UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark one)
⌧☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, ~~2020~~2021
OR
◻☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-37581

Aclaris Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

Registrant’s telephone number, including area code: (484) 324-7933

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934:


Large accelerated filer ◻		Accelerated filer ⌧◻

Non-accelerated filer ◻⌧		Smaller reporting company ⌧☒

		Emerging growth company ⌧☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ⌧☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ◻☐ No ⌧☒

The number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, as of the close of business on ~~May 6, 2020~~April 30, 2021 was ~~41,866,345.~~52,107,355.

Table of Contents

ACLARIS THERAPEUTICS, INC.

INDEX TO FORM 10-Q


			PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements			2

Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020			2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020			3

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, ~~2020~~2021and ~~2019~~2020			4

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020			5

Notes to Unaudited Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2720

Item 3. Quantitative and Qualitative Disclosures about Market Risk			4134

Item 4. Controls and Procedures			4134

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			4235

Item 1A. Risk Factors			4336

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			4536

Item 6. Exhibits			4536

Signatures			4738

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACLARIS THERAPEUTICS, ~~INC.~~INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

March 31,

December 31,


2020

2019

Assets

Current assets:

Cash, cash equivalents and restricted cash

$
53,992

$
35,937

Marketable securities

25,013

39,078

Accounts receivable, net

933

704

Prepaid expenses and other current assets

2,776

3,118

Discontinued operations - current assets

—

4,966

Total current assets

82,714

83,803

Property and equipment, net

2,187

2,470

Intangible assets

7,180

7,199

Other assets

4,731

4,825

Total assets

$
96,812

$
98,297

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
6,946

$
9,917

Accrued expenses

10,374

7,721

Current portion of lease liabilities

624

637

Discontinued operations - current liabilities

2,659

4,157

Total current liabilities

20,603

22,432

Other liabilities

3,477

3,736

Long-term debt, net

10,573

—

Contingent consideration

3,435

1,668

Deferred tax liability

549

549

Total liabilities

38,637

28,385

Stockholders’ Equity:

Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at March 31, 2020 and December 31, 2019

—

—

Common stock, $0.00001 par value; 100,000,000 shares authorized at March 31, 2020 and December 31, 2019; 41,832,220 and 41,485,638 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

—

—

Additional paid‑in capital

527,241

523,505

Accumulated other comprehensive income (loss)

47

(66)

Accumulated deficit

(469,113)

(453,527)

Total stockholders’ equity

58,175

69,912

Total liabilities and stockholders’ equity

$
96,812

$
98,297


	March 31,		December 31,
	2021		2020

Assets
Current assets:
Cash and cash equivalents	$	35,267	$	22,063
Short-term marketable securities		93,028		32,068
Accounts receivable, net		817		772
Prepaid expenses and other current assets		5,389		2,590
Total current assets		134,501		57,493
Marketable securities		14,362		—
Property and equipment, net		1,424		1,654
Intangible assets		7,105		7,123
Other assets		4,007		4,514
Total assets	$	161,399	$	70,784
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,292	$	5,254
Accrued expenses		3,599		5,906
Current portion of lease liabilities		625		603
Discontinued operations - current liabilities		2,989		3,111
Total current liabilities		14,505		14,874
Other liabilities		3,041		3,179
Long-term debt, net		10,692		10,653
Contingent consideration		20,500		4,061
Deferred tax liability		367		367
Total liabilities		49,105		33,134
Commitments and contingencies (Note 17)
Stockholders’ Equity:
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and 0 shares issued or outstanding at March 31, 2021 and December 31, 2020		—		—
Common stock, $0.00001 par value; 100,000,000 shares authorized at March 31, 2021 and December 31, 2020; 52,081,729 and 45,109,314 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		—		—
Additional paid‑in capital		645,730		542,286
Accumulated other comprehensive loss		(140)		(94)
Accumulated deficit		(533,296)		(504,542)
Total stockholders’ equity		112,294		37,650
Total liabilities and stockholders’ equity	$	161,399	$	70,784

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

Table of Contents

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

Three Months Ended

March 31,

2020

2019

Revenues:

Contract research

$
1,189

$
1,263

Other revenue

218

—

Total revenue

1,407

1,263

Costs and expenses:

Cost of revenue

1,269

1,207

Research and development

9,444

19,643

General and administrative

6,200

7,464

Total costs and expenses

16,913

28,314

Loss from operations

(15,506)

(27,051)

Other income (expense), net

178

(230)

Loss from continuing operations

(15,328)

(27,281)

Loss from discontinued operations

(258)

(10,284)

Net loss

$
(15,586)

$
(37,565)

Net loss per share, basic and diluted

$
(0.37)

$
(0.91)

Weighted average common shares outstanding, basic and diluted

41,618,429

41,248,663

Other comprehensive income (loss):

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

$
60

$
34

Foreign currency translation adjustments

53

(14)

Total other comprehensive income (loss)

113

20

Comprehensive loss

$
(15,473)

$
(37,545)


	Three Months Ended
	March 31,
	2021		2020
Revenues:
Contract research	$	1,535	$	1,189
Other revenue		242		218
Total revenue		1,777		1,407

Costs and expenses:
Cost of revenue		1,202		1,269
Research and development		7,838		7,677
General and administrative		4,827		6,200
Revaluation of contingent consideration		16,439		1,767
Total costs and expenses		30,306		16,913
Loss from operations		(28,529)		(15,506)

Other income (expense), net		(225)		178
Loss from continuing operations		(28,754)		(15,328)
Loss from discontinued operations		—		(258)
Net loss	$	(28,754)	$	(15,586)

Net loss per share, basic and diluted	$	(0.57)	$	(0.37)
Weighted average common shares outstanding, basic and diluted		50,337,807		41,618,429

Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax of $0	$	(35)	$	60
Foreign currency translation adjustment		(11)		53
Total other comprehensive income (loss)		(46)		113
Comprehensive loss	$	(28,800)	$	(15,473)

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

Table of Contents

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)

Accumulated

Common Stock

Additional

Other

Total

Par

Paid‑in

Comprehensive

Accumulated

Stockholders’


  Shares

Value

Capital

Gain (Loss)

Deficit

Equity

Balance at December 31, 2019

41,485,638

$
—

$
523,505

$
(66)

$
(453,527)

$
69,912

Vesting of RSUs

346,582

—

(95)

—

—

(95)

Fair value of warrants issued

—

—

378

—

—

378

Unrealized gain on marketable securities

—

—

—

60

—

60

Foreign currency translation adjustment

—

—

—

53

—

53

Stock-based compensation expense

—

—

3,453

—

—

3,453

Net loss

—

—

—

—

(15,586)

