performance obligation is satisfied. The Company only recognizes revenue when collection of the ~~earnings process~~consideration it is ~~complete, which~~entitled to under ~~SEC Staff Accounting~~a contract with a customer is probable.

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.

Contract Research

The Company earns contract research revenue from the provision of laboratory ~~services to clients through Confluence, its 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 to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts.

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~~The~~Under ASC Topic 606, the Company elected to apply the “right to invoice” practical expedient when recognizing contract research revenue and as such, recognizes revenue in the amount which it has the right to invoice. ASC Topic 606 also ~~receives~~provides an optional exemption, which the Company has elected to apply, from disclosing remaining performance obligations when revenue is recognized from ~~grants under~~ the ~~Small Business Innovation Research program~~satisfaction of the ~~National Institutes~~performance obligation in accordance with the “right to invoice” practical expedient.

Licensing

Licenses of ~~Health (“NIH”). The Company, through its Confluence subsidiary, currently has two active grants from NIH which are related to early-stage research.~~Intellectual Property – The Company recognizes revenue received from non-refundable, upfront fees related to ~~these grants as amounts become reimbursable under each grant, which~~the licensing of intellectual property when the intellectual property is ~~generally when research is performed~~determined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the ~~related costs are incurred.~~customer is able to use and benefit from the license.

~~Intangible Assets~~

~~Intangible assets include both finite lived~~Milestone 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.Royalty Payments – The Company ~~tests intangible assets for impairment at least annually, or if indicators of impairment are present.~~ considers any future potential milestones and sales-based royalties to be variable consideration. 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 contingent consideration related to future potential payments based upon the achievement of certain~~revenue from development, regulatory and anniversary milestone payments as they are achieved. The Company recognizes revenue from commercial milestones ~~resulting from~~and royalty payments as the ~~acquisition~~sales occur.

Discontinued Operations

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

As of March 31, 2023, and December 31, 2022, the ~~date of acquisition. Changes~~Company had $2.2 million in fair value reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. Future changes in the fair value of the contingent consideration, if any, will be recordedaccrued expenses reported as ~~income or expense~~discontinued operations in the Company’s consolidated ~~statement of operations.~~ balance sheet.

~~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 the gross assets acquired, or disposed 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. 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 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. 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,~~ ~~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. The Company is assessing the potential impact of ASU 2014-09 on its consolidated financial statements.

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3. ~~Acquisition of Confluence~~

On August 3, 2017, the Company entered into an Agreement 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.

The Company has also agreed to pay the Confluence equity holders contingent consideration of up to $80,000, based upon the achievement of certain development, regulatory and commercial 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 Confluence 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

~~The Company funded the acquisition and transaction expenses with cash on hand.~~

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

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

4. 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:


	March 31, 2023
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	37,108	$	—	$	—	$	37,108
Marketable securities		—		159,683		—		159,683
Total assets	$	37,108	$	159,683	$	—	$	196,791


Liabilities:
Contingent consideration	$	—	$	—	$	32,300	$	32,300
Total liabilities	$	—	$	—	$	32,300	$	32,300

September 30, 2017


Level 1

Level 2

Level 3

Total

Assets:













Cash equivalents

$
44,670

$
13,983

$
—

$
58,653

Marketable securities

—

167,793

—

167,793

Total Assets

$
44,670

$
181,776

$
—

$
226,446

Liabilities:

Acquisition-related contingent consideration

$
—

$
—

$
4,378

$
4,378

Total liabilities

$
—

$
—

$
4,378

$
4,378

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

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~~Plan of Merger – Confluence

~~In August 2012, the~~The Company entered into an ~~assignment agreement with~~Agreement and Plan of Merger, pursuant to which it acquired Confluence (the “Confluence Agreement”). Under the ~~Estate of Mickey Miller, or the Miller Estate, under which~~Confluence Agreement, the Company ~~acquired some~~has agreed to pay the former Confluence equity holders aggregate remaining contingent consideration 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 $1,000up to $75.0 million based upon the achievement of specified regulatory ~~milestones. The payments were recorded as general~~ and ~~administrative expenses~~commercial milestones set forth in the ~~Company’s consolidated statement of operations.~~

~~Under the finder’s services agreement,~~Confluence Agreement. In addition, the Company is obligated to make additional milestone payments of up to $4,500 upon the achievement of specified commercial milestones. Under each of the assignment agreement and the finder’s services agreement, the Company is also obligatedhas 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 March 31, 2023 and ~~product-by-product basis, are payable until~~December 31, 2022, the ~~date that all~~balance of the patent rights for that product have expired, the expiration of any market exclusivity period granted by a regulatory body or, in specified circumstances, ten years from the first commercial sale of such product. The License Agreement terminates on 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. The Company may also terminate the License Agreement without cause at any time upon advance written notice to Columbia.Company’s contingent consideration liability was $32.3 million and $33.1 million, respectively (see Note 3).

The Company accounted for 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 as of the acquisition date on the basis that the cost 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, the Company recorded the $600 upfront payment, the fair value of the shares of common stock issued of $2,355, 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, the Company will record as expense any contingent milestone payments or royalties in the period in which such liabilities are incurred.

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~~13.~~12. 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~~March 31, 2023 and ~~2016 due~~2022. The Company concluded that it is more likely than not that its deferred tax assets will not be realized which resulted in recording a full valuation allowance during those periods.

