The NST Services Agreement was amended in December 2014 pursuant to which NST, LLC assigned all interests, rights, duties and obligations under the NST Services Agreement to NST Consulting, LLC. Under the NST Services Agreement, as amended, NST Consulting, LLC provides services to the Company and the Company provides services to another company under common control with the Company and NST Consulting, LLC. The NST Services Agreement was further amended in August 2015, November 2015, January 2016, December 2016 and May 2017 to reduce the amount of services the CompanyRoyalty income is obligated to provide to NST Consulting, LLC and the amount of services NST Consulting, LLC is obligated to provide to the Company. The Company may offset any payments owed by the Company to NST Consulting, LLC against payments that are owed by NST Consulting, LLC to the Company for the provision of personnel, including consultants, to the Company.

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~~During the three and nine months ended September 30, 2017 and 2016, amounts~~ included in licensing revenue on the condensed consolidated ~~statement~~statements of operations and comprehensive ~~loss for~~loss. EPI Health has also agreed to pay the ~~NST Services Agreement are summarized~~Company potential sales milestone payments of up to $20.0 million in the ~~following table:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Services provided by NST Consulting, LLC

$
49

$
79

$
161

$
237

Services provided to NST Consulting, LLC

—

(15)

(18)

(45)

General and administrative expense, net

$
49

$
64

$
143

$
192

Services provided by NST Consulting, LLC

$
—

$
60

$
—

$
181

Services provided to NST Consulting, LLC

—

(21)

—

(63)

Research and development expense, net

$
—

$
39

$
—

$
118

Services provided by NST Consulting, LLC

$
49

$
139

$
161

$
418

Services provided to NST Consulting, LLC

—

(36)

(18)

(108)

Total, net

$
49

$
103

$
143

$
310

Net payments made to NST

$
35

$
88

$
218

$
263

~~The Company had $17 and $91 payable to NST Consulting, LLC under the NST Services Agreement as of September 30, 2017 and December 31, 2016, respectively.~~

~~12.Agreements Related to Intellectual Property~~

~~Assignment Agreement and Finder’s Services Agreement~~

In August 2012, the Company entered into an assignment agreement with the Estate of Mickey Miller, or the Miller Estate, under which the Company acquired some of the intellectual property rights covering A-101. In connection with obtaining the assignment of the intellectual property from the Miller Estate, the Company also entered into a separate finder’s services agreement with KPT Consulting, LLC. In February 2016, under the terms of the assignment agreement and the finder’s services agreement, the Company made a milestone payment of $300 upon the dosing of the first human subject with A-101 40% Topical Solution in the Company’s Phase 3 clinical trial. In April 2017, the Company made an additional milestone payment of $1,000aggregate upon the achievement of specified ~~regulatory milestones. The payments were recorded as general~~levels of net sales of products covered by the asset purchase agreement, and ~~administrative expenses~~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 ~~Company’s consolidated statement~~disposition in any territory outside of ~~operations.~~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 ~~finder’s services agreement,~~Confluence Agreement, the Company ~~is obligated~~has agreed to ~~make additional milestone payments~~pay the former Confluence equity holders aggregate remaining contingent consideration of up to ~~$4,500~~$75.0 million based upon the achievement of specified future regulatory and commercial ~~milestones. Under each of~~milestones set forth in the ~~assignment agreement and the finder’s services agreement,~~Confluence Agreement. In addition, the Company ~~is also obligated~~has agreed to pay ~~royalties on sales of A-101 or related products, at~~the former Confluence equity holders future royalty payments calculated as a low single-digit ~~percentages~~percentage of net sales, subject to reduction in specified circumstances. The Company has not made any royalty payments to date under either agreement. Both agreements will terminate upon the expiration of the last pending, viable patent claim of the patents acquired under the assignment agreement, but no sooner than 15 years from the effective date of the agreements.

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~~Stock Purchase Agreement with Vixen Pharmaceuticals, Inc. and License Agreement with Columbia University~~

On March 24, 2016, the Company entered into a stock purchase agreement (the “Vixen Agreement”) with Vixen, JAK1, LLC, JAK2, LLC and JAK3, LLC (together with JAK1, LLC and JAK2, LLC, the “Selling Stockholders”) and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the Selling Stockholders. Pursuant to the Vixen Agreement, the Company acquired all shares of Vixen’s capital stock from the Selling Stockholders (the “Vixen Acquisition”). Following the Vixen Acquisition, Vixen became a wholly-owned subsidiary of the Company. Pursuant to the Vixen Agreement, the Company paid $600 upfront and issued an aggregate of 159,420 shares of the Company’s common stock to the Selling Stockholders. The Company is obligated to make annual ~~payments of $100 on March 24~~th ~~of each year, through March 24, 2022, with such amounts being creditable against specified future payments that may be paid under the Vixen Agreement.~~

The Company is obligated to make aggregate payments of up to $18,000 to the Selling Stockholders upon the achievement of specified pre-commercialization milestones for three products in the United States, the European Union and Japan, and aggregate payments of up to $22,500 upon the achievement of specified commercial milestones. With respect to any commercialized products covered by the Vixen Agreement, the Company is obligated to pay low single-digit royalties on net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. IfIn addition to the payments described above, if the Company ~~sublicenses~~sells, licenses or transfers any of ~~Vixen’s patent rights and know-how~~the intellectual property acquired from Confluence pursuant to the ~~Vixen~~Confluence Agreement to a third party, the Company will be obligated to pay ~~a portion of any consideration~~ the ~~Company receives from such sublicenses in specified circumstances.~~

As a result of the transaction with Vixen, the Company became party to the Exclusive License Agreement, by and between Vixen and the Trustees of Columbia University in the City of New York (“Columbia”), dated as of December 31, 2015 (the “License Agreement”). Under the License Agreement, the Company is obligated to pay Columbia an annual license fee of $10, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under the License Agreement. The Company is also obligated to pay up to an aggregate of $11,600 upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments. If the Company sublicenses any of Columbia’s patent rights and know-how acquired pursuant to the License Agreement, it will be obligated to pay Columbiaformer Confluence equity holders a portion of any consideration received from such ~~sublicenses~~sale, license or transfer in specified circumstances. ~~The royalties, as determined on a country-by-country~~

As of September 30, 2022 and ~~product-by-product basis, are payable until~~December 31, 2021, the ~~date that all~~balance of the Company’s contingent consideration liability was $26.0 million and $28.4 million, respectively (see Note 3).

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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 ~~that product have expired,~~ the ~~expiration~~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 ~~market exclusivity period granted by~~regulatory and commercial milestone payments it receives under the Lilly license agreement, as well as a ~~regulatory body or, in specified circumstances, ten years~~portion of the upfront consideration and a portion of the royalties it may receive under the license agreement.

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 ~~first commercial sale of such product. The License Agreement terminates~~license on its own by developing and commercializing the ~~date of expiration of all royalty obligations thereunder unless earlier terminated by either party for a material breach, subject to a specified cure period.~~underlying product using its own resources. The Company ~~may also terminate~~determined that the ~~License Agreement without cause at any time upon advance written notice~~license was a right to ~~Columbia.~~

~~The Company accounted for~~use the ~~transaction with Vixen as an asset acquisition as the arrangement did not meet the definition of a business pursuant to the guidance prescribed in Accounting Standards Codification Topic 805,~~ ~~Business Combinations~~. The Company concluded the transaction with Vixen did not meet the definition of a business because the transaction principally resulted in the acquisition of the License Agreement. The Company did not acquire tangible assets, processes, protocols or operating systems. In addition, at the time of the transaction, there were no activities being conducted related to the licensed patents. The Company expensed the acquired 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 ~~acquisition date on~~execution of the ~~basis that the cost~~license agreement. The Company remains eligible to receive future milestone payments, all of ~~intangible assets purchased from others for use in research and development activities, and that have no alternative future uses, are expensed at the time the costs are incurred. Accordingly,~~which will be paid by the Company ~~recorded~~to third parties following receipt as described above. The Company recognized the ~~$600~~ upfront payment and milestone payments received during the ~~fair value~~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 ~~shares of common stock issued of $2,355,~~three and ~~the present value of the six non-contingent annual payments as research and development expense in the~~ nine months ended September 30, ~~2016. Additionally,~~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 ~~contingent~~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 ~~royalties in~~ the ~~period in~~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 ~~such liabilities are incurred.~~the royalty or sales-based milestones relate.

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13. Income Taxes

The Company did not record a federal or state income tax benefit for losses incurred during the three and nine months ended September 30, ~~2017~~2022 and ~~2016 due~~2021. 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.

14. Discontinued Operations

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


	September 30,		December 31,
(In thousands)	2022		2021
Accrued expenses	$	2,202	$	2,202
Discontinued operations - current liabilities	$	2,202	$	2,202

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15. 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 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. Corporate and other includes general and administrative expenses as well as eliminations of intercompany transactions. 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)			Contract		Corporate		Total
Three Months Ended September 30, 2022	Therapeutics		Research		and Other		Company
Total revenue	$	17,928	$	4,299	$	(3,209)	$	19,018
Cost of revenue		—		3,925		(3,002)		923
Research and development expense		23,863		—		(207)		23,656
General and administrative expense		—		875		4,938		5,813
Licensing expense		7,300		—		—		7,300
Revaluation of contingent consideration		2,200		—		—		2,200
Loss from operations	$	(15,435)	$	(501)	$	(4,938)	$	(20,874)

(In thousands)			Contract		Corporate		Total
Three Months Ended September 30, 2021	Therapeutics		Research		and Other		Company
Total revenue	$	244	$	3,335	$	(1,920)	$	1,659
Cost of revenue		—		2,912		(1,813)		1,099
Research and development expense		14,083		—		(107)		13,976
General and administrative expense		—		837		5,142		5,979
Revaluation of contingent consideration		900		—		—		900
Loss from operations	$	(14,739)	$	(414)	$	(5,142)	$	(20,295)

(In thousands)			Contract		Corporate		Total
Nine Months Ended September 30, 2022	Therapeutics		Research		and Other		Company
Total revenue	$	18,469	$	12,795	$	(9,265)	$	21,999
Cost of revenue		—		11,823		(8,677)		3,146
Research and development expense		57,329		—		(588)		56,741
General and administrative expense		—		2,570		15,417		17,987
Licensing expense		7,300		—		—		7,300
Revaluation of contingent consideration		(2,400)		—		—		(2,400)
Loss from operations	$	(43,760)	$	(1,598)	$	(15,417)	$	(60,775)

(In thousands)			Contract		Corporate		Total
Nine Months Ended September 30, 2021	Therapeutics		Research		and Other		Company
Total revenue	$	704	$	10,016	$	(5,460)	$	5,260
Cost of revenue		—		8,705		(5,141)		3,564
Research and development expense		30,030		—		(319)		29,711
General and administrative expense		—		2,344		14,332		16,676
Revaluation of contingent consideration		22,139		—		—		22,139
Loss from operations	$	(51,465)	$	(1,033)	$	(14,332)	$	(66,830)

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

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16. Legal Proceedings

Securities Class Action

On July 30, 2019, plaintiff Linda Rosi (“Rosi”) filed a putative class action complaint captioned Rosi v. Aclaris Therapeutics, Inc., et al. in the U.S. 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 ~~valuation allowance is required.~~substantially identical putative class action complaint captioned Fulcher v. Aclaris Therapeutics, Inc., et al. in the same court against the same defendants.

~~14. Subsequent Events~~

On November ~~2, 2017,~~6, 2019, the ~~Company entered into~~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 ~~Sublease Agreement (the “Sublease”) with Auxilium Pharmaceuticals, LLC,~~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 ~~Delaware limited liability company (the “Sublandlord”), under which~~motion to dismiss the ~~Company will lease 33,019 square feet of space for its corporate headquarters.~~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 ~~term~~defendants filed an answer to the remaining aspects of the ~~Sublease will begin~~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 ~~1, 2017 and expire on October 31, 2023. Under~~9, 2021.

The Company’s financial obligation under the ~~Sublease, base rent for~~settlement was $2.7 million, which was within the ~~period from December 1, 2017 through February 28, 2018 shall be abated, after which the Company will pay an initial base rent~~limits of ~~$47 per month through February 28, 2019. Beginning March 1, 2019, the monthly base rent will increase annually as specified in the Sublease. In addition, the Company will pay~~ its ~~pro rata share of the annual operating expenses associated with the premises, calculated as set forth in the Sublease.~~ insurance coverage.