(15,586)

Balance at March 31, 2020

41,832,220

$
—

$
527,241

$
47

$
(469,113)

$
58,175

Accumulated

Common Stock

Additional

Other

Total

Par

Paid‑in

Comprehensive

Accumulated

Stockholders’


  Shares

Value

Capital

Loss

Deficit

Equity
Balance at December 31, 2018

41,210,725

$
—

$
507,366

$
(69)

$
(292,173)

$
215,124
Vesting of RSUs

58,918

—

(188)

—

—

(188)
Unrealized gain on marketable securities

—

—

—

34

—

34
Foreign currency translation adjustment

—

—

—

(14)

—

(14)
Stock-based compensation expense

—

—

4,862

—

—

4,862
Net loss

—

—

—

—

(37,565)

(37,565)
Balance at March 31, 2019

41,269,643

$
—

$
512,040

$
(49)

$
(329,738)

$
182,253

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

~~Table of Contents~~

~~ACLARIS THERAPEUTICS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Accumulated

Common Stock

Additional

Other

Total

Par

Paid‑in

Comprehensive

Accumulated

Stockholders’


  Shares

Value

Capital

Loss

Deficit

Equity

Balance at December 31, 2020

45,109,314

$
—

$
542,286

$
(94)

$
(504,542)

$
37,650

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

666,144

—

(2,579)

—

—

(2,579)

Issuance of common stock in connection with public offering, net of offering costs of $7,011

6,306,271

—

103,348

—

—

103,348

Unrealized loss on marketable securities

—

—

—

(35)

—

(35)

Foreign currency translation adjustment

—

—

—

(11)

—

(11)

Stock-based compensation expense

—

—

2,675

—

—

2,675

Net loss

—

—

—

—

(28,754)

(28,754)

Balance at March 31, 2021

52,081,729

$
—

$
645,730

$
(140)

$
(533,296)

$
112,294


						Accumulated
	Common Stock			Additional		Other				Total
		Par		Paid‑in		Comprehensive		Accumulated		Stockholders’
	Shares	Value		Capital		Income (Loss)		Deficit		Equity
Balance at December 31, 2019	41,485,638	$	—	$	523,505	$	(66)	$	(453,527)	$	69,912
Vesting of restricted stock units	346,582		—		(95)		—		—		(95)
Fair value of warrants issued	—		—		378		—		—		378
Unrealized gain on marketable securities	—		—		—		60		—		60
Foreign currency translation adjustment	—		—		—		53		—		53
Stock-based compensation expense	—		—		3,453		—		—		3,453
Net loss	—		—		—		—		(15,586)		(15,586)
Balance at March 31, 2020	41,832,220	$	—	$	527,241	$	47	$	(469,113)	$	58,175

~~(Unaudited)~~

~~(In thousands)~~

Three Months Ended

March 31,


2020

2019

Cash flows from operating activities:







Net loss

$
(15,586)

$
(37,565)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

576

2,226

Stock-based compensation expense

3,453

4,862

Change in fair value of contingent consideration

1,767

—

Changes in operating assets and liabilities:

Accounts receivable

4,737

(10,956)

Prepaid expenses and other assets

338

1,789

Accounts payable

(4,317)

(197)

Accrued expenses

2,227

8,523

Net cash used in operating activities

(6,805)

(31,318)

Cash flows from investing activities:

Purchases of property and equipment

(124)

(284)

Purchases of marketable securities

(8,869)

(73,100)

Proceeds from sales and maturities of marketable securities

22,935

82,000

Net cash provided by (used in) investing activities

13,942

8,616

Cash flows from financing activities:

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

10,950

—

Finance lease payments

(57)

(120)

Proceeds from the issuance of stock

25

—

Net cash (used in) provided by financing activities

10,918

(120)

Net increase (decrease) in cash and cash equivalents

18,055

(22,822)

Cash, cash equivalents and restricted cash at beginning of period

35,937

57,019

Cash, cash equivalents and restricted cash at end of period

$
53,992

$
34,197

Supplemental disclosure of non-cash investing and financing activities:

Additions to property and equipment included in accounts payable

$
16

$
24

Offering costs included in accounts payable

$
30

$
—

Operating lease asset recorded as a result of new accounting standard

$
—

$
2,132

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

Table of Contents

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended
	March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(28,754)	$	(15,586)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		288		576
Stock-based compensation expense		2,675		3,453
Revaluation of contingent consideration		16,439		1,767
Changes in operating assets and liabilities:
Accounts receivable		(45)		4,737
Prepaid expenses and other assets		(2,250)		338
Accounts payable		1,842		(4,317)
Accrued expenses		(2,427)		2,227
Net cash used in operating activities		(12,232)		(6,805)
Cash flows from investing activities:
Purchases of property and equipment		—		(124)
Purchases of marketable securities		(85,814)		(8,869)
Proceeds from sales and maturities of marketable securities		10,500		22,935
Net cash provided by (used in) investing activities		(75,314)		13,942
Cash flows from financing activities:
Proceeds from issuance of common stock in connection with public offering, net of issuance costs		103,348		—
Proceeds from debt financing (including warrants), net of issuance costs		—		10,950
Restricted stock unit employee tax withholdings		(3,014)		—
Finance lease payments		—		(57)
Proceeds from exercise of employee stock options and the issuance of stock		416		25
Net cash provided by financing activities		100,750		10,918
Net increase in cash, cash equivalents and restricted cash		13,204		18,055
Cash, cash equivalents and restricted cash at beginning of period		22,063		35,937
Cash, cash equivalents and restricted cash at end of period	$	35,267	$	53,992

Supplemental disclosure of non-cash investing and financing activities:
Additions to property and equipment included in accounts payable	$	—	$	16
Fair value of warrants issued in connection with debt financing	$	—	$	263
Offering costs included in accounts payable	$	—	$	30

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

Table of Contents

ACLARIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~(Amounts in thousands, except share and per share data)~~

1. Organization and Nature of Business

Overview

Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012. In July 2015, Aclaris Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned subsidiary of Aclaris Therapeutics, Inc. In August 2017, Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.) (“Confluence”) was acquired by Aclaris Therapeutics, Inc. and became a wholly-owned subsidiary thereof. Aclaris Therapeutics, Inc., ATIL and Confluence are referred to collectively as the “Company.” The Company is a ~~physician-led~~clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases. ~~The Company currently has a pipeline of~~In addition to developing its novel drug candidates, ~~focused on immuno-inflammatory diseases, as well as one product approved by~~ the U.S. Food and Drug Administration (“FDA”) that it is not currently distributing, marketing or selling, and other investigational drug candidates. In September 2019, the Company announced the completion of a strategic review of its business, as a result of which it refocused its resources on its immuno-inflammatory development programs. The Company is pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize its novel drug ~~candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), the Company’s non-marketed FDA-approved product.~~candidates.