13. 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 ~~conclusion that a valuation allowance is required.~~

~~14. Subsequent Events~~

On November 2, 2017, the Company entered into a Sublease Agreement (the “Sublease”) with Auxilium Pharmaceuticals, LLC, a Delaware limited liability company (the “Sublandlord”), under which the Company will lease 33,019 square feet of space for its corporate headquarters. The term of the Sublease will begin on December 1, 2017 and expire on October 31, 2023. Under the Sublease, base rent for the period from December 1, 2017 through February 28, 2018 shall be abated, after which the Company will pay an initial base rent of $47 per month through February 28, 2019. Beginning March 1, 2019, the monthly base rent will increase annually as specifiedtangible assets are held 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.~~United States.

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


(In thousands)			Contract		Corporate		Total
Three Months Ended March 31, 2023	Therapeutics		Research		and Other		Company
Total revenue	$	1,638	$	4,901	$	(4,011)	$	2,528
Cost of revenue		—		4,547		(3,739)		808
Research and development		22,859		—		(272)		22,587
General and administrative		—		1,062		7,728		8,790
Licensing		1,061		—		—		1,061
Revaluation of contingent consideration		(800)		—		—		(800)
Loss from operations	$	(21,482)	$	(708)	$	(7,728)	$	(29,918)

(In thousands)			Contract		Corporate		Total
Three Months Ended March 31, 2022	Therapeutics		Research		and Other		Company
Total revenue	$	231	$	4,096	$	(2,874)	$	1,453
Cost of revenue		—		3,854		(2,699)		1,155
Research and development		14,481		—		(175)		14,306
General and administrative		—		840		5,259		6,099
Licensing		—		—		—		—
Revaluation of contingent consideration		(1,200)		—		—		(1,200)
Loss from operations	$	(13,050)	$	(598)	$	(5,259)	$	(18,907)

Intersegment Revenue

Revenue for the contract research segment included $4.0 million and $2.9 million for services performed on behalf of the therapeutics segment for the three months ended March 31, 2023 and 2022, respectively. All intersegment revenue has been eliminated in the Company’s condensed consolidated statement of operations.

14. 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. On September 5, 2019, an additional plaintiff, Robert Fulcher (“Fulcher”), filed a substantially identical putative class action complaint captioned Fulcher v. Aclaris Therapeutics, Inc., et al. in the same court against the same defendants. On November 6, 2019, the court consolidated the Rosi and Fulcher actions (together, the “Consolidated Securities Action”) and appointed Fulcher “lead plaintiff” for the putative class. The parties signed and filed a settlement agreement in July 2021. The court granted final approval of the settlement on December 9, 2021. As of December 31, 2021, the Company’s financial obligation under the settlement was $2.7 million, which was within the limits of its insurance coverage. The settlement was paid in January 2022.

15. Subsequent Events

In March 2023, the Company issued a placement notice to sell 3.4 million shares of its common stock for aggregate gross proceeds of $27.5 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023. The Company paid selling commissions of $0.8 million in connection with the sale. The transaction closed in April 2023.

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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

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~~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,~~2022, 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 23, 2023.

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, as a potential treatment for rheumatoid arthritis and ~~commercializing innovative~~psoriatic arthritis. 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/IL17 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases. Zunsemetinib has been adopted as the nonproprietary name for ATI-450.

Moderate to Severe Rheumatoid Arthritis

In December 2021, we initiated 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 fourth quarter of 2023.

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Moderate to Severe Hidradenitis Suppurativa

In December 2021, we initiated 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). In March 2023, we announced that the study did not meet its primary or secondary efficacy endpoints. We do not plan to further pursue this indication.

Moderate to Severe Psoriatic Arthritis

In June 2022, we initiated 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 and in Poland. The primary endpoint is the proportion of subjects achieving ACR20 at week 12. We expect topline data in the first half of 2024.

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

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

In ~~the first quarter of 2016,~~May 2022, we initiated ~~two multi-center,~~a Phase 2b, multicenter, randomized, ~~double blinded,~~double-blind, vehicle-controlled, ~~Phase 3 clinical trials~~parallel-group trial to determine the efficacy, safety, tolerability and ~~one open-label Phase 3 clinical~~pharmacokinetics of ATI-1777 in subjects with moderate to severe atopic dermatitis (ATI-1777-AD-202). In April 2023, we expanded the patient population to include patients with mild disease. In this trial, we are exploring multiple concentrations of ~~A-101 40% Topical Solution~~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 consists 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 second half of 2023.

ATI-2138, an Investigational Oral Covalent ITK/JAK3 Inhibitor

We are developing ATI-2138, an investigational oral covalent ITK/JAK3 inhibitor, as a potential treatment for T cell-mediated autoimmune diseases. The ITK/JAK3 compound interrupts T cell signaling through the combined inhibition of ITK/JAK3 pathways in lymphocytes. 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 ~~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 2022, we submitted ~~a New Drug Application, or NDA,~~an IND for ~~A-101 40% Topical Solution~~ATI-2138 for the treatment of ~~SK to the U.S. Food and Drug Administration, or FDA, in February 2017, and the NDA~~ulcerative colitis, which was ~~accepted for filing~~allowed 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~~November 2022. In December ~~24, 2017. W~~e also submitted a Marketing Authorization Application, or MAA, 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 2015,2022, 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-related serious adverse events among patients treated with A-101 40% Topical Solution, and the most common adverse events reported were nasopharyngitis and sinusitis which were determined to be unrelated to A-101 40% Topical Solution. Based on these results, we submitted an NDA for A-101 40% Topical Solution for the treatment of SK to the FDA in February 2017, and the NDA was accepted 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 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 diagnosed 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 completedinitiated a Phase ~~2 clinical~~1 placebo-controlled, randomized, multiple ascending dose (MAD) trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-2138 in ~~August 2016 evaluating 40% and 45% concentrations of A-101 for the treatment of common warts. In this Phase 2 clinical~~healthy volunteers (ATI-2138-PKPD-102). This 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 comparedseeks 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 centersenroll approximately 60 healthy volunteers in the United States. We expect ~~to report~~topline data ~~from these additional Phase 2 clinical trials in the first half of 2018.~~