2119

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words ~~or phrases “would~~“may,” “might,” “can,” “will,” “to be,” ~~“will allow,~~“could,” ~~“intends to,~~“would,” ~~“will likely result,~~“should,” ~~“are expected to,~~“expect,” ~~“will continue,~~“intend,” ~~“is anticipated,~~“plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “likely,” “continue,” “ongoing” or similar expressions, or the negative of such words, ~~or phrases,~~ are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking ~~statements due to a number of factors, including risks related to:~~

~~our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;~~

~~the success and timing of our preclinical studies and clinical trials and regulatory approval of protocols for future clinical trials;~~

~~the difficulties in obtaining and maintaining regulatory approval of our drug candidates, and the labeling under any approval we may obtain;~~

~~our plans and ability to develop, manufacture and commercialize our drug candidates;~~

~~the expected benefits of our acquisition of Confluence Life Sciences, Inc.;~~

~~our ability to recruit or retain key scientific or management personnel or to retain our executive officers;~~

~~the size and growth of the potential markets for our drug candidates and our ability to serve those markets;~~

~~regulatory developments in the United States and foreign countries;~~

~~the rate and degree of market acceptance of any of our drug candidates;~~

~~our ability to obtain and maintain intellectual property protection for our drug candidates and our proprietary technology;~~

~~the successful development of our commercialization capabilities, including sales and marketing capabilities;~~

~~the impact of recently enacted and future legislation and regulation regarding the healthcare system;~~

~~the success of competing therapies and products that are or become available; and~~

~~the performance of third parties, including contract research organizations and third-party manufacturers.~~

~~These and other factors~~statements. Factors that could cause or contribute to these differences ~~are described~~include those below in this Quarterly Report on Form 10-Q and those in ~~Part II – Item 1A,~~our Annual Report on Form 10-K, in each case under the caption “Risk Factors,” and ~~under similar captions~~ in our other filings with the Securities and Exchange ~~Commission.~~Commission, or SEC. Statements made herein are as of the date of the filing of this Form 10-Q with the

~~Table of Contents~~

~~Securities and Exchange Commission~~ SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, ~~2016,~~2021, which are included in our ~~2016~~ Annual Report on Form 10-K filed with the ~~Securities and Exchange Commission, or~~ SEC on ~~March 15, 2017.~~February 24, 2022.

Overview

We are a ~~dermatologist-led~~clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases. In addition to developing our novel drug candidates, we are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our novel drug candidates.

Clinical Programs

Zunsemetinib, an Investigational Oral MK2 Inhibitor

We are developing zunsemetinib, an investigational oral, novel, small molecule selective MK2 inhibitor compound, as a potential treatment for rheumatoid arthritis and ~~commercializing innovative~~other immuno-inflammatory diseases. MK2 is a key regulator of pro-inflammatory mediators including TNFα, IL1β, IL6, IL8, IL17 and ~~differentiated therapies to address significant unmet needs~~other essential pathogenic signals in ~~medical and aesthetic dermatology. Our lead~~chronic immuno-inflammatory diseases, as well as in oncology. As an oral drug candidate, ~~A-101 40% Topical Solution, is a proprietary formulation of high-concentration hydrogen peroxide topical solution that~~ we are developing zunsemetinib as a ~~prescription~~potential alternative to injectable anti-TNF/IL1/IL6 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases. Zunsemetinib has been adopted as the nonproprietary name for ATI-450.

We initiated a Phase 1 single (at 10 mg, 30 mg, 50 mg and 100 mg doses) and multiple ascending (at 10 mg, 30 mg and 50 mg doses) dose clinical trial evaluating zunsemetinib in 77 healthy subjects in August 2019 (ATI-450-PKPD-101). Final data from this trial demonstrated that zunsemetinib resulted in marked inhibition of TNFα, IL1β, IL8 and IL6. We also observed that zunsemetinib had dose-proportional pharmacokinetics with a terminal half-life of 9-12 hours in the multiple ascending dose cohort, and had no meaningful food effect or drug-drug interaction with methotrexate. Zunsemetinib was generally well-tolerated at all doses tested in the trial. The most common adverse events (reported by 2 or more subjects who received zunsemetinib) were dizziness, headache, upper respiratory tract infection, constipation, abdominal pain and nausea.

Zunsemetinib was also evaluated at 80 mg and 120 mg doses twice daily in a second Phase 1 clinical trial in healthy subjects (ATI-450-PKPD-102). Final data from this trial showed that no dose-limiting toxicity was observed. Ex vivo analysis of blood samples from this Phase 1 trial showed that increased cytokine inhibition was achieved with these higher doses of zunsemetinib relative to doses tested in the first Phase 1 trial. No serious adverse events were reported and

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all adverse events were mild. The most common adverse events (reported by 2 or more subjects who received zunsemetinib) were headache, dizziness, nausea, parasthesia and, in the post-dosing follow-up period of the trial, dry skin.

Moderate to Severe Rheumatoid Arthritis

Following the completion of the first Phase 1 clinical trial, in March 2020 we initiated a 12-week, Phase 2a, multicenter, randomized, investigator and patient-blind, sponsor-unblinded, parallel group, placebo-controlled clinical trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of zunsemetinib in subjects with moderate to severe rheumatoid arthritis (ATI-450-RA-201). In the trial, which consisted of a 12-week treatment period and a 4-week follow-up period, 19 subjects were randomized in a 3:1 ratio and received either zunsemetinib at 50 mg twice daily or placebo, in combination with methotrexate, for 12 weeks.

The final per-protocol analysis, which consisted of the 17 subjects who completed the treatment period (15 in the treatment arm and two in the placebo arm), showed that zunsemetinib demonstrated durable clinical activity, as defined by a marked and sustained reduction in DAS28-CRP and improvement of American College of Rheumatology 20%/50%/70% (ACR20/50/70) responses over 12 weeks. Zunsemetinib was generally well tolerated. All adverse events were mild to moderate. The most common adverse events (each reported in 2 subjects) were urinary tract infection, or UTI, and ventricular extrasystoles, all of which were determined to be unrelated to treatment except for one UTI. Two subjects withdrew from the trial during the treatment period, one in the treatment arm and one in the placebo arm. The subject in the treatment arm withdrew due to an elevated creatine phosphokinase, or CPK, level, which was determined by the site investigator to be treatment-related; this subject also had palpitations and ventricular extrasystoles, which were unrelated to the trial medication. The subject in the placebo arm withdrew as a result of prohibited medication needed to treat muscle strain. There was also one non-treatment-related serious adverse event (COVID-19) reported in the 4-week follow-up period of the trial in a subject who was no longer receiving treatment; the subject withdrew during the 4-week follow-up period of the trial.

A final analysis, which consisted of the 17 subjects, of ex vivo stimulated cytokines from blood samples taken from the treatment arm showed a marked and durable inhibition of TNFα, IL1β, IL6, and IL8 over the 12-week treatment period. Similarly, analysis of endogenous inflammation biomarkers also demonstrated a marked and sustained inhibition of median concentrations of hsCRP, TNFα, IL6, IL8 and MIP1β in the treatment arm over the 12-week period.

In December 2021, we initiated study activities in a Phase 2b randomized, multicenter, double-blind, parallel group, placebo-controlled, dose-ranging trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of multiple doses (20 mg and 50 mg twice daily) of zunsemetinib in combination with methotrexate in subjects with moderate to severe rheumatoid arthritis (ATI-450-RA-202). This trial consists of a 12-week treatment period and a 30-day follow-up period, and seeks to enroll approximately 240 subjects in the United States and in multiple countries in Europe. The primary endpoint is the proportion of subjects achieving ACR20 at week 12. We expect topline data in the second half of 2023.

Moderate to Severe Hidradenitis Suppurativa

In December 2021, we initiated study activities in a Phase 2a, randomized, multicenter, double-blind, placebo-controlled trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of zunsemetinib (50 mg twice daily) in subjects with moderate to severe hidradenitis suppurativa (ATI-450-HS-201). This trial consists of a 12-week treatment period and a 30-day follow-up period. The primary endpoint is the change in inflammatory nodule and abscess count at week 12. The trial has completed enrollment with 95 subjects randomized in the United States. We expect topline data in mid-first half of 2023.

Moderate to Severe Psoriatic Arthritis

In June 2022, we initiated study activities in a Phase 2a, randomized, multicenter, double-blind, placebo-controlled trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of zunsemetinib (50 mg twice daily) in subjects with moderate to severe psoriatic arthritis (ATI-450-PsA-201). This trial consists of a 12-week treatment period and a 30-day follow-up period, and seeks to enroll approximately 70 subjects in the United States

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and in Poland. The primary endpoint is the proportion of subjects achieving ACR20 at week 12. We expect topline data in the second half of 2023.

ATI-1777, an Investigational Topical “Soft” JAK 1/3 Inhibitor

We are developing ATI-1777, an investigational topical “soft” JAK 1/3 inhibitor compound, as a potential treatment for ~~seborrheic keratosis, or SK,~~moderate to severe atopic dermatitis. “Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure.

In October 2020, we initiated a ~~common non-malignant skin tumor.~~Phase 2a, multicenter, randomized, double-blind, vehicle-controlled, parallel-group clinical trial to determine the efficacy, safety, tolerability and pharmacokinetics of ATI-1777 in subjects with moderate to severe atopic dermatitis (ATI-1777-AD-201). In the ~~first quarter~~trial, which consisted of ~~2016,~~a 4-week treatment period and a 2-week follow-up period during which no treatment was given, 50 subjects with moderate to severe atopic dermatitis were randomized in a 1:1 ratio into one of two arms: ATI-1777 topical solution 2.0% w/w or vehicle applied twice daily. In June 2021, we ~~initiated two multi-center,~~announced that the trial achieved its primary endpoint, which was the percent change from baseline in the modified Eczema Area and Severity Index, or mEASI, score at week 4, with a high degree of statistical significance (p<0.001) (one-sided p-value), which corresponded to a 74.4% reduction in mEASI score from baseline at week 4 in subjects applying ATI-1777 compared to a 41.4% reduction in subjects applying vehicle. The final data was based on the full analysis set, or FAS, which was comprised of 48 subjects randomized ~~double blinded, vehicle-controlled Phase 3 clinical trials~~ and documented to have received at least one ~~open-label Phase 3~~dose of trial medication. Positive trends in favor of ATI-1777 were observed in key secondary efficacy endpoints, such as improvement in itch, percent of mEASI-50 responders, investigator’s global assessment responder analysis, and reduction in body surface area impacted by disease. In addition, the FAS analysis also showed positive trends in favor of ATI-1777 in percent of mEASI-75 responders (65.2% for ATI-1777 compared to 24.0% for vehicle) and mEASI-90 responders (30.4% for ATI-1777 compared to 20.0% for vehicle). These secondary efficacy endpoints were not powered for statistical significance. Based on an analysis of pharmacokinetic plasma samples in the ATI-1777 arm at multiple timepoints, minimal systemic exposure was observed, which supports a “soft” topical JAK inhibitor approach.

ATI-1777 was generally well tolerated. No serious adverse events were reported. The most common adverse events (reported in at least 2 subjects in the trial) were increased blood CPK levels and headache in subjects in the ATI-1777 arm and urinary tract infection (one in each of the ATI-1777 and the vehicle arm); none of these adverse events in the ATI-1777 arm were determined by the clinical trial investigators to be related to ATI-1777. One treatment-related adverse event, application site pruritus, was reported in one subject in the ATI-1777 arm.

In May 2022, we activated multiple clinical sites in a Phase 2b, multicenter, randomized, double-blind, vehicle-controlled, parallel-group trial to determine the efficacy, safety, tolerability and pharmacokinetics of ~~A-101 40% Topical Solution~~ATI-1777 in subjects with moderate to severe atopic dermatitis (ATI-1777-AD-202). In this trial, we will explore multiple concentrations of twice daily treatment with ATI-1777 and a single concentration of once daily treatment with ATI-1777, in patients ~~with SK.~~ 12 years and older. This trial will consist of a 4-week treatment period and a 2-week follow-up period, and seeks to enroll approximately 240 subjects in the United States. The primary endpoint is the percentage change from baseline in EASI score at week 4. We expect topline data in the first half of 2023.