Liquidity

The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. AtAs of March 31, ~~2020,~~2021, the Company had cash, cash equivalents and ~~restricted cash and~~ marketable securities of ~~$79,005~~$142.7 million and an accumulated deficit of ~~$469,113.~~$533.3 million. Since inception, the Company has incurred net losses and negative cash flows from its operations. Prior to the acquisition of Confluence in August 2017, the Company had never generated revenue. There can be no assurance that profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing basis. In addition, development activities, including clinical and preclinical testing of the Company’s drug candidates, will require significant additional financing. The future viability of the Company is dependent on its ability to successfully develop its drug candidates and to generate revenue from identifying and consummating transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize its development assets or to raise additional capital to finance its operations. The Company ~~expects that it~~ will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop its preclinical compounds, and to support its discovery efforts.

Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable the Company to continue to implement its long-term business strategy. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If the Company is unable to raise sufficient additional capital or generate revenue from transactions with potential third-party partners for the development and/or commercialization of its drug candidates, it may need to substantially curtail planned operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

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

~~Table of Contents~~

~~conditions or events~~does not believe that ~~exist which raise~~ substantial doubt exists about its ability to continue as a going ~~concern within one year after the date of the issuance of these condensed consolidated financial statements.~~concern. The Company believes its existing cash, cash equivalents and marketable securities are sufficient to fund its operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of these condensed consolidated financial statements.

~~The Company has taken a number~~

Table of actions to support its operations and meet its liquidity needs. In September 2019, the Company announced the completion of a strategic review and its decision to refocus its resources on its immuno-inflammatory development programs and to pursue strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA. As a result of this decision, the Company restructured its operations and terminated employees, which lowered operating costs. In October 2019, the Company sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) to further its focus on its development programs and improve cash flow. In March 2020, the Company borrowed $11,000 under a term loan facility with Silicon Valley Bank.Contents

The Company’s plans to further alleviate the substantial doubt about its going concern, which are probable of effectively being implemented and mitigating these conditions, primarily include its ability to control the timing and spending on its research and development programs. The Company may also consider other plans to fund its operations including: (1) raising additional capital through debt or equity financings; (2) identification of third-party partners to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA, which may generate revenue and/or milestone payments; (3) reducing spending on one or more research and development programs by delaying or discontinuing development; and/or (4) further restructuring its operations to change its overhead structure. Finally, additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable the Company to continue to implement its long-term business strategy.

2. Summary of Significant Accounting Policies

~~Basis of Presentation~~

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements of the Company include the accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, ATIL and Confluence. All significant intercompany transactions have been eliminated. Based upon the revenue from contract research services, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations.

~~Discontinued Operations~~

In September 2019, the Company announced the completion of a strategic review and its decision to refocus its resources on its immuno-inflammatory development programs and to actively seek partners for its commercial products. The Company also announced a plan to terminate 86 employees (see Note 6).

The accompanying condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to the Company’s commercial products as discontinued operations (see Note 15).

~~Use of Estimates~~

~~Table of Contents~~

the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, research and development expenses, contingent consideration and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The COVID-19 pandemic has resulted in a global slowdown of economic activity. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from the Company’s estimates.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, ~~2020,~~2021, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, and the condensed consolidated statements of cash flows for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements contained in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, ~~2020~~2021 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of March 31, ~~2020,~~2021, the results of its operations and comprehensive loss for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, its changes in stockholders’ equity for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 and its cash flows for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. The condensed consolidated balance sheet data as of December 31, ~~2019~~2020 was derived from audited financial statements but does not include all disclosures required by ~~GAAP.~~generally accepted accounting principles in the United States (“GAAP”). The financial data and other information disclosed in these notes related to the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 are unaudited. The results for the three months ended March 31, ~~2020~~2021 are not necessarily indicative of results to be expected for the year ending December 31, ~~2020,~~2021, any other interim periods, or any future year or period. The unaudited interim financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, ~~2019~~2020 included in the Company’s annual report on Form 10-K filed with the SEC on February 25, ~~2020.~~2021.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP. The condensed consolidated financial statements of the Company include the accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, ATIL and Confluence. All intercompany transactions have been eliminated. Based upon the Company’s revenue, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, research and development expenses, contingent consideration and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The COVID-19 pandemic has resulted in a global slowdown in economic activity. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from the Company’s estimates.

Reclassifications

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

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Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, ~~2019~~2020 included in the Company’s annual report on Form 10-K filed with the SEC on February 25, ~~2020.~~

~~Cash, Cash Equivalents and Restricted Cash~~

~~The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents. Cash equivalents, which~~2021. Except as set forth below, there have consisted of money market accounts, commercial paper and corporate debt securities with original maturities of less than three months, are stated at fair value. Restricted cash as of March 31, 2020 consisted of $1,750 placed in escrow pursuantbeen no changes to the ~~asset purchase agreement with EPI Health, LLC.~~

~~Revenue Recognition~~

~~The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue~~Company’s significant accounting policies from Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those ~~goods or services.~~

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To determine revenue recognition in accordance with ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligationsdisclosed in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. At contract inception, the Company assesses the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct. The Company recognizes the revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied. The Company only recognizes revenue when collection of the consideration it is entitled to under a contract with a customer is probable. annual report.

~~Contract Research~~

The Company earns contract research revenue from the provision of laboratory services to clients through Confluence, its wholly-owned subsidiary. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered. Revenue related to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts. Under ASC Topic 606, the Company elected to apply the “right to invoice” practical expedient when recognizing contract research revenue. The Company recognizes contract research revenue in the amount to which it has the right to invoice.

~~Other Revenue~~

~~Licenses of Intellectual Property~~ – The Company recognizes revenue received from non-refundable, upfront fees related to the licensing of intellectual property when the intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the customer is able to use and benefit from the license.

~~Milestone Payments~~ – At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the amount allocated to the license of intellectual property. Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

~~Intangible Assets~~

Intangible assets include both definite-lived and indefinite-lived assets. Definite-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. Definite-lived intangible assets consist of a research technology platform the Company acquired through the acquisition of Confluence. Indefinite-lived intangible assets consist of an in-process research and development (“IPR&D”) drug candidate acquired through the acquisition of Confluence. IPR&D assets are considered indefinite-lived until the completion or abandonment of the associated research and development efforts. The cost of IPR&D is either amortized over its estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned.