In addition, we are developing the JAK inhibitors, ATI-50001 and ATI-50002, which we in-licensed from Rigel Pharmaceuticals, Inc., or Rigel, 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.

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.~~ 2023.

Preclinical Programs

ATI-2231, an Investigational Oral MK2 Inhibitor

We are ~~also developing another series~~exploring the use of ~~JAK inhibitors~~ATI-2231, an investigational oral MK2 inhibitor designed to have a long half-life, as a potential treatment 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~~pancreatic cancer and ~~preclinical~~metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer. We expect clinical development ~~capabilities~~activities to be initiated in 2023, which we expect ~~will allow us~~ to ~~bring early-stage research and development activities in-house that we currently outsource to~~

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advance as a collaboration with an academic third ~~parties. Through the acquisition of Confluence, we also acquired several preclinical product candidates, including additional~~party.

Discovery Programs

We are developing oral gut-biased JAK inhibitors ~~known~~with limited systemic exposure 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. potential treatments for inflammatory bowel disease.

Financial Overview

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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~~$28.2 million for the three months ended March 31, 2023 and $86.9 million for the year ended December 31, ~~2016 and $45.6 million for the nine months ended September 30, 2017.~~2022. As of ~~September 30, 2017,~~March 31, 2023, we had an accumulated deficit of ~~$136.5~~$710.5 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, as needed, 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~~candidates.

Recent Developments

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

In March 2023, we issued a placement notice to sell 3.4 million shares of our common stock for aggregate gross proceeds of $27.5 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023. We paid selling commissions of $0.8 million in connection with the sale. The transaction closed in April 2023.

Impact of Macroeconomic Conditions on Our Business

Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including rising inflation, the U.S. Federal Reserve raising interest rates, the closure of financial institutions and the Russia-Ukraine war, have led to economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or ~~delay~~the global economy worsens, our ~~pursuit~~business, financial condition and results of ~~potential in-licenses~~operations may be harmed.

Acquisition and License Agreements

Agreement and Plan of Merger with Confluence

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

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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 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, 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 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.

Upon execution of the agreement, 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.

During the three months ended March 31, 2023, we received $1.4 million in royalties from Lilly, a portion of which was payable to third parties.

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License Agreement with Pediatrix Therapeutics, Inc.

In November 2022, we entered into a license agreement with Pediatrix Therapeutics, Inc., or Pediatrix, under which we granted Pediatrix the exclusive rights to develop, manufacture and commercialize ATI-1777 in Greater China. Pediatrix has agreed to pay us an upfront payment, development, regulatory and commercial milestone payments, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of ATI-1777 by Pediatrix in Greater China. A portion of consideration received from Pediatrix is payable to the former Confluence equity holders as described above.

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

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~~license and acquisition agreements with third parties, as described above.

Other

Other revenue consists of amounts earned from the ~~laboratory services are performed, based upon~~sub-sublease of our office space, which was terminated during the ~~rates specified in the contracts.~~ year ended December 31, 2022.

We also receive revenue from grants under the Small Business Innovation Research program of the National Institutes of 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 performedCost and ~~the related costs are incurred.~~ Expenses

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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.

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;

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●

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

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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 moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for mild 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 macroeconomic conditions;

●

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 of dollars in development costs.~~

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~~travel expenses.

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Licensing

Licensing expenses consist of third-party contractual obligations incurred under license and ~~officer insurance premiums associated~~acquisition agreements with ~~being a public company. Additionally, if and when we believe a marketing approval~~third parties, as described above.

Revaluation of ~~a drug candidate appears likely, we anticipate an increase~~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.

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Other Income, Net

Other income, net primarily consists of interest earned on our cash, cash equivalents and marketable ~~securities, interest expense, and gains and losses on transactions denominated in foreign currencies.~~securities.

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 there~~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~~2022 included in our ~~2016~~ Annual Report on Form 10-K filed with the SEC on ~~March 15, 2017.~~February 23, 2023.

~~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 of the potential payments. Significant judgement was involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of our contingent consideration liability can result from changes to one or more of these assumptions. These assumptions are highly dependent on the ~~date of acquisition. Changes in fair value reflect new information about the likelihood~~outcome and timing of the ~~payment~~development of ~~the contingent consideration and the passage of time. Future changes in~~our drug candidates. 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~~

~~In January 2017, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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 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 payments. Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data. Probability of success assumptions ranged between 10% and 41% on March 31, 2023. Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value. The discount rate ranged between 9.0% and 9.8% depending on the year of each potential payment.