ATI-2138, an Investigational Oral Covalent ITJ Inhibitor

We are developing ATI-2138, an investigational oral covalent ITK/TXK/JAK3, or ITJ, inhibitor compound, as a potential treatment for T cell-mediated autoimmune diseases. The ITJ compound interrupts T cell signaling through the combined inhibition of ITK/TXK/JAK3 pathways in lymphocytes.

In ~~November 2016, we announced positive top-line results from the two pivotal Phase 3 clinical trials, which are summarized below. Based on these results,~~October 2021, we submitted aan Investigational New Drug ~~Application,~~application, or ~~NDA,~~IND, for ~~A-101 40% Topical Solution~~ATI-2138 for the treatment of ~~SK to~~psoriasis. The IND was allowed by the U.S. Food and Drug Administration, or FDA, in ~~February 2017,~~November 2021.

In December 2021, we initiated a Phase 1 randomized, observer-blind, placebo-controlled, single ascending dose (SAD) trial to investigate the safety, tolerability, pharmacokinetics and ~~the NDA~~pharmacodynamics of ATI-2138 in healthy subjects (ATI-2138-PKPD-101), which we completed in November 2022. In this trial, 64 male and female healthy

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volunteer subjects were randomized in a 3:1 ratio into seven doses in eight cohorts. Each cohort consisted of eight randomized subjects, with six receiving ATI-2138 and two receiving placebo. Single dose levels were 1 mg, 3 mg, 5 mg, 15 mg, 25 mg, 50 mg and 80 mg. Preliminary data from this trial showed that ATI-2138 was ~~accepted for filing by the FDA in May 2017.~~ ~~The Prescription Drug User Fee Act, or PDUFA, target action date for the completion of the FDA’s review of the NDA is December 24, 2017. We also submitted a Marketing Authorization Application, or MAA,~~generally well tolerated at all doses tested in the European Union in July 2017. We are also developing A-101 45% Topical Solution as a prescription treatment for common warts, also known as verruca vulgaris. Additionally, in 2015, we in-licensed exclusive, worldwide rights to certain inhibitors of the Janus kinase, or JAK, family of enzymes, for specified dermatological conditions, including alopecia areata, or AA, vitiligo and androgenetic alopecia, or AGA. In 2016, we acquired additional intellectual property rights for the development and commercialization of certain JAK inhibitors for specified dermatological conditions. We intend to continue to in-license or acquire additional drug candidates and technologies to build a fully integrated dermatology company.

In November 2016, we completed two pivotal Phase 3 clinical trials of A-101 40% Topical Solution in a combined 937 patients who each had a total of four target SK lesions located on the face, trunk and extremities. Each trial met all primary and secondary endpoints for that trial, achieving clinically and statistically significant clearance of SK lesions. Additionally, we completed an open-label safety trial of A-101 40% Topical Solution in November 2016, in which we enrolled 147 patients. Across all three clinical trials, there were no treatment-relatedtrial. No serious adverse events ~~among patients treated with A-101 40% Topical Solution, and the~~or severe adverse events were reported. The most common adverse events ~~reported~~in subjects treated with ATI-2138, headache (four subjects) and lightheadedness (two subjects), were ~~nasopharyngitis~~mild and ~~sinusitis which were determined~~transient. ATI-2138 demonstrated linear pharmacokinetic data and absorption with a favorable pharmacokinetic profile up to ~~be unrelated~~the 80 mg single dose. The terminal half-life ranged from 1.5 to ~~A-101 40% Topical Solution. Based on these results,~~2.5 hours. In addition, no significant food effect at the 15 mg dose (fasted versus fed) was observed, and similar pharmacokinetic data was observed with the capsule versus tablet formulation at the 25 mg dose. We also observed dose-dependent inhibition of both ITK and JAK3 exploratory pharmacodynamic biomarkers, and near complete inhibition of the dual ITK and JAK3-stimulated interferon production at the 15 mg through 80 mg doses.

We have selected ulcerative colitis as the intended first clinical development target for ATI-2138. We are also exploring additional indications that are relevant to the mechanism of action. In October 2022, we submitted ~~an NDA~~a new IND for ~~A-101 40% Topical Solution~~ATI-2138 for the treatment of SKulcerative colitis. If the IND is allowed, we plan to ~~the FDA~~initiate a Phase 1 multiple ascending dose (MAD) trial of ATI-2138 in ~~February 2017, and the NDA was accepted~~healthy subjects by the ~~FDA in May 2017. We also submitted an MAA in the European Union in July 2017.~~ ~~The PDUFA target action date for the completion~~end of ~~the FDA’s review of the NDA is December 24, 2017.~~ ~~If approved, A-101 40% Topical Solution would become the first FDA-approved medication for the treatment of SK.~~

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We are also developing A-101 45% Topical Solution for the treatment of common warts. Although common warts are generally not harmful and in most cases eventually clear without medical treatment, they may be painful and aesthetically unattractive and are contagious. On an annual basis, 1.9 million people are diagnosed2022, with common warts. Common warts can be removed with slow-acting, over-the-counter products containing salicylic acid. As with SK, cryosurgery is the most frequently used in-office treatment for common warts. No prescription drugs have been approved by the FDA for the treatment of common warts. We completed a Phase 2 clinical trial in August 2016 evaluating 40% and 45% concentrations of A-101 for the treatment of common warts. In this Phase 2 clinical trial, in which 90 patients completed an eight-week treatment period, we observed statistically significant improvements in the mean change in the Physician’s Wart Assessment, or PWA, score and in complete clearance of common warts in patients treated with the 45% concentration of A-101 compared to placebo. In June 2017, we commenced two additional Phase 2 clinical trials of A-101 45% Topical Solution to assess the dose frequency in adult and pediatric patients with common warts. We have completed enrollment in these trials, with a total of 316 patients enrolled at 34 investigational centers in the United States. We expect to reporttopline data ~~from these additional Phase 2 clinical trials~~expected in the first half of ~~2018.~~ 2023.

Preclinical Programs

ATI-2231, an Investigational Oral MK2 Inhibitor

We are exploring the use of ATI-2231, an investigational oral MK2 inhibitor compound designed to have a long half-life, as a potential treatment for pancreatic cancer and metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer. IND-enabling studies are currently underway. We expect to submit an IND for ATI-2231 by the end of 2022. If allowed, we expect to progress ATI-2231 into the clinic in 2023. We are currently evaluating the clinical development program for this asset, which could include a collaboration with a third party.

Discovery Programs

We are developing oral gut-biased JAK inhibitors with limited systemic exposure as potential treatments for inflammatory bowel disease. In addition, we are ~~developing the JAK inhibitors, ATI-50001 and ATI-50002, which we in-licensed from Rigel Pharmaceuticals, Inc., or Rigel,~~engaged in research to identify brain penetrant kinase inhibitor candidates as potential treatments for AA. AA is an autoimmune dermatologic condition typically characterized by patchy non-scarring hair loss on the scalp and body. More severe forms of AA include total scalp hair loss, known as alopecia totalis, and total hair loss on the scalp and body, known as alopecia universalis. AA affects up to 2.0% of people globally at some point during their lifetime (i.e. incidence) and up to 0.2% of people are affected at any given time (i.e. prevalence) - with two-thirds of affected individuals being 30 years old or younger at the time of disease onset. Treatment options for the less severe, patchy forms of AA include corticosteroids, either topically applied or injected directly into the scalp where the bare patches are located, or the induction of an allergic reaction at the site of hair loss using a topical contact sensitizing agent, an approach known as topical immunotherapy. The same treatment options are utilized for the more severe forms of AA, although utilization of these treatment options for the more severe forms of AA is limited due to limited efficacy, certain side effects, and their impracticality for extensive surface areas.neurodegenerative diseases.

Financial Overview

We are developing ATI-50001 as an oral treatment for AA and ATI-50002 as a topical treatment for AA and vitiligo, a disorder in which white patches of skin appear on different parts of the body. We submitted an Investigational New Drug application, or IND, to the FDA for ATI-50001 in October 2016, and we completed a Phase 1 clinical trial to evaluate the pharmacokinetic and pharmacodynamic properties of this drug candidate in the first quarter of 2017. We plan to initiate a Phase 2 dose-ranging clinical trial of ATI-50001 for the treatment of AA in the first half of 2018. We submitted an IND to the FDA for ATI-50002 for the treatment of AA in July 2017. We have initiated two Phase 2 clinical trials of ATI-50002 for the treatment of AA in which we expect to enroll a total of up to 36 patients, with data expected to be available in the first half of 2018. We expect to initiate one additional Phase 2 dose-ranging clinical trial of ATI-50002 for the treatment of AA in November 2017 in which we plan to enroll approximately 120 patients at 20 investigational centers in the United States. We expect data for this additional Phase 2 clinical trial to be available in the second half of 2018. We also plan to initiate a Phase 2 clinical trial of ATI-50002 for the treatment of vitiligo by the end of 2017. We are also developing another series of JAK inhibitors for the treatment of AGA.

In August 2017, we acquired Confluence Life Sciences, Inc. or Confluence. The acquisition of Confluence adds small molecule drug discovery and preclinical development capabilities which, we expect, will allow us to bring early-stage research and development activities in-house that we currently outsource to third parties. Through the acquisition of Confluence, we also acquired several preclinical product candidates, including additional JAK inhibitors known as “soft” JAK inhibitors, as well as inhibitors of the MK-2 signaling pathway and inhibitors of interleukin-2-inducible T cell kinase, or ITK. We paid $10.3 million in cash and issued 349,527 shares of our common stock with a value of $9.7 million, to the former equity holders of Confluence. We are obligated to pay up to $80.0 million to the former Confluence equityholders upon the achievement of specified development, regulatory and commercial milestones, as well as low single-digit royalties upon net sales of covered products and a portion of any amounts we may receive from the further sale, out-license or transfer of the acquired intellectual property to third parties.

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Since our inception in July 2012, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing A-101 40% Topical Solution for the treatment of SK, building our intellectual property portfolio, developing our supply chain and engaging in other discovery and clinical activities in dermatology. Through the date of this report, we have financed our operations with sales of our convertible preferred stock, as well as net proceeds from our initial public offering, or IPO, in October 2015, a private placement of our common stock in June 2016, public offerings of our common stock in November 2016 and August 2017, and an at-the-market facility with Cowen and Company LLC, or Cowen that we entered into in November 2016. We do not expect to generate significant revenue unless and until we obtain marketing approval for and commercialize A-101 40% Topical Solution for the treatment of SK or one of our other current or future drug candidates.

Since our inception, we have incurred significant ~~operating~~net losses. Our net loss was ~~$48.1 million for the year ended December 31, 2016 and $45.6~~$59.3 million for the nine months ended September 30, ~~2017.~~2022 and $90.9 million for the year ended December 31, 2021. As of September 30, ~~2017,~~2022, we had an accumulated deficit of ~~$136.5~~$654.7 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical ~~development~~ and clinical ~~trials, seek marketing approval and pursue commercialization of any approved drug candidate.~~development. In addition, our drug candidates, even if wethey are approved by regulatory agencies for marketing, may not achieve commercial success. We may also not be successful in pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for ~~any of~~and/or commercialize our drug candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional drug candidates. Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. We also expect to add additional personnel to support our operational plans and strategic direction. As a result, we will need substantial additional funding to support our continuing operations.

We have historically financed our operations primarily with sales of equity securities and ~~pursue our growth strategy. Until such time as we can generate significant revenue~~incurring indebtedness in the form of loans from ~~product sales, if ever,~~commercial lenders. In the near term, we expect to finance our operations through ~~the sale of equity, debt financings or~~these and other capital sources, including potential ~~collaborations~~partnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development ~~and commercialization~~ of one or more of our drug candidates.

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Impacts of COVID-19 on Our Business

The impacts of the global COVID-19 pandemic continue to evolve. We have implemented a hybrid work model of remote and in-person operations for our employees that enables us to continue to develop our drug candidates and provide contract research services to our clients. We are focused on ensuring the continuity of our operations.

If COVID-19 continues to spread, we may experience disruptions that could severely impact our business, results of operations and prospects, including the timing of our development programs and our clinical trials, including our trials of zunsemetinib as a potential treatment for moderate to severe rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, and the supply of active pharmaceutical ingredients and drug product for our clinical trials. The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the spread of the disease, the introduction and spread of new variants, travel restrictions, quarantines, stay-at-home orders, social distancing requirements, business closures, staffing shortages, and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease, including the administration of vaccines. Accordingly, we do not know the full extent of the potential impacts on our business, our preclinical and clinical development and regulatory activities.