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Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, which the Company performs during the fourth quarter, or when indicators of an impairment are present. The Company recognizes impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.

~~Leases~~

Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets. The Company evaluates leases at their inception to determine if they are an operating lease or a finance lease. A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term. Leases that do not meet the finance lease criteria are accounted for as an operating lease.

The Company recognizes assets and liabilities for leases at their inception based upon the present value of all payments due under the lease. The Company uses an implicit interest rate to determine the present value of finance leases, and its incremental borrowing rate to determine the present value of operating leases. The Company determines incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease. The Company recognizes expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method. The Company includes estimates for any residual value guarantee obligations under its leases in lease liabilities recorded on its condensed consolidated balance sheet.

Right-of-use assets are included in other assets and property and equipment, net on the Company’s condensed consolidated balance sheet for operating and finance leases, respectively. Obligations for lease payments are included in current portion of lease liabilities and other liabilities on the Company’s condensed consolidated balance sheet for both operating and finance leases.

Contingent Consideration

The Company initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of ~~certain~~the development, regulatory and commercial milestones, as well as estimated future ~~projected~~ sales performance, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition. The ultimate amount of future payments, if any, is based on criteria such as sales performancelevels and the ~~achievement~~discount rates applied to calculate the present value of ~~certain regulatory and sales milestones. The Company estimates~~ the ~~fair value~~potential payments. Significant judgement was involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of the contingent consideration liability ~~related~~can result from changes to ~~the achievement~~one or more of ~~regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return.~~these assumptions. The Company ~~estimates~~evaluates the fair value estimate of the contingent consideration liability ~~associated~~on a quarterly basis with ~~sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting~~changes, if any, recorded as income or expense in the ~~associated cash payment amounts to their present values~~condensed consolidated statement of operations.

The fair value of contingent consideration is estimated using a ~~credit-risk-adjusted interest rate.~~probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments. Significant assumptions used in the Company’s estimates include the probability of ~~success of~~ achieving regulatory milestones and ~~sales milestones,~~commencing commercialization, which are based ~~upon~~on an asset’s current stage of development and a review of existing clinical data. Probability of success assumptions ranged between 4% and ~~15%~~40%. The Company evaluates fair value estimates of contingent consideration liabilities on a periodic basis. Any change in fair value reflects new information about the likelihood of the payment of the contingent considerationAdditionally, estimated future sales levels and the ~~passage of time. For example, if~~risk-adjusted discount rate applied to the ~~timing of the development of an acquired drug candidate, or the size of~~ potential ~~commercial opportunities related to an acquired drug, differ from the Company’s~~payments are also significant assumptions ~~then~~used in calculating the fair ~~value~~value. The discount rate ranged between 5.9% and 8.1% depending on the year of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent consideration, if any, will be recorded as income or expense in the Company’s condensed consolidated statement of operations.

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each potential payment.

~~Concentration of Credit Risk and of Significant Suppliers~~

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company holds all cash, cash equivalents and marketable securities balances at one accredited financial institution, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on third-party manufacturers to supply drug product, including all underlying components, for its research and development activities, including preclinical and clinical testing. These activities could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients or other components.

Recently Issued Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant. None.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. The Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. The Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant.

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3. Fair Value of Financial Assets and Liabilities

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


	March 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	29,132	$	—	$	—	$	29,132
Marketable securities		—		107,390		—		107,390
Total assets	$	29,132	$	107,390	$	—	$	136,522


Liabilities:
Contingent consideration	$	—	$	—	$	20,500	$	20,500
Total liabilities	$	—	$	—	$	20,500	$	20,500

March 31, 2020


Level 1

Level 2

Level 3

Total

Assets:













Cash equivalents

$
27,210

$
—

$
—

$
27,210

Marketable securities

—

25,013

—

25,013

Total assets

$
27,210

$
25,013

$
—

$
52,223

Liabilities:

Acquisition-related contingent consideration

$
—

$
—

$
3,435

$
3,435

Total liabilities

$
—

$
—

$
3,435

$
3,435

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	December 31, 2019								December 31, 2020
	Level 1		Level 2		Level 3		Total
(In thousands)									Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	21,277	$	—	$	—	$	21,277	$	14,955	$	1,500	$	—	$	16,455
Marketable securities		—		39,078		—		39,078		—		32,068		—		32,068
Total assets	$	21,277	$	39,078	$	—	$	60,355	$	14,955	$	33,568	$	—	$	48,523


Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	1,668	$	1,668
Contingent consideration									$	—	$	—	$	4,061	$	4,061
Total liabilities	$	—	$	—	$	1,668	$	1,668	$	—	$	—	$	4,061	$	4,061

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company’s cash equivalents consisted of ~~investments with maturities of less than three months and included~~ a money market fund, which was valued based upon Level 1 ~~inputs, and the~~inputs. The Company’s cash equivalents as of December 31, 2020 also included commercial paper, which was valued based upon Level 2 inputs. The Company’s marketable securities as of March 31, 2021 and December 31, 2020 consisted of ~~investments with maturities of more than three months and included~~ commercial paper ~~corporate~~and asset-backed and U.S. government agency debt ~~asset-backed~~ securities, ~~and government obligations,~~ which were valued based upon Level 2 inputs. The Company’s marketable securities as of March 31, 2021 also included corporate debt securities, which were valued based upon Level 2 inputs.

In determining the fair value of its Level 2 investments, the Company relied on quoted prices for identical securities in markets that are not active. These quoted prices were obtained by the Company with the assistance of a third-party pricing service based on available trade, bid and other observable market data for identical securities. Quarterly, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of the quoted prices provided. The Company evaluates whether adjustments to third-party pricing isare necessary and, historically, the Company has not made adjustments to quoted prices obtained from the third-party pricing service. During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, there were no transfers between Level 1, Level 2 and Level 3.

The increase in contingent consideration of ~~$1,767~~$16.4 million during the three months ended March 31, ~~2020 was the result of~~2021 resulted from updates to the Company’s probability of achieving regulatory milestones and commencing commercialization and estimated future sales level assumptions as a result of the ~~successful~~ completion of a Phase 12a clinical trial of ATI-450 in subjects with moderate to severe rheumatoid arthritis and the inclusion of estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for ATI-450.