During the three months ended March 31, 2023, we did not modify any significant assumptions other than the removal of estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication. This impact ~~of ASU 2017-01 on our consolidated financial statements.~~

was partially offset by lower discount rates resulting from lower risk-free rates

2825

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~~In January 2017,~~and changes in credit spreads being applied to potential payments relative to prior periods, as well as 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~~passage 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~~time, resulting in an ~~amount that reflects the~~overall decrease in contingent 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.~~ $0.8 million.

Results of Operations

Comparison of Three Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022


	Three Months Ended September 30,
	2017		2016		Change
	(In thousands)
Revenue	$	684	$	—	$	684

							Three Months Ended March 31,
(In thousands)							2023		2022		Change
Revenues:
Contract research							$	889	$	1,221	$	(332)
Licensing								1,639		202		1,437
Other								—		30		(30)
Total revenue								2,528		1,453		1,075

Costs and expenses:
Cost of revenue		453		—		453		808		1,155		(347)
Gross profit		231		—		231
Operating expenses:
Research and development		10,864		7,162		3,702		22,587		14,306		8,281
General and administrative		8,123		3,650		4,473		8,790		6,099		2,691
Total operating expenses		18,987		10,812		8,175
Licensing								1,061		—		1,061
Revaluation of contingent consideration								(800)		(1,200)		400
Total costs and expenses								32,446		20,360		12,086
Loss from operations		(18,756)		(10,812)		(7,944)		(29,918)		(18,907)		(11,011)

Other income, net		564		118		446		1,758		118		1,640
Net loss	$	(18,192)	$	(10,694)	$	(7,498)	$	(28,160)	$	(18,789)	$	(9,371)

~~Table of Contents~~

Revenue

~~Revenue~~

Contract research

~~Revenue~~

Contract research revenue was ~~$ 0.7~~$0.9 million and $1.2 million for the three months ended ~~September 30, 2017,~~March 31, 2023 and 2022, 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 revenue in the three months ended September 30, 2016.~~ 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~~$1.6 million and $0.2 million for the three months ended ~~September 30, 2017,~~March 31, 2023 and 2022, respectively. The increase was ~~comprised entirely~~driven by $1.4 million 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~~royalty and milestone payments received under the Lilly license agreement.

Other

Other revenue inwas $30 thousand for the three months ended ~~September 30, 2016.~~ March 31, 2022, and was comprised of revenue earned from the sub-sublease of our office space. The sub-sublease was terminated in December 2022.

~~Research~~Costs and ~~Development~~ Expenses

~~Research~~Cost of Revenue

Cost of revenue was $0.8 million and ~~development expenses were $10.9~~$1.2 million for the three months ended ~~September 30, 2017, compared~~March 31, 2023 and 2022, respectively, and in each case, related to ~~$7.2 million for~~providing laboratory services. Changes in cost of revenue generally correlate to changes in contract research revenue. Cost of revenue decreased in the three months ended ~~September 30, 2016.~~ March 31, 2023 compared to the corresponding prior year period due to lower variable costs resulting from the decrease in hours billed.

Table of Contents

Research and Development

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


	Three Months Ended
	March 31,
(In thousands)	2023		2022		Change
Zunsemetinib	$	6,839	$	4,712	$	2,127
ATI-1777		3,123		2,356		767
ATI-2138		3,225		1,126		2,099
ATI-2231		—		1,586		(1,586)
Discovery		1,381		1,089		292
Other research and development		498		322		176
Personnel		4,919		3,228		1,691
Stock-based compensation		2,602		(113)		2,715
Total research and development expenses	$	22,587	$	14,306	$	8,281

Zunsemetinib

The increase ~~of $3.7 million~~in expenses for zunsemetinib during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily driven by an increase of $1.2 million of expenses related to our Phase 2 clinical trials of A-101 45% Topical Solution, an increase of $0.9 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,~~costs associated with drug candidate manufacturing and costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021, and several ancillary clinical trials. The increase was partially offset by a decrease in costs associated with clinical development activities for a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021 and was completed in early March 2023.

ATI-1777

The increase in expenses for ATI-1777 during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to higher costs associated with drug candidate manufacturing and other preclinical development activities as well as costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis.

ATI-2138

The increase in expenses for ATI-2138 during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to an increase ~~of $0.7 million~~ in ~~stock-based compensation expense,~~clinical development expenses associated with a Phase 1 MAD trial during the three months ended March 31, 2023, as well as an increase in preclinical development activities.

ATI-2231

The decrease in expenses for ATI-2231 during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to preclinical development activities and ~~a $0.6 million~~IND-enabling studies as we progressed the program toward IND submission during the three months ended March 31, 2022.

Discovery

The 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~~during the three months ended ~~September 30, 2016.~~ March 31, 2023 compared to the three months ended March 31, 2022 was due to continued investment in our discovery-stage programs as we progressed programs toward candidate selection.

Table of Contents

Personnel and stock-based compensation

The ~~increases noted above were partially offset by a $1.2 million decrease~~increase in personnel and stock-based compensation expenses in the aggregate during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to an increase in costs associated with higher average headcount during the ~~development of A-101 40% Topical Solution~~three months ended March 31, 2023, and lower costs during the three months ended March 31, 2022 due to forfeiture credits.