Acquisition and License Agreements

Agreement and Plan of Merger with Confluence

In 2017, we entered into an Agreement and Plan of Merger, or ~~delay~~the Confluence Agreement, with Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.), or Confluence, Aclaris Life Sciences, Inc., our ~~pursuit~~wholly-owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of ~~potential in-licenses~~the equity holders of Confluence. Pursuant to the terms of the Confluence Agreement, Merger Sub merged with and into Confluence, with Confluence surviving as our wholly-owned subsidiary.

Under the Confluence Agreement, we have 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. In addition, we have 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, ~~acquisitions.~~in specified circumstances, ten years from the first commercial sale of such product. In addition to the payments described above, if we sell, license or transfer any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, we 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.

Asset Purchase Agreement with EPI Health

In 2019, we entered into an asset purchase agreement with EPI Health, LLC, or EPI Health, pursuant to which we sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, which included the assignment of certain licenses for related intellectual property assets, or the Disposition.

Pursuant to the asset purchase agreement, EPI Health paid us closing consideration of $35.2 million. In addition, EPI Health has agreed to pay us (i) potential sales milestone payments of up to $20.0 million in the aggregate upon the achievement of specified levels of net sales of products covered by the agreement, (ii) a specified high single-digit royalty calculated as a percentage of net sales, on a product-by-product and country-by-country basis, until the date that the patent rights related to a particular product, such as RHOFADE, have expired, provided, that with respect to sales of RHOFADE in any territory outside of the United States, such royalty shall be paid on a country-by-country basis until the date that the RHOFADE patent rights in the particular country have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country and (iii) 25% of any upfront, license, milestone, maintenance or fixed payment received

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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 addition, EPI Health has agreed to assume our obligation to pay specified royalties and milestone payments under certain agreements with third parties.

License Agreement with Eli Lilly and Company

In August 2022, we entered into a non-exclusive patent license agreement with Eli Lilly and Company, or Lilly. Under the license agreement, we granted Lilly non-exclusive rights under certain patents and patent applications that we exclusively license 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 us 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. We have separate contractual obligations under which we have agreed to pay to third parties an amount equal to any regulatory and commercial milestone payments we receive under the Lilly license agreement, as well as a portion of the upfront consideration and a portion of the royalties we may receive under the license agreement.

During the three months ended September 30, 2022, we 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. We remain eligible to receive future milestone payments, all of which will be paid by us to third parties following receipt as described above. We recorded amounts paid to third parties of $7.3 million during the three months ended September 30, 2022.

Components of Our Results of Operations

Revenue

~~We recognize revenue when the earnings process is complete, which under SEC Staff Accounting~~Contract Research

We earn revenue from the provision of laboratory ~~services to clients through Confluence, our wholly-owned subsidiary. Laboratory service~~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~~

Licensing

Licensing revenue primarily consists of upfront consideration, royalties and milestone payments earned pursuant to ~~these contracts is generally recognized as~~ the ~~laboratory services are performed, based upon the rates specified in the contracts.~~

~~We also receive revenue from grants under the Small Business Innovation Research program of the National Institutes of~~asset purchase agreement with EPI Health or NIH. Through our Confluence subsidiary, we currently have two active grants from NIH which are related to early-stage research. We recognize revenue related to these grants as amounts become reimbursable under each grant, which is generally when research is performed and the ~~related costs are incurred.~~ license agreement with Lilly described above.

Other

~~Table~~Other revenue consists of ~~Contents~~

amounts earned from the sub-sublease of our office space.

Cost and Expenses

Cost of Revenue

Cost of revenue consists of the costs incurred in connection with the provision of ~~laboratory services to our clients through Confluence.~~contract research services. Cost of revenue primarily includes:

●

employee-related expenses, which include salaries, benefits and stock-based compensation;

●

outsourced professional scientific services;

●

depreciation of laboratory equipment;

●

facility-related costs; and

●

laboratory materials and supplies used to support the services provided.

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Research and Development ~~Expenses~~

Research and development expenses consist of expenses incurred in connection with the discovery and development of our drug candidates. These expenses primarily include:

●

expenses incurred under agreements with contract research organizations, or CROs, as well as ~~investigative~~clinical trial sites and consultants that conduct our clinical trials and preclinical ~~studies;~~

studies, and investigator-initiated trials;

●

manufacturing scale-up expenses and the cost of acquiring and manufacturing active pharmaceutical ingredients and preclinical and clinical trial materials, ~~and commercial materials,~~ including ~~manufacturing validation batches;~~

domestic technology transfer expenses;

●

quality assurance and quality control costs;

●

outsourced professional scientific development services;

●

medical affairs expenses related to our drug candidates;

●

employee-related expenses, which include salaries, benefits and stock-based compensation;

●

~~depreciation of manufacturing equipment;~~

payments made under agreements with third parties under which we have acquired or licensed intellectual property;

●

expenses relating to regulatory activities, including filing fees paid to regulatory agencies; and

●

laboratory materials and supplies used to support our research activities.

We expense research and development costs as incurred. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, investigator sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials, and are tracked on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses, which are included within “Personnel and other costs” in the table below, to specific research and development programs.

~~The following table summarizes our research and development expenses for the periods presented:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

(In thousands)
A-101 Topical Solution (40% and 45%)

$
3,750

$
3,326

$
7,031

$
13,029
JAK inhibitors

2,753

1,893

7,639

4,901
Vixen acquisition

—

—

—

3,385
Other research expenses

407

50

508

140
Total project-related expenses

6,910

5,269

15,178

21,455
Personnel and other costs

2,622

1,270

7,570

3,501
Stock-based compensation

1,332

623

3,853

1,577
Total research and development expenses

$
10,864

$
7,162

$
26,601

$
26,533

~~Table of Contents~~

Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect ~~our~~to continue to incur research and development expenses ~~to increase significantly over~~in the ~~next several years~~near term as we ~~increase~~continue the clinical development of zunsemetinib as a potential treatment for moderate to severe rheumatoid arthritis and other immuno-inflammatory diseases, ATI-1777 as a potential treatment for moderate to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, and as we continue the development of our preclinical compounds and discover and develop additional drug candidates. We expense research and development costs as incurred. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, clinical trial sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials, and are tracked on a program-by-program basis. We do not allocate personnel costs ~~including stock-based compensation, continue~~or other indirect expenses to ~~conduct pre-commercial activities related to A-101 40% Topical Solution for the treatment of SK,~~specific research and ~~conduct clinical trials and prepare regulatory filings for our other drug candidates.~~development programs.

The successful development of our drug candidates is highly uncertain. ~~At this time, we~~We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

●

the number of clinical sites included in the trials;

●

the length of time required to enroll suitable ~~patients;~~

subjects;

●

the number of ~~patients~~subjects that ultimately participate in the trials;

●

the number of doses ~~patients~~subjects receive;

●

the impact on the recruitment, enrollment, conduct and timing of our clinical trials due to the COVID-19 pandemic;

●

the duration of ~~patient~~subject follow-up; and

●

the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the ~~terms and timing~~preparation of ~~marketing approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving marketing approval~~regulatory filings for ~~any of~~ our drug candidates. We may obtain unexpected results from our clinical ~~trials.~~trials or other development activities. We may elect to discontinue, delay or modify the development, including clinical trials, of some drug candidates or focus on others. A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. ~~Drug commercialization will take several years and millions~~

Table of ~~dollars in development costs.~~Contents

General and Administrative ~~Expenses~~

General and administrative expenses consist principally of salaries and related costs, including stock-based compensation, for personnel in executive, administrative, finance and legal ~~functions, including stock-based compensation, travel expenses and recruiting expenses. Other general~~functions. General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for ~~marketing,~~ legal, auditing and tax services, ~~insurance costs, as well as payments made under our related party services agreement and milestone payments under our finder’s services agreement.~~

We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, including stock-based compensation, expanded infrastructure and higher consulting, legal and tax-related services associated with maintaining compliance with NASDAQ and SEC requirements, accounting and investor relations costs, business development costs, insurance costs and ~~director and officer insurance premiums associated with being a public company. Additionally, if and when we believe a marketing approval~~travel expenses.

Licensing

Licensing expenses consist of ~~a drug candidate appears likely, we anticipate an increase~~third party contractual obligations incurred related to the receipt of specified payments under the Lilly license agreement described above.

Revaluation of Contingent Consideration

Revaluation of contingent consideration consists of changes in ~~payroll and other expenses as a result~~the fair value of our ~~preparation for commercial operations, especially as it relates to the sales and marketing of that drug candidate.~~contingent consideration liability between reporting dates.

~~Table of Contents~~

Other Income (Expense), Net

Other income (expense), net primarily consists of interest earned on our cash, cash equivalents and marketable securities and in prior periods included interest expense ~~and gains and losses on transactions denominated in foreign currencies.~~related to our debt obligations.

Critical Accounting ~~Policies and Significant Judgments and~~ Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with ~~GAAP.~~generally accepted accounting principles in the United States. The preparation of ~~these~~our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. ~~On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, contingent consideration and stock-based compensation.~~ We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. ~~Actual~~We evaluate our estimates and judgments on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. ~~We believe~~Except as described below, there have been no material changes to our ~~critical~~significant accounting policies and use of estimates as disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, ~~2016~~2021 included in our ~~2016~~ Annual Report on Form 10-K filed with the SEC on ~~March 15, 2017.~~February 24, 2022.

~~Intangible Assets~~

Intangible assets include both finite lived and indefinite lived assets. Finite lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Indefinite lived intangible assets are not amortized. In-process research and development assets acquired in a business combination are considered indefinite lived until the completion or abandonment of the associated research and development efforts. We test intangible assets for impairment at least annually, or if indicators of impairment are present. We recognize impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.

Contingent Consideration

We initially recorded ~~the~~a contingent consideration liability at fair value on the date of acquisition related to future potential payments ~~based upon the achievement of certain development, regulatory and commercial milestones,~~ resulting from the acquisition of Confluence ~~at its~~based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated ~~fair~~future sales levels and the discount rates applied to calculate the present value ~~on the date of acquisition. Changes in fair value reflect new information about the likelihood~~ of the ~~payment~~potential payments. Significant judgement was involved in determining the appropriateness of ~~the~~these assumptions. These assumptions are considered Level 3 inputs. Revaluation of our contingent consideration ~~and the passage~~liability can result from changes to one or more of ~~time. Future changes in~~these assumptions. We evaluate the fair value estimate of ~~the~~our contingent consideration liability on a quarterly basis with changes, if any, ~~will be~~ recorded as income or expense in our consolidated statement of operations. Any such changes could have a material impact on our financial results.

~~Recently Issued Accounting Pronouncements~~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 our estimates include the probability of achieving regulatory milestones and commencing

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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 compared to between 4% and 40% at September 30, 2021. Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value. The discount rate ranged between 10.9% and 11.6% depending on the year of each potential payment.

~~In January 2017,~~During the ~~Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2017-01,~~ ~~Business Combinations-Clarifying~~nine months ended September 30, 2022, we did not modify any significant assumptions; however, due to higher discount rates resulting from higher risk-free rates and wider credit spreads being applied to potential payments relative to prior periods, we recorded an overall decrease in contingent consideration of $2.4 million. The decreases resulting from the ~~Definition~~higher discount rates and wider credit spreads were partially offset by increases as a result of the impact of the passage of time.

During the nine months ended September 30, 2021, we updated assumptions for probability of success and estimated future sales levels as a result of the completion of a ~~Business (Topic 805).~~ ~~The amendments~~Phase 2a clinical trial of zunsemetinib in ~~this ASU provide~~subjects with moderate to severe rheumatoid arthritis and as a ~~screen~~result of the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to ~~determine when~~severe atopic dermatitis. We also included estimated future sales of zunsemetinib as a ~~set of acquired assets and/or activities is not a business. The screen requires that when substantially all of~~potential treatment for hidradenitis suppurativa and psoriatic arthritis, which are additional planned indications for zunsemetinib. These updates resulted in an increase in the fair value of the ~~gross assets acquired, or disposed~~contingent consideration liability of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments in this ASU will reduce the number of transactions that meet the definition of a business. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years, and early adoption will be permitted. We are assessing the potential impact of ASU 2017-01 on our consolidated financial statements. $22.1 million.