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As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of the Company’s available for sale marketable securities by type of security was as follows:


	March 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	21,556	$	—	$	(31)	$	21,525
Commercial paper		54,045		—		—		54,045
Asset-backed debt securities		14,062		1		(6)		14,057
U.S. government agency debt securities		17,760		3		—		17,763
Total marketable securities	$	107,423	$	4	$	(37)	$	107,390

March 31, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

Loss

Value

Marketable securities:

Corporate debt securities

$
3,835

$
—

$
(3)

$
3,832

Commercial paper

9,061

—

—

9,061

Asset-backed securities

2,002

—

—

2,002

U.S. government agency debt securities

10,051

67

—

10,118

Total marketable securities

$
24,949

$
67

$
(3)

$
25,013

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	December 31, 2019								December 31, 2020
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
(In thousands)									Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	7,815	$	2	$	—	$	7,817
Commercial paper		15,129		—		—		15,129	$	20,483	$	—	$	—	$	20,483
Asset-backed securities		8,004		4		—		8,008
Asset-backed debt securities										4,036		1		—		4,037
U.S. government agency debt securities		8,126		1		(3)		8,124		7,547		1		—		7,548
Total marketable securities	$	39,074	$	7	$	(3)	$	39,078	$	32,066	$	2	$	—	$	32,068

4. Property and Equipment, Net

Property and equipment, net consisted of the following:


		March 31,		December 31,		March 31,		December 31,
	2020		2019
(In thousands)					2021		2020
Computer equipment	$	1,315	$	1,315	$	1,197	$	1,197
Finance lease right-of-use assets		435		435
Lab equipment		1,265		1,250		1,340		1,340
Furniture and fixtures		647		647		617		617
Leasehold improvements		889		889		1,123		1,123
Property and equipment, gross		4,551		4,536		4,277		4,277
Accumulated depreciation		(2,364)		(2,066)		(2,853)		(2,623)
Property and equipment, net	$	2,187	$	2,470	$	1,424	$	1,654

Depreciation expense was ~~$298~~$0.2 million and ~~$402~~$0.3 million for the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

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5. Intangible Assets

Intangible assets consisted of the following:


		Gross Cost				Accumulated Amortization					Gross Cost				Accumulated Amortization
	Remaining		March 31,		December 31,		March 31,		December 31,	Remaining		March 31,		December 31,		March 31,		December 31,
	Life (years)	2020		2019		2020		2019
(In thousands, except years)										Life (years)	2021		2020		2021		2020
Other intangible assets	7.3		751		751		200		181	6.3	$	751	$	751	$	275	$	257
Total definite-lived intangible assets			751		751		200		181
IPR&D	na		6,629		6,629		—		—
In-process research and development										na		6,629		6,629		—		—
Total intangible assets		$	7,380	$	7,380	$	200	$	181		$	7,380	$	7,380	$	275	$	257

As of March 31, ~~2020,~~2021, estimated future amortization expense is as follows:

Year Ending December 31,

2020

$
56

2021

75

2022

75

2023

75

2024

75

Thereafter

195

Total

$
551


		Year Ending
(In thousands)		December 31,
2021	$	56
2022		75
2023		75
2024		75
2025		75
Thereafter		120
Total	$	476

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6. Accrued Expenses

Accrued expenses consisted of the following:


		March 31,		December 31,		March 31,		December 31,
	2020		2019
(In thousands)					2021		2020
Employee compensation expenses	$	1,419	$	3,321	$	1,357	$	3,971
Research and development expenses		2,322		2,857		1,086		761
Professional fees		166		168
Payable to EPI Health		5,241		—
Other		1,226		1,375		1,156		1,174
Total accrued expenses	$	10,374	$	7,721	$	3,599	$	5,906

~~Restructuring Charges~~

In September 2019, the Company announced the completion of a strategic review and its decision to refocus on its immuno-inflammatory development programs and to actively seek partners for its commercial products. As a result, the Company terminated 63 employees (“terminated employees”) and gave notice to an additional 23 employees (“noticed employees”) who were asked to provide transition services through termination dates ranging between 4 to 10 months from the date notice was given. The terminated employees were entitled to receive cash severance payments as well as cash payments in lieu of sixty days’ notice required by the Worker Adjustment and Retraining Notification Act (the “WARN Act”). The noticed employees were entitled to receive one-time cash severance payments which were not contingent upon providing additional services to the Company. In addition, certain noticed employees earned retention bonuses if they continued to be employed by the Company through certain termination dates. The Company recorded a restructuring charge for the one-time severance and WARN Act payments, which was triggered immediately upon either terminating or giving notice to the impacted employees. The Company expensed the cost of retention bonuses for noticed employees over their respective service terms. During the three months ended March 31, 2020, the Company recognized expense of $79 related to retention bonuses for noticed employees, and made cash payments of $343 related to severance and retention bonuses to noticed employees.

~~Payable to EPI Health~~

~~As of March 31, 2020, the Company had $5,241 payable to EPI Health, LLC (“EPI Health”) (see Note 15 for additional information).~~

7. Debt

Loan and Security Agreement – Silicon Valley Bank

In March 2020, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”). The Loan and Security Agreement provides for ~~$11,000~~$11.0 million in term loans, of which the Company borrowed the entire amount on March 30, 2020. The Loan and Security Agreement is secured by substantially all of the assets of the Company other than intellectual property. In connection with the Loan and Security Agreement, the Company issued to SVB a warrant to purchase up to 460,251 shares of common stock (the “Warrant”) (see Note 8). The proceeds of the Loan and Security Agreement were allocated to the term loan and Warrant using a relative fair value approach.

The term loan repayment schedule provides for interest only payments beginning April 1, 2020 and continuing through March 1, 2022, followed by 24 consecutive equal monthly installments of principal, plus monthly payments of accrued interest, starting on April 1, 2022 and continuing through the maturity date of March 1, 2024. All outstanding

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principal and accrued and unpaid interest will be due and payable on the maturity date. The Loan and Security Agreement provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%.

The Loan and Security Agreement includes a final payment fee equal to 5% of the original principal amount borrowed. The Company has the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for any prepayment on or prior to the first anniversary of March 30, 2020, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.

As of March 31, 2021 and December 31, 2020 the outstanding principal balance on the SVB Loan and Security Agreement was $11.0 million.

8. Stockholders’ Equity

Preferred Stock

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock. There were no0 shares of preferred stock outstanding as of March 31, ~~2020~~2021 or December 31, ~~2019.~~2020.

Common Stock

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company’s amended and restated certificate of incorporation authorized the Company to issue 100,000,000 shares of $0.00001 par value common stock.