General and Administrative

The following table summarizes our general and administrative expenses:


	Three Months Ended
	March 31,
(In thousands)	2023		2022		Change
Personnel	$	1,980	$	1,574	$	406
Professional and legal fees		1,721		1,129		592
Facility and support services		618		609		9
Other general and administrative		566		556		10
Stock-based compensation		3,905		2,231		1,674
Total general and administrative expenses	$	8,790	$	6,099	$	2,691

Personnel and stock-based compensation

Personnel and stock-based compensation expenses in the aggregate increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to higher average headcount and salary increases and new equity awards granted in 2023.

Professional and legal fees

Professional and legal fees, including accounting, investor relations and corporate communication costs, increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily as a result of ~~the completion of our Phase 3 clinical trials~~an increase in ~~November 2016.~~ patent expenses.

~~General~~Facility and ~~Administrative Expenses~~support services

~~General~~Facility and ~~administrative~~support services, including general office expenses, ~~were $8.1 million for~~information technology costs and other expenses, increased slightly during the three months ended ~~September 30, 2017,~~March 31, 2023 compared to ~~$3.7 million for~~ the three months ended ~~September 30, 2016. The increase~~March 31, 2022 primarily as a result of ~~$4.5 million was primarily attributable to~~ an increase ~~of $0.7 million~~ in ~~payroll-related expenses~~rent expense due to leasing additional office and laboratory space during the three months ended March 31, 2023.

Licensing

Licensing expenses increased ~~headcount, $1.2~~during the three months ended March 31, 2023 due to amounts due to third parties of $1.1 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~~pertaining 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~~the Lilly agreement. There were no ~~similar amounts~~licensing expenses during the three months ended March 31, 2022.

Revaluation of Contingent Consideration

The decrease in the fair value of our contingent consideration liability during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was mainly due to the removal of estimated future sales levels of zunsemetinib (ATI-450) for moderate to severe hidradenitis suppurativa. This decrease was partially offset by lower discount rates being applied to potential payments relative to prior ~~year period.~~ periods and the passage of time.

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Other Income, ~~Net~~net

~~The $0.4 million increase in other~~Other income, net ~~was~~increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to higher ~~invested balances of marketable securities as a result of funds received from our financing transactions in 2016 and 2017.~~ interest income on investment portfolio balances.

~~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, 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 revenue in the nine months ended September 30, 2016.

~~Cost of Revenue~~

Cost of revenue was $ 0.5 million for the nine months ended September 30, 2017, 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 nine months ended September 30, 2016.

~~Research and Development Expenses~~

Research and development expenses were $26.6 million for the nine months ended September 30, 2017 and $26.5 million for the nine months ended September 30, 2016. Although there was a minimal change in total research and development expenses, we had decreases of $7.6 million in the 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 and $3.4 million in expenses associated with the acquisition of Vixen Pharmaceuticals, Inc., or Vixen, in the nine months ended September 30, 2016, 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 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 the nine months ended September 30, 2016.

~~Table of Contents~~

~~General 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 expenses due to increased headcount, $3.5 million in 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.

~~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,~~March 31, 2023, we had cash, cash equivalents and marketable securities of ~~$227.8~~$204.4 million. Subsequent to March 31, 2023, we raised aggregate gross proceeds of $27.5 million through our at-the-market equity facility. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.

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 and Commitments.”~~ At-the-Market-Facility

~~Initial Public Offering~~

~~On October 13, 2015,~~In March 2023, we ~~closed our IPO in which we sold 5,750,000 shares of common stock at~~issued a ~~price~~placement notice to ~~the public of $11.00 per share, for aggregate gross proceeds of $63.3 million. We paid underwriting discounts and commissions of $4.4~~sell 3.4 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.

~~Table of Contents~~

~~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 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 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~~SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, 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 Public Offering~~

~~On August 16, 2017, we closed our follow-on public offering in which we sold 3,747,602 shares of common stock at a price to the public of $23.02 per share,~~February 23, 2023, for aggregate gross proceeds of ~~$86.3~~$27.5 million. We paid ~~underwriting discounts and~~selling commissions of ~~$5.2 million, and we also incurred expenses of $0.2~~$0.8 million in connection with the ~~offering. As~~sale. This transaction closed in April 2023.

Cash Flows

Cash and cash equivalents were $44.7 million as of March 31, 2023 compared to $45.3 million as of December 31, 2022. We also had $159.7 million in short- and long-term marketable securities as of March 31, 2023 compared to $184.5 million as of December 31, 2022.

The sources and uses of cash that contributed to the change in cash and cash equivalents were:


	Three Months Ended
	March 31,
(In thousands)	2023		2022
Cash and cash equivalents beginning balance	$	45,277	$	27,349
Net cash used in operating activities		(26,353)		(20,969)
Net cash provided by investing activities		25,798		29,932
Net cash provided by financing activities		—		30
Cash and cash equivalents ending balance	$	44,722	$	36,342

Table of Contents

Operating Activities

Cash flow related to operating activities was the result of:



	Three Months Ended
	March 31,
(In thousands)	2023		2022
Net loss	$	(28,160)	$	(18,789)
Non-cash adjustments to reconcile net loss to net cash used in operating activities		6,204		1,354
Change in accounts payable and accrued expenses		(3,321)		(3,712)
Change in accounts receivable		(202)		(10)
Change in prepaid expenses and other assets		(874)		188
Net cash used in operating activities	$	(26,353)	$	(20,969)

Net cash used in operating activities increased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily as a result of higher net losses after adjusting for non-cash items and an increase in the ~~net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $80.9 million.~~ accretion of interest on investments.