~~Table of Contents~~

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other-Simplifying the Test for Goodwill Impairment (Topic 350)~~. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. We are assessing the potential impact of ASU 2017-04 on our consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers(Topic 606).~~ Under this ASU, entities should recognize revenue in an amount that reflects the consideration to which they expect to be entitled to in exchange for goods and services provided. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. We are assessing the potential impact of ASU 2014-09 on our consolidated financial statements.

Results of Operations

Comparison of Three and Nine Months Ended September 30, ~~2017~~2022 and ~~2016~~2021

Three Months Ended September 30,


2017

2016

Change

(In thousands)

Revenue

$
684

$
—

$
684

Cost of revenue

453

—

453

Gross profit

231

—

231

Operating expenses:

Research and development

10,864

7,162

3,702

General and administrative

8,123

3,650

4,473

Total operating expenses

18,987

10,812

8,175

Loss from operations

(18,756)

(10,812)

(7,944)

Other income, net

564

118

446

Net loss

$
(18,192)

$
(10,694)

$
(7,498)


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2022		2021		Change		2022		2021		Change
Revenues:
Contract research	$	1,090	$	1,415	$	(325)	$	3,529	$	4,556	$	(1,027)
Licensing		17,898		214		17,684		18,378		612		17,766
Other		30		30		—		92		92		—
Total revenue		19,018		1,659		17,359		21,999		5,260		16,739

Costs and expenses:
Cost of revenue		923		1,099		(176)		3,146		3,564		(418)
Research and development		23,656		13,976		9,680		56,741		29,711		27,030
General and administrative		5,813		5,979		(166)		17,987		16,676		1,311
Licensing		7,300		—		7,300		7,300		—		7,300
Revaluation of contingent consideration		2,200		900		1,300		(2,400)		22,139		(24,539)
Total costs and expenses		39,892		21,954		17,938		82,774		72,090		10,684
Loss from operations		(20,874)		(20,295)		(579)		(60,775)		(66,830)		6,055

Other income (expense), net		922		(851)		1,773		1,502		(1,231)		2,733
Net loss	$	(19,952)	$	(21,146)	$	1,194	$	(59,273)	$	(68,061)	$	8,788

~~Table of Contents~~

Revenue

~~Revenue~~

Contract research

~~Revenue~~

Contract research revenue was ~~$ 0.7~~$1.1 million and $1.4 million for the three months ended September 30, ~~2017,~~2022 and 2021, respectively, and was comprised ~~primarily~~ of fees earned from the provision of laboratory ~~services to clients through Confluence, which we acquired in August 2017. We did not generate any~~services. The decrease was driven by lower overall hours billed, partially offset by a higher average billing rate.

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Contract research revenue inwas $3.5 million and $4.6 million for the ~~three~~nine months ended September 30, ~~2016.~~ 2022 and 2021, respectively, and was comprised of fees earned from the provision of laboratory services. The decrease was driven by lower overall hours billed, partially offset by a higher average billing rate.

~~Cost of Revenue~~Licensing

~~Cost of~~Licensing revenue was ~~$ 0.5~~$17.9 million and $0.2 million for the three months ended September 30, ~~2017,~~2022 and was comprised entirely of costs incurred to provide laboratory services to our clients through Confluence, which we acquired in August 2017. We did not incur any cost of revenue in the three months ended September 30, 2016.

~~Research and Development Expenses~~

~~Research and development expenses were $10.9 million for the three months ended September 30, 2017, compared to $7.2 million for the three months ended September 30, 2016.~~2021, respectively. The increase ~~of $3.7 million~~ was ~~primarily~~ driven by ~~an increase of $1.2~~$17.6 million of ~~expenses related to our Phase 2 clinical trials of A-101 45% Topical Solution, an increase of $0.9~~upfront and milestone payments received under the Lilly agreement.

Licensing revenue was $18.4 million ~~in preclinical~~ and clinical trial development expenses related to the JAK inhibitor technology, an increase of $0.3 million in expenses related to the scale-up of commercial manufacturing for A-101 40% Topical Solution, an increase of $0.6 million in payroll-related expenses due to higher headcount, an increase of $0.7 million in stock-based compensation expense, and a $0.6 million increase in expenses related to medical affairs activities. We also incurred $0.3 million of expenses related to drug discovery research performed by Confluence, which we acquired in August 2017; and therefore did not incur similar expenses in the three months ended September 30, 2016. The increases noted above were partially offset by a $1.2 million decrease in costs associated with the development of A-101 40% Topical Solution as a result of the completion of our Phase 3 clinical trials in November 2016.

~~General and Administrative Expenses~~

General and administrative expenses were $8.1 million for the three months ended September 30, 2017, compared to $3.7 million for the three months ended September 30, 2016. The increase of $4.5 million was primarily attributable to an increase of $0.7 million in payroll-related expenses due to increased headcount, $1.2 million in higher stock-based compensation expense. In addition, we had a $1.4 million increase in market research expenses and a $0.2 million increase in sales operations expenses, both related to pre-commercial activities for A-101 40% Topical Solution. We also incurred $0.4 million of professional fees in conjunction with our acquisition of Confluence, for which there were no similar amounts in the prior year period.

~~Other Income, Net~~

~~The $0.4 million increase in other income, net was primarily due to higher invested balances of marketable securities as a result of funds received from our financing transactions in 2016 and 2017.~~

~~Table of Contents~~

~~Comparison of Nine Months Ended September 30, 2017 and 2016~~

Nine Months Ended September 30,


2017

2016

Change

(In thousands)

Revenue

$
684

$
—

$
684

Cost of revenue

453

—

453

Gross profit

231

—

231

Operating expenses:

Research and development

26,601

26,533

68

General and administrative

20,611

10,407

10,204

Total operating expenses

47,212

36,940

10,272

Loss from operations

(46,981)

(36,940)

(10,041)

Other income, net

1,392

336

1,056

Net loss

$
(45,589)

$
(36,604)

$
(8,985)

~~Revenue~~

~~Revenue was $ 0.7~~ million for the nine months ended September 30, ~~2017,~~2022 and 2021, respectively. The increase was ~~comprised primarily~~driven by $17.6 million of ~~fees earned~~upfront and milestone payments received under the Lilly agreement.

Costs and Expenses

Cost of Revenue

Cost of revenue was $0.9 million and $3.1 million for the three and nine months ended September 30, 2022, respectively, and $1.1 million and $3.6 million for the three and nine months ended September 30, 2021, respectively. In each case, cost of revenue related to providing laboratory services. Changes in cost of revenue generally correlate to changes in contract research revenue. Cost of revenue decreased in the three and nine months ended September 30, 2022 compared to the corresponding prior year periods due to lower variable costs resulting from the ~~provision~~decrease in hours billed, partially offset by an increase in fixed overhead costs, including personnel-related costs.

Research and Development

The following table summarizes our research and development expenses by drug candidate or, for unallocated expenses, by type:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2022		2021		Change		2022		2021		Change
Zunsemetinib	$	10,182	$	8,207	$	1,975	$	21,500	$	12,532	$	8,968
ATI-1777		3,354		450		2,904		9,220		1,894		7,326
ATI-2138		1,793		980		813		4,060		3,330		730
ATI-2231		1,308		263		1,045		4,397		333		4,064
Discovery		1,141		935		206		3,411		2,401		1,010
Other research and development		418		469		(51)		1,084		1,268		(184)
Personnel		4,060		1,733		2,327		10,841		4,984		5,857
Stock-based compensation		1,400		939		461		2,228		2,969		(741)
Total research and development expenses	$	23,656	$	13,976	$	9,680	$	56,741	$	29,711	$	27,030

Zunsemetinib

The increase in expenses for zunsemetinib during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021, a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021, a Phase 2a trial in subjects with psoriatic arthritis, which initiated in June 2022, and several ancillary clinical trials.

ATI-1777

The increase in expenses for ATI-1777 during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to higher costs associated with drug candidate

Table of ~~laboratory services~~Contents

manufacturing and other preclinical development activities as well as costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis. Lower costs associated with a Phase 2a clinical trial in subjects with atopic dermatitis, which commenced in 2020 and concluded in 2021, partially offset the overall increase in expenses.

ATI-2138

The increase in expenses for ATI-2138 during the three and nine months ended September 30, 2022 compared to ~~clients through Confluence,~~the three and nine months ended September 30, 2021 was primarily due to an increase in clinical development expenses associated with a Phase 1 SAD trial, which initiated in December 2021, offset by a decrease in preclinical development activities.

ATI-2231

Expenses for ATI-2231 were higher during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily due to preclinical development activities and IND-enabling studies as we ~~acquired~~progressed the program toward IND submission.

Discovery

Expenses related to discovery increased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 due to continued investment in ~~August 2017. We did not generate any revenue~~our discovery-stage programs as we progressed programs toward candidate selection.

Personnel and stock-based compensation

Personnel and stock-based compensation expenses increased in the aggregate during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily due to an increase in costs associated with higher average headcount. For the nine months ended September 30, ~~2016.~~ 2022 the increase in costs associated with higher average headcount was partially offset by a decrease in stock-based compensation expense mainly attributable to forfeiture credits recorded during the period.

~~Cost of Revenue~~General and Administrative

~~Cost of revenue was $ 0.5 million for~~The following table summarizes our general and administrative expenses:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2022		2021		Change		2022		2021		Change
Personnel	$	1,283	$	1,099	$	184	$	4,221	$	3,205	$	1,016
Professional and legal fees		877		1,207		(330)		3,167		3,898		(731)
Facility and support services		601		557		44		1,692		1,369		323
Other general and administrative		571		559		12		1,746		1,751		(5)
Stock-based compensation		2,481		2,557		(76)		7,161		6,453		708
Total general and administrative expenses	$	5,813	$	5,979	$	(166)	$	17,987	$	16,676	$	1,311

Personnel and stock-based compensation

Personnel and stock-based compensation expenses in the aggregate increased during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to higher average headcount.

Personnel and stock-based compensation expenses in the aggregate increased during the nine months ended September 30, ~~2017, and was comprised entirely of costs incurred~~2022 compared to ~~provide laboratory services to our clients through Confluence, which we acquired in August 2017. We did not incur any cost of revenue in~~ the nine months ended September 30, ~~2016.~~ 2021 primarily due to higher average headcount and an increase in stock-based compensation expense associated with new equity awards granted in 2022.

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Professional and legal fees

~~Research~~

Professional and ~~Development Expenses~~legal fees, including accounting, investor relations and corporate communication costs, decreased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily as a result of lower accounting and other professional expenses due to a reduction in temporary staffing costs.

~~Research~~Facility and ~~development~~support services

Facility and support services, including general office expenses, ~~were $26.6 million for~~information technology costs and other expenses, increased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily due to an increase in overhead expenses, including increases in tax and license fees and information technology support costs.

Revaluation of Contingent Consideration

The increase in the fair value of our contingent consideration liability during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was mainly due to the modification of a valuation model assumption, offset by higher discount rates being applied to potential payments.

The decrease in the fair value of our contingent consideration liability during the nine months ended September 30, ~~2017 and $26.5 million for~~2022 compared to the nine months ended September 30, ~~2016. Although there~~2021 was ~~a minimal change in total research~~mainly due to higher discount rates, resulting from higher risk-free rates and ~~development expenses, we had decreases~~wider credit spreads, being applied to potential payments relative to the prior year period. We recorded increases during the nine months ended September 30, 2021 from updates to the probability of ~~$7.6 million in the costs associated with the development of A-101 40% Topical Solution~~success and estimated future sales level assumptions as a result of the completion of ~~our~~a Phase 32a clinical ~~trials~~trial of zunsemetinib in ~~November 2016~~subjects with rheumatoid arthritis, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with atopic dermatitis. Additionally, the inclusion of estimated future sales of zunsemetinib as a potential treatment for hidradenitis suppurativa and ~~$3.4 million in expenses associated with the acquisition of Vixen Pharmaceuticals, Inc., or Vixen, in the nine months ended September 30, 2016,~~psoriatic arthritis, which are additional planned indications for ~~which there was no similar transaction in the current year period. These decreases were offset primarily by an increase of $2.7 million in preclinical and clinical development expenses related~~zunsemetinib, also contributed to the ~~JAK inhibitor technology, an~~ increase of $1.1 million of expenses related to our Phase 2 clinical trials of A-101 45% Topical Solution an increase of $1.8 million in payroll-related expenses due to higher headcount, a $2.3 million increase in stock-based compensation expense, a $2.0 million increase in expenses related to medical affairs activities, and $0.5 million of regulatory expenses associated with the NDA filing for A-101 40% Topical Solution incurred during the nine months ended September 30, ~~2017. We also incurred $0.3 million of expenses related to drug discovery research performed by Confluence, which we acquired in August 2017; therefore we did not incur similar expenses in~~2021.