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Each share of common stock entitles the holder to ~~one~~1 vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to any preferential dividend rights of any series of preferred stock that may be outstanding. NoNaN dividends have been declared through March 31, ~~2020.~~2021.

Warrants

~~In connection with the Loan and Security Agreement with SVB, the Company issued the Warrant to SVB.~~ The Warrant ~~has~~issued to SVB in March 2020 had an initial exercise price of $0.956 per share, subject to adjustment as provided in the Warrant. The Warrant became immediately exercisable in full upon the funding of the term loan facility. The Warrant will terminate, if not earlier exercised, on the earlier of March 29, 2030 and the closing of certain merger or other transactions in which the consideration is cash, stock of a publicly-traded acquirer or a combination thereof. The Company assigned a fair value of ~~$378~~$0.4 million to the Warrant using a Black-Scholes valuation methodology, and also concluded that the Warrant was indexed to its own stock and therefore classified the Warrant as an equity instrument. In January 2021, SVB net exercised the Warrant in full, and the Company issued to SVB 388,119 shares of common stock.

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

In August 2020, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) which provided that, upon the terms and subject to the conditions and limitations set forth therein, the Company could sell to Lincoln Park, at its discretion, up to $15.0 million of shares of its common stock over the 36-month term of the Purchase Agreement. Upon execution of the Purchase Agreement, the Company issued 121,584 shares of its common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement. The commitment shares were valued using the closing price of the Company’s common stock on the effective date of the Purchase Agreement resulting in an aggregate fair value of $0.3 million. Through December 31, 2020, the Company sold 2,111,170 shares of its common stock to Lincoln Park under the Purchase Agreement for net proceeds of $7.7 million. The Company terminated the Purchase Agreement in January 2021 in connection with the public offering of common stock described below. The Company did not sell any additional shares prior to terminating the Purchase Agreement.

January 2021 Public Offering

In January 2021, the Company closed a public offering in which it sold 6,306,271 shares of common stock at a price to the public of $17.50 per share, for aggregate gross proceeds of $110.4 million. The Company paid underwriting discounts and commissions of $6.6 million, and also incurred expenses of $0.4 million in connection with the offering. As a result, the net offering proceeds received by the Company, after deducting underwriting discounts, commissions and offering expenses, were $103.3 million.

9. Stock-Based Awards

2015 Equity Incentive Plan

In September 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”), and the Company’s stockholders approved the 2015 Plan. The 2015 Plan became effective in connection with the Company’s initial public offering in October 2015. Beginning at the time the 2015 Plan became effective, no further grants may be made under the Company’s 2012 Equity Compensation Plan, as amended and restated (the “2012 Plan”). The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit (“RSU”) awards, performance stock awards, cash-based awards and other

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stock-based awards. The number of shares initially reserved for issuance under the 2015 Plan was 1,643,872 shares of common stock. The number of shares of common stock that may be issued under the 2015 Plan will automatically increase on January 1 of each year ending on January 1, 2025, in an amount equal to the lesser of (i) 4.0% of the shares of the Company’s common stock outstanding on December 3131st of the preceding calendar year or (ii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that expire, are otherwise terminated, settled in cash or repurchased by the Company under the 2015 Plan and the 2012 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. As of January 1, ~~2020,~~2021, the number of shares of common stock that may be issued under the 2015 Plan was increased by ~~1,451,997~~1,804,372 shares. As of March 31, ~~2020, 1,299,002~~2021,

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2,937,121 shares remained available for grant under the 2015 Plan. The Company had 2,725,405 stock options and 2,385,853 RSUs outstanding as of March 31, 2021 under the 2015 Plan.

2017 Inducement Plan

In July 2017, the Company’s board of directors adopted the 2017 Inducement Plan (the “2017 Inducement Plan”). The 2017 Inducement Plan is a ~~non-shareholder~~non-stockholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules. The Company had ~~451,850~~439,500 stock options and ~~47,590~~25,758 RSUs outstanding as of March 31, ~~2020~~2021 under the 2017 Inducement Plan. All shares of common stock that were eligible for issuance under the 2017 Inducement Plan after October 1, 2018, including any shares underlying any awards that expire or are otherwise terminated, reacquired to satisfy tax withholding obligations, settled in cash or repurchased by the Company in the future that would have been eligible for re-issuance under the 2017 Inducement Plan, were retired.

2012 Equity Compensation Plan

Upon the 2015 Plan becoming effective, no0 further grants can be made under the 2012 Plan. The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which ~~679,264 and 745,735~~549,561 were outstanding as of March 31, ~~2020 and December 31, 2019, respectively.~~2021. Stock options granted under the 2012 Plan ~~vest over four years and~~ expire after ten years.

Stock Option Valuation

The weighted average assumptions the Company used to estimate the fair value of stock options granted during the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows:


	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2020		2019		2021		2020
Risk-free interest rate	0.97	%	2.53	%	0.90	%	0.97	%
Expected term (in years)	6.2		6.3		6.3		6.2
Expected volatility	85.28	%	101.70	%	76.60	%	85.28	%
Expected dividend yield	0	%	0	%	0	%	0	%

The Company recognizes compensation expense for awards over their vesting period. Compensation expense for awards includes the impact of forfeitures in the period when they occur.

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Stock Options

The following table summarizes stock option activity for the three months ended March 31, ~~2020:~~2021:


				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, 2020	2,871,498	$	15.16	6.8	$	4,890
Granted	880,600		24.06
Exercised	(27,632)		15.06			224
Forfeited and cancelled	(10,000)		21.93
Outstanding as of March 31, 2021	3,714,466	$	17.25	7.3	$	31,732
Options vested and expected to vest as of March 31, 2021	3,714,466	$	17.25	7.3	$	31,732
Options exercisable as of March 31, 2021	2,083,539	$	17.56	5.9	$	18,085

Weighted


Weighted

Average

Average

Remaining

Aggregate

Number

Exercise

Contractual

Intrinsic

of Shares

Price

Term

Value

(in years)

Outstanding as of December 31, 2019

3,102,221

$
20.33

6.55

$
148

Granted

602,800

1.28

Exercised

—

—

Forfeited and cancelled

(275,088)

21.36

Outstanding as of March 31, 2020

3,429,933

$
16.90

6.70

$
21

Options vested and expected to vest as of March 31, 2020

3,429,933

$
16.90

6.70

$
21

Options exercisable as of March 31, 2020

2,121,161
⁽¹⁾
$
19.47

5.46

$
21

~~(1)~~

All options granted under the 2012 Plan are exercisable immediately, subject to a repurchase right in the Company’s favor that lapses as the option vests. This amount reflects the number of shares under options that were vested, as opposed to exercisable, as of March 31, 2020.