~~Cash Flows~~

The ~~following table summarizes our~~increase in non-cash adjustments to reconcile net loss to net cash ~~flows for~~used in operating activities was mainly the ~~nine~~result of an increase in stock-based compensation expense during the three 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~~March 31, 2023 compared to the ~~nine~~three months ended ~~September 30, 2017, operating activities used $36.5 million~~March 31, 2022 due to higher employee headcount and new equity awards granted in 2023, as well as forfeiture credits recognized during the three months ended March 31, 2022. This increase was partially offset by a decrease in the revaluation of ~~cash, primarily~~contingent consideration during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to the removal of estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication. This impact was partially offset by lower discount rates resulting from ~~our net loss of $45.6 million~~lower risk-free rates 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 liabilities 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 duecredit spreads being applied to ~~a $2.0 million PDUFA fee paid~~potential payments relative to the ~~FDA~~prior period.

Investing Activities

Cash flow related to investing activities was the result of:


	Three Months Ended
	March 31,
(In thousands)	2023		2022
Purchases of property and equipment	$	(553)	$	(164)
Purchases of marketable securities		(28,524)		(14,558)
Proceeds from sales and maturities of marketable securities		54,875		44,654
Net cash provided by investing activities	$	25,798	$	29,932

The change 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.

~~Table of Contents~~

~~During the nine months ended September 30, 2016, operating activities used $26.5 million of cash, primarily resulting from our~~ net ~~loss of $36.6 million partially offset by~~ cash provided by ~~changes in our operating assets 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 during~~investing activities for the ~~nine~~three months ended ~~September 30, 2016 consisted primarily of a $2.9 million increase in accounts payable and accrued expenses. The increase in accounts payable and accrued expenses was primarily due~~March 31, 2023 compared 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 the nine~~three months ended ~~September 30, 2017, investing activities used $34.1 million of cash, consisting of proceeds~~March 31, 2022 primarily resulted from higher sales and maturities of marketable securities ~~of $96.7 million,~~during the three months ended March 31, 2023, which were used to fund our operations, partially offset byfrom higher purchases of marketable securities during the three months ended March 31, 2023.

Table of ~~$120.5 million, $9.6 million~~Contents

Financing Activities

Cash flow related to financing activities was the result of:


	Three Months Ended
	March 31,
(In thousands)	2023		2022
Restricted stock unit employee tax withholdings		—		(7)
Proceeds from exercise of employee stock options and the issuance of stock		—		37
Net cash provided by financing activities	$	—	$	30

Net cash provided by financing activities decreased for the ~~acquisition of Confluence and purchases of equipment of $0.7 million.~~

~~During the nine~~three months ended ~~September 30, 2016, investing activities provided $15.9 million of cash, consisting of~~March 31, 2023 compared to the three months ended March 31, 2022 primarily due to there being no 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 the nine months ended September 30, 2017, financing activities 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 exerciseexercises of employee stock ~~options.~~

~~During~~options and the ~~nine~~issuance of stock or employee tax withholdings pertaining to restricted stock units during the three months ended ~~September 30, 2016, financing activities provided $18.6 million of cash primarily from the private placement of our common stock in June 2016.~~March 31, 2023.

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 moderate to severe rheumatoid arthritis and moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for mild to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, continue the ~~treatment~~development of SKour preclinical compounds, and continue ~~research~~to discover and development of A-101 45% Topical Solution for the treatment of common warts and ATI-50001 and ATI-50002 for the treatment of AA, and potentially for other dermatological conditions, as well as for development of other JAK inhibitor compounds. In addition, we plan to continue to invest in discovery efforts to exploredevelop 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.

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 potentially worsening global economic conditions caused by a variety of factors including geopolitical tensions, rising interest rates, the closure of financial institutions and inflationary pressures.If 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.

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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 macroeconomic conditions, including the ~~costs involved in, obtaining~~Russia-Ukraine war;

●

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~~a sublease agreement which has a term through October 2023. Following the expiration of this lease, ~~agreements both of~~we anticipate entering into a new lease agreement. In December 2020, we entered into a sub-sublease agreement under which ~~have terms through November 2019, that require future aggregate rental payments of $0.1 million during the three months ending~~we sub-subleased 8,115 square feet. The sub-sublease was terminated in 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~~2022. We also 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. In February 2023, we added an additional 6,261 square feet of ~~$0.1~~office and laboratory space in St. Louis, Missouri.

Our aggregate remaining lease payment obligations for these two spaces was $3.4 million ~~during the three months ending December~~as of March 31, ~~2017.~~ 2023.

~~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 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 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.~~

~~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.

laboratory services.

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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.~~ Interest Rate Risk

Our cash equivalents and marketable securities consist of money market funds, asset-backed debt securities, commercial paper, corporate debt securities, treasury bills, U.S. government and U.S. government agency ~~debt.~~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.

Inflation Risk

Inflation generally affects us by increasing our cost of labor. Although inflation has increased generally in the United States in recent months, we do not believe that inflation has had a material effect on our business, financial condition or results of operations during the three months ended March 31, 2023.

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 March 31, 2023, 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 controls and procedures, management~~ Management recognizes that ~~disclosure~~any controls and 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~~March 31, 2023, 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~~March 31, 2023 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,~~2022, filed with the SEC on ~~March 15, 2017.~~ February 23, 2023.

~~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:

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~~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.