Other Income (Expense), net

Other income (expense), net increased during the three and nine months ended September 30, ~~2016.~~

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~~General~~2022 compared to the three and ~~Administrative Expenses~~

~~General and administrative expenses were $20.6 million for the~~ nine months ended September 30, 2017, compared to $10.4 million for the nine months ended September 30, 2016. The increase of $10.2 million was primarily attributable to increases of $2.5 million in market research expenses and $0.3 million in sales operations expenses, both related to pre-commercial activities for A-101 40% Topical Solution, an increase of $1.6 million in payroll-related expenses2021 due to ~~increased headcount, $3.5 million~~lower interest expense associated with the Loan and Security Agreement with Silicon Valley Bank, or SVB, which was repaid in July 2021, and higher stock-based compensation expense and $0.5 million in higher facilities-related costs including rent expense. In addition, milestone payments pursuant to the finder’s services agreement related to A-101 40% Topical Solution increased $0.7 million over the prior year period. We also incurred $0.6 million of professional fees in conjunction with our acquisition of Confluence, for which there were no similar amounts in the prior year period. interest income on investment portfolio balances.

~~Other Income, Net~~

~~The $1.1 million increase in other income, net was primarily due to higher invested balances of marketable securities as a result of funds received from our financing transactions 2016 and 2017.~~

Liquidity and Capital Resources

Overview

Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our acquisition of Confluence, ~~in August 2017,~~ we ~~had never generated~~did not generate any revenue. We have financed our operations ~~since inception~~over the last several years primarily through sales of our ~~convertible preferred stock, as well as net proceeds~~equity securities and incurring indebtedness in the form of loans from commercial lenders. We may engage in additional debt and equity financing transactions in order to raise funds. We may also receive royalties and milestone payments under existing license and acquisition agreements with third parties. In addition, to the extent we are able to consummate transactions with potential third-party partners to further develop, obtain marketing approval for and/or commercialize our ~~IPO in October 2015,~~drug candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our ~~private placement in June 2016, our public offerings in November 2016 and August 2017 and our at-the-market facility with Cowen.~~liquidity.

As of September 30, ~~2017,~~2022, we had cash, cash equivalents and marketable securities of ~~$227.8~~$248.1 million.Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.

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We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, ~~over the next five years,~~ other than our ~~sublease obligations and~~ contingent obligations under ~~acquisition~~the Confluence Agreement, which is summarized above under “Overview—Acquisition and ~~intellectual property licensing agreements, which are summarized below~~License Agreements,” and our lease obligations.

Equity Financing

Sale of Common Stock under ~~“Contractual Obligations~~At-the-Market Facility

In April 2022, we sold 4,838,709 shares of our 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 ~~Commitments.”~~ Cantor Fitzgerald & Co., as sales agents, dated May 20, 2021. We paid selling commissions and other fees of $2.2 million in connection with the sale.

~~Initial~~June 2021 Public Offering

~~On October 13, 2015,~~In June 2021, we closed ~~our IPO~~a public offering in which we sold ~~5,750,000~~8,098,592 shares of common stock at a price to the public of ~~$11.00~~$17.75 per share, for aggregate gross proceeds of ~~$63.3~~$143.8 million. We paid underwriting discounts and commissions of ~~$4.4~~$8.6 million, and we also incurred expenses of ~~$2.3 million in connection with the IPO. As a result, the net offering proceeds to us, after deducting underwriting discounts and commissions and expenses, were $56.6 million.~~

~~Private Placement~~

On June 2, 2016, we closed a private placement in which we sold an aggregate of 1,081,082 shares of common stock at a price of $18.50 per share, for gross proceeds of $20.0 million. We incurred placement agent fees of $1.3 million, and expenses of $0.2 million in connection with the private placement. As a result, the net offering proceeds to us, after deducting placement agent fees and transaction expenses, were $18.5 million.

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~~November 2016 Public Offering~~

On November 23, 2016, we closed our follow-on public offering in which we sold 4,600,000 shares of common stock at a price to the public of $22.75 per share, for aggregate gross proceeds of $104.7 million. We paid underwriting discounts and commissions of $6.3 million, and we also incurred expenses of $0.2$0.3 million in connection with the offering. As a result, the net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were ~~$98.2~~$134.9 million.

~~At-The-Market Facility~~

On April 21, 2017, we sold 635,000 shares of our common stock at a weighted average price per share of $31.50, for aggregate gross proceeds of approximately $20.0 million. We paid underwriting discounts and commissions of $0.6 million, and we also incurred expenses of $0.1 million in connection with this sale. The shares were sold through Cowen pursuant to a sales agreement with them dated November 2, 2016. Following these sales, we may offer and sell additional shares of our common stock having an aggregate offering price of up to approximately $55.0 million from time to time through Cowen pursuant to the sales agreement.

~~August 2017~~January 2021 Public Offering

~~On August 16, 2017,~~In January 2021, we closed ~~our follow-on~~a public offering in which we sold ~~3,747,602~~6,306,271 shares of common stock at a price to the public of ~~$23.02~~$17.50 per share, for aggregate gross proceeds of ~~$86.3~~$110.4 million. We paid underwriting discounts and commissions of ~~$5.2~~$6.6 million, and we also incurred expenses of ~~$0.2~~$0.4 million in connection with the offering. As a result, the net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were ~~$80.9~~$103.3 million.

Debt Financing

Loan and Security Agreement with Silicon Valley Bank

In March 2020, we entered into a Loan and Security Agreement with SVB. The Loan and Security Agreement provided for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020. In July 2021, we 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.

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Cash Flows

Cash ~~Flows~~and cash equivalents were $61.7 million as of September 30, 2022 compared to $27.3 million as of December 31, 2021. We also had $186.4 million in short-term marketable securities as of September 30, 2022 compared to $198.3 million in short- and long-term marketable securities as of December 31, 2021.

The ~~following table summarizes our~~sources and uses of cash ~~flows~~that contributed to the change in cash and cash equivalents were:


	Nine Months Ended
	September 30,
(In thousands)	2022		2021
Cash and cash equivalents beginning balance	$	27,349	$	22,063
Net cash used in operating activities		(48,452)		(35,059)
Net cash provided by (used in) investing activities		9,926		(158,456)
Net cash provided by financing activities		72,830		225,054
Cash and cash equivalents ending balance	$	61,653	$	53,602

Operating Activities

Cash flow related to operating activities was the result of:



	Nine Months Ended
	September 30,
(In thousands)	2022		2021
Net loss	$	(59,273)	$	(68,061)
Non-cash adjustments to reconcile net loss to net cash used in operating activities		8,433		33,826
Change in accounts payable and accrued expenses		(1,046)		(777)
Change in accounts receivable		26		(39)
Change in prepaid expenses and other assets		3,408		(8)
Net cash used in operating activities	$	(48,452)	$	(35,059)

Net cash used in operating activities increased for the nine months ended September 30, ~~2017 and 2016:~~

Nine Months Ended September 30,


2017

2016


(In thousands)

Net cash used in operating activities

$
(36,453)

$
(26,531)

Net cash (used in) provided by investing activities

(34,127)

15,915

Net cash provided by financing activities

100,464

18,561

Net increase in cash and cash equivalents

$
29,884

$
7,945

~~Operating Activities~~

~~During~~2022 compared to the nine months ended September 30, ~~2017,~~2021 primarily as a result of higher net losses after adjusting for non-cash items and a decrease in cash paid for prepaid expenses and other assets.

The decrease in non-cash adjustments to reconcile net loss to net cash used in operating activities ~~used $36.5 million~~was mainly the result of ~~cash, primarily resulting from our net loss~~a decrease in revaluation of $45.6 million and changes in our operating assets and liabilities of $1.2 million, partially offset by non-cash adjustments of $10.4 million. Net cash used by changes in our operating assets and liabilitiescontingent consideration during the nine months ended September 30, 2017 consisted of a $4.3 million increase in prepaid expenses and other current assets partially offset by a $3.1 million increase in accounts payable and accrued expenses. The increase in prepaid expenses and other current assets was primarily due2022 compared to a $2.0 million PDUFA fee paid to the FDA in conjunction with the filing of the NDA for A-101 40% Topical Solution, as well as deposits made for clinical supplies and development activities which are expected to be incurred during the fourth quarter of 2017. The increase in accounts payable and accrued expenses was primarily due to expenses incurred, but not yet paid, in connection with our Phase 2 clinical trials for A-101 45% Topical Solution, ATI-50001 and ATI-50002, as well as the timing of vendor invoicing and payments. Non-cash expenses of $10.4 million were primarily composed of stock-based compensation expense.

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~~During~~ the nine months ended September 30, ~~2016, operating activities used $26.5 million of cash, primarily~~2021 due to higher discount rates, resulting from ~~our net loss of $36.6 million partially offset by cash provided by changes in our operating assets~~higher risk-free rates and ~~liabilities of $3.0 million and by non-cash adjustments of $7.1 million. Net cash provided by changes in our operating assets and liabilities~~wider credit spreads, being applied to potential payments relative to the prior period. We recorded increases during the nine months ended September 30, ~~2016 consisted primarily~~2021 from updates to the probability of success and estimated future sales level assumptions as a result of the completion of a ~~$2.9 million~~Phase 2a clinical trial of zunsemetinib in subjects with rheumatoid arthritis, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with atopic dermatitis. Additionally, the inclusion of estimated future sales of zunsemetinib as a potential treatment for hidradenitis suppurativa and psoriatic arthritis, which are additional planned indications for zunsemetinib, also contributed to the increase in accounts payable and accrued expenses. The increase in accounts payable and accrued expenses was primarily due to expenses incurred, but not yet paid, in connection with our Phase 3 clinical trials for A-101 and the timing of vendor invoicing and payments. Non-cash expenses of $7.1 million were primarily composed of $4.2 million of stock-based compensation expense and $2.8 million associated with the acquisition of Vixen.

~~Investing Activities~~

~~During~~during the nine months ended September 30, ~~2017,~~2021.

The decrease in cash paid for prepaid expenses and other assets resulted from a decrease in the prepaid research and development balance at September 30, 2022 relative to the balance at December 31, 2021, as compared to the prepaid research and development balance at September 30, 2021 relative to the balance at December 31, 2020. Additionally, the decrease resulted from the realization of previously recorded assets during the nine months ended September 30, 2022.

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Investing Activities

Cash flow related to investing activities was the result of:


	Nine Months Ended
	September 30,
(In thousands)	2022		2021
Purchases of property and equipment	$	(500)	$	(108)
Purchases of marketable securities		(118,729)		(199,862)
Proceeds from sales and maturities of marketable securities		129,155		41,514
Net cash provided by (used in) investing activities	$	9,926	$	(158,456)

Net cash provided by investing activities for the nine months ended September 30, 2022 compared to net cash used ~~$34.1 million of cash, consisting of proceeds~~in investing activities for the nine months ended September 30, 2021 primarily resulted from higher sales and maturities of marketable securities ~~of $96.7 million, partially offset by purchases of marketable securities of $120.5 million, $9.6 million for the acquisition of Confluence and purchases of equipment of $0.7 million.~~

~~During~~during the nine months ended September 30, ~~2016, investing activities provided $15.9 million~~2022, which were used to fund our operations, and a reduction of ~~cash, consisting of proceeds from sales and maturities of marketable securities of $49.8 million, partially offset by~~ purchases of marketable securities, ~~of $33.7 million and purchases of equipment of $0.2 million.~~

~~Financing Activities~~

~~During~~which were higher during the nine months ended September 30, ~~2017,~~2021 following our January 2021 and June 2021 public offerings.

Financing Activities

Cash flow related to financing activities was the result of:


	Nine Months Ended
	September 30,
(In thousands)	2022		2021
Proceeds from issuance of common stock in connection with public offerings, net of issuance costs	$	—	$	238,200
Proceeds from issuance of common stock under the at-the-market sales agreement, net of issuance costs		72,744		—
Repayment of debt		—		(11,483)
Payments of employee withholding taxes related to restricted stock unit award vesting		(34)		(3,122)
Proceeds from exercise of employee stock options and the issuance of stock		120		1,459
Net cash provided by financing activities	$	72,830	$	225,054

Net cash provided $100.5 million including $19.3 million in April 2017 under our sales agreement with Cowen, and $80.9 million of net proceeds from our August 2017 public offering, as well as $0.2 million of cash received from the exercise of employee stock options.