The weighted average grant date fair value of stock options granted during the three months ended March 31, ~~2020~~2021 was ~~$0.93~~$16.15 per share.

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Restricted Stock Units

The following table summarizes RSU activity for the three months ended March 31, ~~2020:~~2021:

Weighted

Average

Grant Date

Number

Fair Value

of Shares

Per Share

Outstanding as of December 31, 2019

3,592,915

$
4.62

Granted

977,385

1.26

Vested

(430,896)

6.62

Forfeited and cancelled

(269,345)

4.96

Outstanding as of March 31, 2020

3,870,059

$
3.52


		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, 2020	2,244,157	$	3.83
Granted	565,600		24.06
Vested	(377,371)		5.94	$	8,892
Forfeited and cancelled	(20,775)		2.85
Outstanding as of March 31, 2021	2,411,611	$	8.25

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Stock-Based Compensation

Stock-based compensation expense included in total costs and expenses on the condensed consolidated statement of operations included the following:


	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2020		2019
(In thousands)					2021		2020
Cost of revenue	$	260	$	206	$	247	$	260
Research and development		816		1,594		876		816
General and administrative		2,377		2,472		1,552		2,377
Total stock-based compensation expense	$	3,453	$	4,272	$	2,675	$	3,453

As of March 31, ~~2020,~~2021, the Company had unrecognized stock-based compensation expense for stock options and RSUs of ~~$10,292~~$17.1 million and ~~$10,689,~~$17.8 million, respectively, each of which is expected to be recognized over a weighted average ~~periods~~period of ~~1.72 years and 2.27 years, respectively.~~3.4 years.

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10. Net Loss per Share

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


	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2020		2019
(In thousands, except for share and per share data)					2021		2020
Numerator:
Net loss	$	(15,586)	$	(37,565)	$	(28,754)	$	(15,586)
Denominator:
Weighted average shares of common stock outstanding		41,618,429		41,248,663
Weighted average shares of common stock outstanding, basic and diluted						50,337,807		41,618,429
Net loss per share, basic and diluted	$	(0.37)	$	(0.91)	$	(0.57)	$	(0.37)

The Company’s potentially dilutive securities, which included stock options, RSUs and warrants, have been excluded from the computation of diluted net loss per share since the effect would be to reduce the net loss per share. Therefore, the weighted average number of shares of common stock outstanding used to calculate both basic and diluted net loss per share ~~attributable to common stockholders~~ is the same. The following table presents potential shares of common stock excluded from the calculation

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of diluted net loss per share ~~attributable to common stockholders~~ for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. All share amounts presented in the table below represent the total number outstanding as of March 31, ~~2020~~2021 and ~~2019.~~2020.



	March 31,		March 31,
	2020	2019	2021	2020
Options to purchase common stock	3,429,933	4,182,584	3,714,466	3,429,933
Restricted stock unit awards	3,870,059	1,968,023	2,411,611	3,870,059
Warrants issued to SVB	460,251	—
Warrants			—	460,251
Total potential shares of common stock	7,760,243	6,150,607	6,126,077	7,760,243

11. Leases

Operating Leases

Agreements for Office Space

~~In November 2017, the~~The Company ~~entered into~~has a sublease agreement with Auxilium Pharmaceuticals, LLC (the “Sublandlord”) pursuant to which it subleases 33,019 square feet of office space for its headquarters in Wayne, Pennsylvania. The sublease has a term that runs through October 2023. If for any reason the lease between Chesterbrook Partners, LP (“~~the~~ Landlord”) and Sublandlord is terminated or expires prior to October 2023, the Company’s sublease will automatically terminate. In December 2020, the Company entered into a sub-sublease agreement under which it sub-subleased 8,115 square feet. The sub-sublease term runs concurrently with the original sublease agreement.

In February 2019, the Company entered into a sublease agreement with a third party for ~~21,056~~20,433 square feet of office and laboratory space in St. Louis, Missouri. The lease commenced in June 2019 and has a term that runs through June 2029.

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


		March 31,		December 31,		March 31,		December 31,
(In thousands)					2021		2020
Operating Leases:	2020		2019
Gross cost	$	5,213	$	5,213	$	5,240	$	5,240
Accumulated amortization		(633)		(480)		(1,279)		(1,111)
Other Assets	$	4,580	$	4,733
Other assets					$	3,961	$	4,129

Other current liabilities	$	547		526
Current portion of lease liabilities					$	625	$	603
Other liabilities		3,404		3,548		2,730		2,894
Total operating lease liabilities	$	3,951	$	4,074	$	3,355	$	3,497

Amortization expense related to operating lease right-of-use assets and accretion of operating lease liabilities ~~was $257 and $143~~totaled $0.3 million for each of the three months ended March 31, ~~2020~~2021 and ~~2019, respectively.~~2020.

Finance Leases

Laboratory Equipment

The Company ~~leases~~leased laboratory equipment which isit used in its laboratory space in St. Louis, Missouri under ~~two~~2 finance lease financing arrangements which the Company entered into in August 2017 and October ~~2017. The leases have~~2017, with terms ~~which end~~ended in October 2020 and December 2020, respectively.

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12. Related Party Transactions

Mallinckrodt plc

In April 2018, Bryan Reasons was appointed to the Company’s board of directors. Subsequently, in March 2019, Mr. Reasons became the Chief Financial Officer of Mallinckrodt plc. Prior to Mr. Reasons joining Mallinckrodt plc, the Company entered into a master services agreement with a subsidiary ~~(“Mallinckrodt”)~~ of Mallinckrodt plc, ~~in November 2018,~~ pursuant to which Confluence provides laboratory services to ~~Mallinckrodt~~the subsidiary (“Mallinckrodt”) in the ordinary course of business. Mr. Reasons was not involved in the negotiation or execution of the agreement, but may be deemed to have an interest in the ongoing transactions based on his employment as an executive officer of Mallinckrodt plc. ~~As of~~During the three months ended March 31, ~~2020~~2021 and ~~December 31, 2019,~~2020, the Company ~~had~~ invoiced Mallinckrodt for ~~$228~~$20 thousand and ~~$57,~~$0.2 million, respectively, under the master services agreement. As of March 31, 2021 and December 31, 2020, the Company had $20 thousand and $24 thousand, respectively, of outstanding accounts receivable balances from Mallinckrodt. Mr. Reasons had no financial interest in ~~this transaction.~~these transactions.