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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 January 1, 2023, by and between the Registrant and ~~NST Consulting, LLC,~~Douglas Manion (incorporated herein by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K (File No. 001-37581), filed with the SEC on February 23, 2023).

10.2+		Employment Agreement, dated as of ~~July 17, 2017.~~January 1, 2023, by and between the Registrant and Kevin Balthaser (incorporated herein by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K (File No. 001-37581), filed with the SEC on February 23, 2023).
~~10.2~~
10.3+		~~Aclaris Therapeutics, Inc. Inducement Plan~~Eighth Amended and Restated Non-Employee Director Compensation Policy (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K (File No. 001-37581), filed with the SEC on February 23, 2023).

10.4+*		Ninth Amended and Restated Non-Employee Director Compensation Policy.

10.5+		Consulting Agreement, dated as of January 1, 2023, by and between the Registrant and Frank Ruffo (incorporated herein by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K (File No. 001-37581), filed with the SEC on February 23, 2023).

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10.6+		Amendment No. 1 to Consulting Services Agreement, dated as of March 23, 2023, by and between the Registrant and Frank Ruffo (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)~~March 27, 2023).
~~10.3~~
10.7		~~Form~~Sales Agreement, dated as of ~~Stock Option Grant Notice~~February 23, 2023, by and ~~Stock Option Agreement used in connection with~~among the ~~Aclaris Therapeutics, Inc. Inducement Plan~~Registrant, SVB Securities LLC and Cantor Fitzgerald & Co. (incorporated herein by reference to Exhibit ~~10.2~~10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on ~~August 1, 2017)~~February 23, 2023).
~~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

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.

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**	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.

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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~~May 8, 2023	By:	/s/ ~~Neal Walker~~Douglas Manion
		~~Neal Walker~~Douglas Manion
		President and Chief Executive Officer
		(On behalf of the Registrant)


Date: ~~November 7, 2017~~May 8, 2023	By:	/s/ ~~Frank Ruffo~~Kevin Balthaser
		~~Frank Ruffo~~Kevin Balthaser
		Chief Financial Officer
		(Principal Financial Officer)

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(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~~March 31, 2023
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~~March 31, 2023 and December 31, ~~2016~~2022	2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023, and ~~2016~~2022	3

Unaudited Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and 2022	4

Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	5

Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 19

Item 3. Quantitative and Qualitative Disclosures about Market Risk	38 33

Item 4. Controls and Procedures	38 33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	40 34

Item 1A. Risk Factors	40 34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41 34

Item 6. Exhibits	42 34

Signatures	44
		36


	September 30,		December 31,
	2017		2016

Assets
Current assets:
Cash and cash equivalents	$	60,055	$	30,171
Marketable securities		167,793		107,051
Accounts receivable, net		658		—
Prepaid expenses and other current assets		5,616		1,334
Total current assets		234,122		138,556
Marketable securities		—		36,912
Property and equipment, net		1,203		481
Intangible assets		7,367		—
Goodwill		18,504		—
Other assets		195		136
Total assets	$	261,391	$	176,085
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,483	$	2,845
Accrued expenses		3,510		3,378
Total current liabilities		9,993		6,223
Contingent consideration		4,378		—
Other liabilities		375		372
Deferred tax liability		2,386		—
Total liabilities		17,132		6,595
Stockholders’ Equity:
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at September 30, 2017 and December 31, 2016		—		—
Common stock, $0.00001 par value; 100,000,000 shares authorized at September 30, 2017 and December 31, 2016; 30,834,679 and 26,059,181 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		—		—
Additional paid‑in capital		380,873		260,671
Accumulated other comprehensive loss		(113)		(269)
Accumulated deficit		(136,501)		(90,912)
Total stockholders’ equity		244,259		169,490
Total liabilities and stockholders’ equity	$	261,391	$	176,085


	March 31,		December 31,
	2023		2022

Assets
Current assets:
Cash and cash equivalents	$	44,722	$	45,277
Short-term marketable securities		126,081		172,294
Accounts receivable, net		686		484
Prepaid expenses and other current assets		12,872		13,495
Total current assets		184,361		231,550
Marketable securities		33,602		12,242
Property and equipment, net		1,513		1,099
Intangible assets		6,954		6,973
Other assets		3,275		2,732
Total assets	$	229,705	$	254,596
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,190	$	10,351
Accrued expenses		7,263		8,701
Current portion of lease liabilities		603		684
Discontinued operations		2,202		2,202
Total current liabilities		18,258		21,938
Other liabilities		1,970		1,570
Contingent consideration		32,300		33,100
Deferred tax liability		367		367
Total liabilities		52,895		56,975
Commitments and contingencies (Note 14)
Stockholders’ Equity:
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at March 31, 2023 and December 31, 2022		—		—
Common stock, $0.00001 par value; 100,000,000 shares authorized at March 31, 2023 and December 31, 2022; 67,206,025 and 66,688,647 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		1		1
Additional paid‑in capital		887,638		880,832
Accumulated other comprehensive loss		(354)		(897)
Accumulated deficit		(710,475)		(682,315)
Total stockholders’ equity		176,810		197,621
Total liabilities and stockholders’ equity	$	229,705	$	254,596