~~During~~by financing activities decreased for the nine months ended September 30, ~~2016, financing activities provided $18.6 million of cash~~2022 compared to the nine months ended September 30, 2021 primarily due to our January 2021 and June 2021 public offerings, partially offset by the proceeds from our April 2022 sale under the ~~private placement of our common stock in June 2016.~~ at-the-market sales agreement.

Funding Requirements

~~We plan to focus in the near term on the development, marketing approval and potential commercialization of A-101 40% Topical Solution for the treatment of SK.~~ We anticipate we will incur net losses ~~for~~in the ~~next several years~~near term as we continue ~~our~~the clinical development of ~~A-101 40% Topical Solution~~zunsemetinib as a potential treatment for ~~the~~moderate to severe rheumatoid arthritis and other immuno-inflammatory diseases, ATI-1777 as a potential treatment ~~of SK~~for moderate to severe atopic dermatitis and ~~continue research and development of A-101 45% Topical Solution~~ATI-2138 as a potential treatment for ~~the treatment of common warts and ATI-50001 and ATI-50002 for the treatment of AA, and potentially for other dermatological conditions,~~T cell-mediated autoimmune diseases, as well as ~~for~~continue the development of ~~other JAK inhibitor compounds. In addition, we plan to continue to invest in discovery efforts to explore~~our preclinical compounds and discover and develop additional drug ~~candidates, build commercial capabilities and expand our corporate infrastructure.~~candidates. We may not be able to ~~complete the development and initiate commercialization of~~generate revenue from these programs if, among other things, our clinical trials are not successful, ~~or if~~ the FDA does not approve ~~A-101 40% Topical Solution or~~ our ~~other~~ drug candidates currently in clinical trials when we expect, or at ~~all.~~all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical ~~trial~~ costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. We expect to add additional personnel to support our operational plans and strategic direction. Our future funding requirements will be heavily determined by the resources needed to support the development ~~and commercialization~~ of our drug candidates.

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As a publicly traded company, we ~~have incurred~~incur and will continue to incur significant legal, accounting and other ~~expenses that we were not required to incur as a private company.~~similar expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the ~~NASDAQ~~Nasdaq Stock Market LLC, requires public companies to implement specified corporate governance practices that ~~were not applicable to us prior to our IPO. We expect ongoing compliance with these~~

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~~rules and regulations will~~could increase our ~~legal and financial~~ compliance ~~costs and will make some activities more time-consuming and costly.~~costs.

We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of our ~~unaudited~~ condensed consolidated financial statements that appear in Item 1 of this Quarterly Report on Form 10-Q based on our current operating assumptions including the completion of our Phase 2 clinical trials for A-101 45% Topical Solution for the treatment of common warts and the continued development of ATI-50001 and ATI-50002 as potential treatments for AA and vitiligo. These assumptions may prove to be wrong, and we could utilize our available capital resources sooner than we expect.assumptions. We ~~expect that we~~ will require additional capital to ~~commercialize A-101 40% Topical Solution, if we receive marketing approval,~~complete the clinical development of zunsemetinib, ATI-1777 and ATI-2138, to develop our preclinical compounds, and to pursue in-licenses or acquisitions of other drug candidates. If we receive marketing approval for A-101 40% Topical Solution, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize that drug candidate.support our 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 us to continue to implement our long-term business strategy. Our 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. If we are unable to raise sufficient additional capital or generate revenue from transactions with potential third-party partners for the development and/or commercialization of our drug candidates, we may need to substantially curtail our planned ~~operations and the pursuit of our growth strategy.~~operations.

We may raise additional capital through the sale of equity or ~~convertible~~ debt securities. In such an event, ~~your~~our stockholders’ ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a holder of our common stock.

Because of the numerous risks and uncertainties associated with research ~~development~~ and ~~commercialization~~development of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our ~~future~~ funding requirements in the near term will depend on many factors, including:

●

the number and ~~characteristics~~development requirements of the drug candidates that we may pursue;

●

the scope, progress, results and costs of ~~researching~~preclinical development, laboratory testing and ~~developing~~conducting preclinical and clinical trials for our drug candidates;

●

the costs, timing and outcome of regulatory review of our drug candidates;

●

the extent to which we in-license or acquire additional drug candidates and ~~conducting preclinical studies~~technologies;

●

the costs and ~~clinical trials;~~

timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

●

the impact on the timing of our preclinical studies, the recruitment, enrollment, conduct and timing of our clinical trials and our business due to the ~~costs involved in, obtaining~~COVID-19 pandemic;

●

our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing ~~approvals~~approval for and/or commercialize our drug candidates;

and

●

~~the cost of manufacturing our drug candidates and any drugs we successfully commercialize;~~

our ability to ~~establish and maintain strategic collaborations, licensing~~earn revenue as a result of licenses to, or partnerships or other arrangements ~~and the financial terms of such agreements;~~

with, third parties.

~~the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and~~

~~the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future drug candidates, if any.~~

~~Contractual Obligations and Commitments~~Leases

We occupy ~~office~~ space for our headquarters in ~~Malvern,~~Wayne, Pennsylvania under ~~two operating lease agreements both of~~a sublease agreement which ~~have terms~~has a term through ~~November 2019, that require future aggregate rental payments of $0.1 million during~~October 2023. In December 2020, we entered into a sub-sublease agreement under which we sub-subleased 8,115 square feet to a third party. The sub-sublease term runs concurrently with the ~~three months ending December 31, 2017, $0.4 million during the year ending December 31, 2018, and $0.4 million during the year ending December 31, 2019.~~

~~Confluence occupies~~original sublease agreement. We occupy office and laboratory space in St. Louis, Missouri under ~~an operating lease~~a sublease agreement which has a term through ~~December 2017, which requires future rental payments~~June 2029. Our aggregate remaining lease payment obligations for these two facilities was $3.1 million as of ~~$0.1 million during the three months ending December 31, 2017.~~ September 30, 2022.

~~Table~~Agreement and Plan of ~~Contents~~Merger – Confluence

Under the ~~assignment agreement pursuant to which we acquired intellectual property,~~Confluence Agreement, we have agreed to pay ~~royalties on sales of A-101 40% Topical Solution or related products at rates ranging in low single-digit percentages of net sales, as defined in~~ the ~~agreement. Under the related finder’s services agreement, we have agreed to make~~former Confluence equity holders aggregate ~~payments~~remaining contingent consideration of up to ~~$4.5~~$75.0 million based upon the achievement of specified future regulatory and commercial ~~milestones.~~milestones set forth in the Confluence Agreement. In addition, we have agreed to pay ~~royalties on sales of A-101 40% Topical Solution or related products at a low single-digit percentage of net sales,~~the former Confluence equity holders future royalty payments calculated as ~~defined in the agreement.~~

Under a commercial supply agreement with a third party, we have agreed to pay a termination fee of up to $0.4 million in the event we terminate the agreement without cause or the third party terminates the agreement for cause.

Under a license agreement with Rigel that we entered into in August 2015, we have agreed to make aggregate payments of up to $80.0 million upon the achievement of specified pre-commercialization milestones, such as clinical trials and regulatory approvals. Further, we have agreed to pay up to an additional $10.0 million to Rigel upon the achievement of a second set of development milestones. With respect to any products we commercialize under the agreement, we will pay Rigel quarterly tiered royalties on our annual net sales of each product developed using the licensed JAK inhibitors at a high single-digit percentage of annual net sales, subject to specified reductions.

~~Under a stock purchase agreement with the selling stockholders of~~ ~~Vixen, w~~e are obligated to make aggregate payments of up to $18.0 million upon the achievement of specified pre-commercialization milestones for three products covered by the Vixen patent rights in the United States, the European Union and Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial milestones for products covered by the Vixen patent rights. We are also obligated to make a payment of $0.1 million on March 24th of each year, through March 24, 2022, which amounts are creditable against any specified future payments that may be paid under the stock purchase agreement. ~~With respect to any covered products that we commercialize, we are obligated to pay~~ a low single-digit percentage of annual net sales, subject to specified

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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. IfIn addition to the payments described above, if we ~~sublicense~~sell, license or transfer any of the ~~patent rights and know-how~~intellectual property acquired from Confluence pursuant to the ~~stock purchase agreement~~,Confluence Agreement to a third party, we will be obligated to pay ~~a portion of any consideration we receive from such sublicenses in specified circumstances.~~

~~Under a license agreement with The Trustees of Columbia University in~~ the City of New York, or Columbia, we are obligated to pay an annual license fee of $10,000, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under the license agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired pursuant to the license agreement, we will be obligated to pay Columbiaformer Confluence equity holders a portion of any consideration received from such ~~sublicenses~~sale, license or transfer in specified circumstances.

~~Under an acquisition agreement with Confluence~~ we are obligated to make aggregate payments of up to $80.0 million upon the achievement of specified development, regulatory and commercialization milestones. With respect to any covered products we commercialize, we are obligated to pay 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. If we sublicense any of the patent rights and know-how acquired pursuant to the merger ~~agreement, we will be obligated to pay a portion of any consideration we receive from such sublicenses in specified circumstances.~~ R&D Obligations

We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other service providers for clinical trials, preclinical ~~research~~ studies and testing, manufacturing and other services and products for operating purposes. These contracts generally

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provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

~~Off-Balance Sheet Arrangements~~

Segment Information

We ~~did not~~ have ~~during~~two reportable segments, therapeutics and contract research. The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases. The contract research segment earns revenue from the ~~periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations~~provision of ~~the SEC.~~ laboratory services.

~~Emerging Growth Company Status~~

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

~~We are exposed to market risk related to changes in interest rates.~~ Our cash equivalents and marketable securities consist of money market funds, asset-backed debt securities, commercial paper, corporate debt securities, ~~and~~foreign government agency, ~~debt.~~U.S. government and U.S. government agency debt securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, due to the short-term nature and ~~risk~~low-risk profile of our investment portfolio, we do not expect that an immediate 10% change in market interest rates would have a material effect on the fair market value of our investment portfolio. We have the ability to hold our marketable securities until maturity, and therefore we dowould not expect our operating results or cash flows to be affected ~~significantly~~to any significant degree by the effect of a change in market interest rates on our investments.

The uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic and ongoing geopolitical tensions has introduced significant volatility in the financial markets during and subsequent to the quarter ended September 30, 2022.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as ~~defined~~set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, ~~refers to~~means controls and other procedures of a company that are designed to ~~ensure~~provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the ~~SEC’s~~ rules and ~~forms.~~forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ~~ensure~~provide reasonable assurance that ~~such~~ information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to athe company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

~~In designing and evaluating our disclosure~~ Management recognizes that any controls and ~~procedures, management recognizes that disclosure controls and~~

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procedures, no matter how well ~~conceived~~designed and operated, can provide only reasonable ~~not absolute,~~ assurance ~~that the~~of achieving their objectives, ~~of the disclosure controls~~ and ~~procedures are met. Additionally, in designing disclosure controls and procedures, our~~ management necessarily ~~was required to apply~~applies its judgment in evaluating the cost-benefit relationship of possible ~~disclosure~~ controls and procedures. ~~The design of any system of controls also is based in part upon certain assumptions about~~Based on the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

~~Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness~~evaluation of our disclosure controls and procedures as of September 30, ~~2017, the end~~2022, our chief executive officer and chief financial officer concluded that, as of ~~the period covered by this Quarterly Report on Form 10-Q. Based upon~~ such ~~evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that~~date, our disclosure controls and procedures were effective ~~as of such date~~ at the reasonable assurance level.

~~Management’s assessment of disclosure controls and procedures excluded consideration of Confluence’s~~(b) Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting ~~which was acquired~~identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the third quarter of 2017. This exclusion is consistent with guidance provided by the staff of the SEC that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting for up to one year from the date of acquisition, subject to specified conditions. Confluence’s total assets were $1.3 million as of September 30, 2017 and Confluence’s total revenues were $0.7 million during the three months ended September 30, 2017.

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~~(b)~~ ~~Changes in Internal Controls Over Financial Reporting~~

~~There have not been any changes in our internal controls over financial reporting during our fiscal~~ quarter ended September 30, ~~2017~~2022 that has materially affected, or ~~are~~is reasonably likely to materially affect, our internal control over financial reporting. ~~As a result of our acquisition of Confluence, we are in the process of designing and implementing controls over intangible assets.~~

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we ~~may be~~are subject to litigation and claims arising in the ordinary course of ~~business.~~business including intellectual property and product liability litigation. We are not currently a party to any material legal proceedings and we are not aware of any other pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.