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

Revenue	$	684	$	—	$	684	$	—
Cost of revenue		453		—		453		—
Gross profit		231		—		231		—
Operating expenses:
Research and development		10,864		7,162		26,601		26,533
General and administrative		8,123		3,650		20,611		10,407
Total operating expenses		18,987		10,812		47,212		36,940
Loss from operations		(18,756)		(10,812)		(46,981)		(36,940)
Other income, net		564		118		1,392		336
Net loss	$	(18,192)	$	(10,694)	$	(45,589)	$	(36,604)
Net loss per share, basic and diluted	$	(0.63)	$	(0.50)	$	(1.68)	$	(1.76)
Weighted average common shares outstanding, basic and diluted		28,834,808		21,415,871		27,180,244		20,752,590
Other comprehensive loss:
Unrealized gain (loss) on marketable securities, net of tax of $0	$	63	$	(12)	$	7	$	144
Foreign currency translation adjustments		(10)		(43)		149		(49)
Total other comprehensive income (loss)		53		(55)		156		95
Comprehensive loss	$	(18,139)	$	(10,749)	$	(45,433)	$	(36,509)


						Accumulated
	Common Stock			Additional		Other				Total
		Par		Paid‑in		Comprehensive		Accumulated		Stockholders’
	Shares	Value		Capital		Loss		Deficit		Equity
Balance at December 31, 2022	66,688,647	$	1	$	880,832	$	(897)	$	(682,315)	$	197,621
Issuance of common stock in connection with vesting of restricted stock units	517,378		—		—		—		—		—
Unrealized gain on marketable securities	—		—				543		—		543
Stock-based compensation expense	—		—		6,806		—		—		6,806
Net loss	—		—		—		—		(28,160)		(28,160)
Balance at March 31, 2023	67,206,025	$	1	$	887,638	$	(354)	$	(710,475)	$	176,810


						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


	September 30, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	44,670	$	13,983	$	—	$	58,653
Marketable securities		—		167,793		—		167,793
Total Assets	$	44,670	$	181,776	$	—	$	226,446


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


	December 31, 2016
	Level 1		Level 2		Level 3		Total

									December 31, 2022
(In thousands)									Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	11,522	$	12,691	$	—	$	24,213	$	38,516	$	—	$	—	$	38,516
Marketable securities		—		143,963		—		143,963		—		184,536		—		184,536
Total	$	11,522	$	156,654	$	—	$	168,176
Total assets									$	38,516	$	184,536	$	—	$	223,052


Liabilities:
Contingent consideration									$	—	$	—	$	33,100	$	33,100
Total liabilities									$	—	$	—	$	33,100	$	33,100


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


									March 31, 2023
											Gross		Gross
									Book		Unrealized		Unrealized		Fair
(In thousands)									Value		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	39,432	$	—	$	(9)	$	39,423
Corporate debt securities⁽¹⁾									$	32,114	$	33	$	(34)	$	32,113
Commercial paper		76,130		—		—		76,130		70,910		9		(87)		70,832
Asset-backed securities		20,752		—		(3)		20,749
U.S. government agency debt securities		31,521		—		(30)		31,491
Treasury bills										4,940		—		(24)		4,916
Asset-backed debt securities⁽²⁾										19,409		—		(103)		19,306
U.S. government and government agency debt securities⁽³⁾										32,667		30		(181)		32,516
Total marketable securities	$	167,835	$	—	$	(42)	$	167,793	$	160,040	$	72	$	(429)	$	159,683
⁽¹⁾ Included in Corporate debt securities is $9.2 million with maturity dates between one and two years.
⁽²⁾ Included in Asset-backed debt securities is $19.3 million with maturity dates between two and four years.
⁽³⁾ Included in U.S. government and government agency debt securities is $5.1 million with maturity dates between one and two years.


		Year Ending
(In thousands)		December 31,
2023	$	56
2024		75
2025		75
2026		75
2027		44
Total	$	325


	Nine Months Ended
	September 30,
	2017		2016


					Three Months Ended
					March 31,
					2023		2022
Risk-free interest rate	1.89	%	1.41	%	3.46	%	1.60	%
Expected term (in years)	6.2		6.5		6.3		6.3
Expected volatility	93.84	%	96.60	%	77.73	%	77.95	%
Expected dividend yield	0	%	0	%	0	%	0	%


					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
		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, 2022	5,167,164	$	16.04	7.2	$	15,288
Granted	1,901,800		16.94
Forfeited and cancelled	(203,440)		15.59
Outstanding as of March 31, 2023	6,865,524	$	16.30	7.4	$	4,743
Options vested and expected to vest as of March 31, 2023	6,865,524	$	16.30	7.4	$	4,743
Options exercisable as of March 31, 2023	2,964,557	$	16.81	4.9	$	4,307


		Gross Cost				Accumulated Amortization
	Remaining		March 31,		December 31,		March 31,		December 31,
(In thousands, except years)	Life (years)	2023		2022		2023		2022
Other intangible assets	4.3	$	751	$	751	$	426	$	407
In-process research and development	n/a		6,629		6,629		—		—
Total intangible assets		$	7,380	$	7,380	$	426	$	407


		Weighted
		Average
		Grant Date
	Number	Fair Value
	of Shares	Per Share
Outstanding as of December 31, 2016	219,614	$	27.43

					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, 2022				1,520,730	$	14.02
Granted	88,547		26.59	800,827		16.84
Vested	(9,299)		20.32	(517,378)		11.43	$	6,444
Forfeited and cancelled	(4,531)		27.05	(64,098)		15.61
Outstanding as of September 30, 2017	294,331	$	27.41
Outstanding as of March 31, 2023				1,740,081	$	16.03


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


	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)