Item 1A. Risk Factors

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. ~~Except for the new risk factors set forth immediately below, our~~Our risk factors have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2021, filed with the SEC on ~~March 15, 2017.~~ February 24, 2022.

~~We may not realize the anticipated benefits of our acquisition of Confluence.~~

In August 2017, we acquired Confluence Life Sciences, Inc., or Confluence, including several preclinical drug candidates and Confluence’s contract research services business. Acquisitions are inherently risky, and we may not realize the anticipated benefits of the acquisition of Confluence. Specifically, we are subject to the risks that:

~~we fail to successfully develop or integrate Confluence’s preclinical drug candidates into our pipeline in order to achieve our strategic objectives;~~

~~we are unable to adequately integrate or continue operating Confluence’s contract research services business;~~

~~we receive inadequate or unfavorable data from preclinical studies or clinical trials evaluating the acquired preclinical drug candidates; and~~

our due diligence processes in connection with the acquisition fail to identify significant problems, liabilities or other shortcomings or challenges of Confluence, including problems, liabilities or other shortcomings or challenges with respect to intellectual property, product quality and safety and other known and unknown liabilities.

~~If we are unable to successfully integrate Confluence’s business and employees, it could have an adverse effect on our future results and the market price of our common stock.~~

The success of our acquisition of Confluence will depend, in large part, on our ability to realize operating synergies from combining our business with Confluence’s business. To realize these anticipated benefits, we must successfully integrate Confluence’s business and employees. This integration will be complex and time-consuming.

The failure to successfully integrate and manage the challenges presented by the integration process may result in our failure to achieve some or all of the anticipated benefits of the merger. Potential difficulties that may be encountered in the integration process include the following:

~~Table of Contents~~

~~complexities associated with managing the larger combined company with distant business locations;~~

~~integrating personnel from the two companies;~~

~~current and prospective employees may experience uncertainty regarding their future roles with our company, which might adversely affect our ability to retain, recruit and motivate key personnel~~;

~~lost sales and customers as a result of customers of Confluence’s contract research services business deciding not to do business with the combined company;~~

~~potential unknown liabilities and unforeseen expenses associated with the merger; and~~

~~performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.~~

If any of these events were to occur, the ability of the combined company to maintain relationships with customers, suppliers and employees or our ability to achieve the anticipated benefits of the merger could be adversely affected, or could reduce our future earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect the market price of our common stock.

~~Charges to earnings resulting from the merger may cause our operating results to suffer.~~

~~Under accounting principles, we will allocate the total purchase price of the merger to Confluence’s net tangible assets and intangible assets based on their fair values as of the date of the~~ merger, and we will record the excess of the purchase price over those fair values as goodwill. Our management’s estimates of fair value will be based upon assumptions that they believe to be reasonable but that are inherently uncertain. The following factors, among others, could result in material charges that would cause our financial results to be negatively impacted:

~~impairment of goodwill~~

~~charges for the amortization of identifiable intangible assets and for stock-based compensation; and~~

~~accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the purchase price allocation.~~

Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would negatively impact our results of operations.

~~Our sublease could terminate if the master lease is terminated for any reason, thus terminating our rights to access our corporate headquarters.~~

We sublease space for our corporate headquarters. While the term of the sublease extends until October 31, 2023, if for any reason the master lease is terminated or expires prior to October 31, 2023, our sublease will also automatically terminate. ~~In such an event, we would need to obtain a new direct lease with the master landlord or negotiate and enter into a new lease for office space at a different location, which may harm our business.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~Table of Contents~~

Item 6. Exhibits


Exhibit No.		Document
Exhibit No.		~~Document~~

~~2.1*+^~~		~~Agreement and Plan of Merger, dated as of August 3, 2017, by and among the Registrant, Aclaris Life Sciences, Inc., Confluence Life Sciences, Inc. and Fortis Advisors LLC~~
3.1		Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on October 13, 2015).

3.2		Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit ~~3.2~~3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on ~~October 13, 2015)~~June 24, 2020).

10.1*10.1+		~~Fifth Amendment to Amended and Restated Sublease,~~Employment Agreement, dated as of August 1, 2022, by and between the Registrant and ~~NST Consulting, LLC, dated as of July 17, 2017.~~
~~10.2~~		~~Aclaris Therapeutics, Inc. Inducement Plan~~Douglas Manion (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, ~~2017)~~2022).
~~10.3~~		Form of Stock Option Grant Notice and Stock Option Agreement used in connection with the Aclaris Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
~~10.4~~		Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement used in connection with Aclaris Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
��
31.1*		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act.

31.2*		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act.

32.1**		Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act.

101.INS		XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

Table of Contents


101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document


104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*	Filed herewith.

~~Table of Contents~~

**	These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
+	~~Confidential treatment has been requested with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the SEC.~~

^	Pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC, certain exhibits and schedules to this agreement have been omitted. The Registrant hereby agrees to furnish supplementally to the SEC, upon its request, anyIndicates management contract or ~~all of such omitted exhibits or schedules~~
	compensatory plan.

4339

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ACLARIS THERAPEUTICS, INC.

Date: November ~~7, 2017~~8, 2022	By:	/s/ Neal Walker
		Neal Walker
		~~President and~~ Chief Executive Officer
		(On behalf of the Registrant)


Date: November ~~7, 2017~~8, 2022	By:	/s/ Frank Ruffo
		Frank Ruffo
		Chief Financial Officer
		(Principal Financial Officer)

4440


(Mark one)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, ~~2017~~2022
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware (State or Other Jurisdiction of Incorporation or Organization)	46-0571712 (I.R.S. Employer Identification No.)
~~101 Lindenwood Drive,~~640 Lee Road, Suite ~~400~~200 ~~Malvern,~~Wayne, PA (Address of principal executive offices)	~~19355~~19087 (Zip Code)


Title of Each Class:	Trading Symbol(s)	Name of Each Exchange on which Registered
Common Stock, $0.00001 par value	ACRS	The Nasdaq Stock Market, LLC


Large accelerated filer ☐⌧		Accelerated filer ☒◻

Non-accelerated filer ☐◻		Smaller reporting company ☐◻
~~(Do not check if a smaller reporting company)~~
		Emerging growth company ☒☐


		PAGE
	~~PAGE~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	2

Unaudited Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021	2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, ~~2017~~2022 and ~~2016~~2021	3

Unaudited Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity for the three and nine months ended September 30, ~~2017~~2022and 2021	4

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2022 and ~~2016~~2021	5

Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 20

Item 3. Quantitative and Qualitative Disclosures about Market Risk	38 36

Item 4. Controls and Procedures	38 36

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	40 38

Item 1A. Risk Factors	40 38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41 38

Item 6. Exhibits	42 38

Signatures	44 40


						Accumulated
	Common Stock			Additional		Other				Total
		Par		Paid‑in		Comprehensive		Accumulated		Stockholders’
	Shares	Value		Capital		Loss		Deficit		Equity
Balance at December 31, 2021	61,228,446	$	1	$	792,971	$	(224)	$	(595,407)	$	197,341
Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units	509,037		—		49		—		—		49
Unrealized loss on marketable securities	—		—		—		(748)		—		(748)
Stock-based compensation expense	—		—		2,346		—		—		2,346
Net loss	—		—		—		—		(18,789)		(18,789)
Balance at March 31, 2022	61,737,483	$	1	$	795,366	$	(972)	$	(614,196)	$	180,199
Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units	91,388		—		88		—		—		88
Issuance of common stock under at-the-market sales agreement, net of offering costs of $2,341	4,838,709		—		72,659		—		—		72,659
Unrealized loss on marketable securities	—		—		—		(354)		—		(354)
Stock-based compensation expense	—		—		3,692		—		—		3,692
Net loss	—		—		—		—		(20,532)		(20,532)
Balance at June 30, 2022	66,667,580	$	1	$	871,805	$	(1,326)	$	(634,728)	$	235,752
Issuance of common stock in connection with vesting of restricted stock units	12,061		—		(11)		—		—		(11)
Unrealized loss on marketable securities	—		—		—		(139)		—		(139)
Stock-based compensation expense	—		—		4,188		—		—		4,188
Net loss	—		—		—		—		(19,952)		(19,952)
Balance at September 30, 2022	66,679,641	$	1	$	875,982	$	(1,465)	$	(654,680)	$	219,838


						Accumulated
	Common Stock			Additional		Other				Total
		Par		Paid‑in		Comprehensive		Accumulated		Stockholders’
	Shares	Value		Capital		Loss		Deficit		Equity
Balance at December 31, 2016	26,059,181	$	—	$	260,671	$	(269)	$	(90,912)	$	169,490
Issuance of common stock under the at-the-market sales agreement, net of offering costs of $691	635,000		—		19,311		—		—		19,311
Issuance of common stock in connection with public offering, net of underwriting discounts and commissions and offering costs of $5,352	3,747,602		—		80,918		—		—		80,918
Issuance of common stock in connection with the acquisition of Confluence	349,527				9,675		—		—		9,675
Exercise of stock options and vesting of restricted stock units	43,369		—		168		—		—		168
Unrealized loss on marketable securities	—		—		—		7		—		7
Foreign currency translation adjustment	—		—		—		149		—		149
Stock-based compensation expense	—		—		10,130		—		—		10,130
Net loss	—		—		—		—		(45,589)		(45,589)
Balance at September 30, 2017	30,834,679	$	—	$	380,873	$	(113)	$	(136,501)	$	244,259


Cash consideration paid	$	10,269
Aclaris common stock issued		9,675
Contingent consideration		4,378
Total fair value of consideration to Confluence equity holders	$	24,322


Cash and cash equivalents	$	622
Accounts receivable, net		574
Other current assets		89
Property and equipment		268
Other intangible assets		751
IPR&D		6,629
Goodwill		18,504
Total assets acquired		27,437

Accounts payable and accrued expenses		656
Deferred tax liability		2,386
Other liabilities		73
Total liabilities assumed		3,115

Total net assets acquired	$	24,322


	December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	11,522	$	12,691	$	—	$	24,213
Marketable securities		—		143,963		—		143,963
Total	$	11,522	$	156,654	$	—	$	168,176


					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number		Exercise		Contractual	Intrinsic
	of Shares		Price		Term	Value
					(in years)
Outstanding as of December 31, 2016	2,702,350		$	18.94	9.05	$	24,434
Granted	617,500			26.47
Exercised	(36,738)			6.40
Forfeited and cancelled	(40,281)			21.09
Outstanding as of September 30, 2017	3,242,831		$	20.49	8.60	$	21,704
Options vested and expected to vest as of September 30, 2017	3,242,831		$	20.49	8.60	$	21,704
Options exercisable as of September 30, 2017	828,823	(1)	$	10.95	7.73	$	12,666


		Weighted
		Average
		Grant Date
	Number	Fair Value
	of Shares	Per Share
Outstanding as of December 31, 2016	219,614	$	27.43
Granted	88,547		26.59
Vested	(9,299)		20.32
Forfeited and cancelled	(4,531)		27.05
Outstanding as of September 30, 2017	294,331	$	27.41


Year Ending December 31,
2017	$	114
2018		394
2019		368
2020		—
2021		—
Thereafter		—
Total	$	876


	Three Months Ended September 30,
	2017		2016		Change
	(In thousands)
Revenue	$	684	$	—	$	684
Cost of revenue		453		—		453
Gross profit		231		—		231
Operating expenses:
Research and development		10,864		7,162		3,702
General and administrative		8,123		3,650		4,473
Total operating expenses		18,987		10,812		8,175
Loss from operations		(18,756)		(10,812)		(7,944)
Other income, net		564		118		446
Net loss	$	(18,192)	$	(10,694)	$	(7,498)


	Nine Months Ended September 30,
	2017		2016		Change
	(In thousands)
Revenue	$	684	$	—	$	684
Cost of revenue		453		—		453
Gross profit		231		—		231
Operating expenses:
Research and development		26,601		26,533		68
General and administrative		20,611		10,407		10,204
Total operating expenses		47,212		36,940		10,272
Loss from operations		(46,981)		(36,940)		(10,041)
Other income, net		1,392		336		1,056
Net loss	$	(45,589)	$	(36,604)	$	(8,985)