13.Agreements Related to Intellectual Property

Asset Purchase Agreement – EPI Health, LLC

In October 2019, the Company sold RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) to EPI Health, LLC (“EPI Health”) pursuant to an asset purchase agreement. EPI Health agreed to pay the Company a high single-digit royalty calculated as a percentage of net sales on a country-by-country basis until the date that the patent rights related to RHOFADE have expired or, if later, 10ten years from the date of the first commercial sale of RHOFADE in such country. The Company recorded royalty income under the asset purchase agreement of ~~$218 and $0~~$0.2 million during each of the three months ended March 31, ~~2020~~2021 and ~~2019, respectively.~~2020. Royalty income is included in other revenue on the condensed consolidated statements of operations and comprehensive loss. EPI Health has also agreed to pay the Company potential sales milestone payments of up to ~~$20,000~~$20.0 million in the aggregate upon the achievement of specified levels of net sales of products covered by the asset purchase agreement, and 25% of any upfront, license,

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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.

Agreement and Plan of Merger -– Confluence

In August 2017, the Company entered into an Agreement and Plan of Merger, pursuant to which it acquired Confluence (the “Confluence Agreement”). In November 2018, ~~the Company achieved~~ a development milestone specified in the Confluence Agreement was achieved, as a result of which ~~was comprised of $2,500~~the Company paid the former Confluence equity holders $2.5 million in cash and issued 253,208 shares of its common stock with a fair value of ~~$2,200. The~~$2.2 million. Under the Confluence Agreement, the Company also agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to ~~$75,000,~~$75.0 million based upon the achievement of specified regulatory and commercial milestones set forth in the Confluence Agreement. In addition, the Company agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition to the payments described above, if the Company sells, licenses or transfers any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, the Company will be obligated to pay the former Confluence equity holders a portion of any ~~incremental~~ consideration ~~(in excess of the development and milestone payments described above)~~ received from such sale, license or transfer in specified circumstances.

~~License and Collaboration Agreement – Rigel Pharmaceuticals, Inc.~~

~~In August 2015, the Company entered into an exclusive, worldwide license and collaboration agreement with Rigel Pharmaceuticals, Inc. (“Rigel”) for the development and commercialization~~Table of products containing two specified JAK inhibitors, which the Company refers to as ATI-501 and ATI-502. Under the agreement, the Company agreed to make aggregate payments of up to $80,000 upon the achievement of specified development milestones. During the three months ended September 30, 2019, the Company made a milestone payment of $4,000 to Rigel upon the achievement of a specified development milestone. With respect to any products the Company commercializes under the agreement, the Company will pay Rigel quarterly tiered royalties on its annual net sales of each product at a high single-digit percentage of annual net sales, subject to specified reductions, 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 countries under specified circumstances, ten years from the first commercial sale of such product. Contents

In connection with an amendment of the agreement with Rigel in October 2019, the Company agreed to pay Rigel an amendment fee of $1,500 in three installments of $500 in January 2020, April 2020 and July 2020. In addition, the parties modified certain other development milestones, and the Company agreed to increase the potential payments payable upon the achievement of such milestones from $10,000 to $10,500 in the aggregate.

14. Income Taxes

The Company did not record a federal or state income tax benefit for losses incurred during each of the three months ended March 31, ~~2020~~2021 and ~~2019 due to the Company’s conclusion~~2020. 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 ~~was required for~~during those periods.

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15. Discontinued Operations

~~The components of loss from discontinued operations as reported in the Company’s condensed consolidated statement of operations were as follows:~~

Three Months Ended

March 31,

2020

2019
Revenues:

Product sales, net

$
—

$
3,778
Total revenue, net

—

3,778

Costs and expenses:

Cost of revenue

—

1,570
Research and development

—

276
Sales and marketing

257

9,688
General and administrative

1

869
Amortization of definite-lived intangible

—

1,659
Total costs and expenses

258

14,062
Loss from discontinued operations

$
(258)

$
(10,284)

Net loss from discontinued operations per share, basic and diluted

$
(0.01)

$
(0.25)
Weighted average common shares outstanding, basic and diluted

41,618,429

41,248,663

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

Three Months Ended

March 31,

2020

2019
ESKATA

$
—

$
72
RHOFADE

—

3,706
Total product sales, net

$
—

$
3,778

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


	March 31,		December 31,		March 31,		December 31,
	2020		2019
Accounts receivable, net	$	—	$	4,966
Discontinued operations - current assets	$	—	$	4,966


(In thousands)					2021		2020
Accounts payable	$	306	$	1,705	$	971	$	1,175
Accrued expenses		2,353		2,452		2,018		1,936
Discontinued operations - current liabilities	$	2,659	$	4,157	$	2,989	$	3,111

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~~The following table presents certain non-cash items related to discontinued operations, which are included in the Company’s condensed consolidated statement of cash flows:~~

Three Months Ended

March 31,

2020

2019
Depreciation and amortization

$
—

$
125
Stock-based compensation expense

—

590
Total non-cash items

$
—

$
715

The Company relied on Allergan Sales, LLC (“Allergan”) to distribute RHOFADE on its behalf pursuant to the terms of a transition services agreement. Accounts receivable, net as of March 31, 2020 and December 31, 2019 included $0 and $4,966, respectively, related to amounts invoiced by Allergan for sales of RHOFADE. In addition, during the three months ended March 31, 2020, in accordance with the asset purchase agreement with EPI Health, the Company received $5,241 from Allergan related to sales of RHOFADE that occurred after the date the Company sold RHOFADE to EPI Health. Accordingly, the $5,241 is payable to EPI Health and is included in accrued expenses on the Company’s condensed consolidated balance sheet as of March 31, 2020.

16. Segment Information

The Company has ~~two~~2 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 to clients through Confluence, the Company’s wholly-owned subsidiary.~~services. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis. Corporate and other includes general and administrative expenses as well as eliminations of intercompany transactions. The Company does not report balance sheet information by segment since it is not reviewed by the chief operating decision maker, and all of the Company’s tangible assets are held in the United States.

The Company’s results of operations by segment for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 are summarized in the tables below:


(In thousands)			Contract		Corporate		Total
Three Months Ended March 31, 2021	Therapeutics		Research		and Other		Company
Total revenue	$	242	$	3,200	$	(1,665)	$	1,777
Cost of revenue		—		2,769		(1,567)		1,202
Research and development		7,936		—		(98)		7,838
General and administrative		—		629		4,198		4,827
Revaluation of contingent consideration		16,439		—		—		16,439
Loss from operations	$	(24,133)	$	(198)	$	(4,198)	$	(28,529)


(In thousands)			Contract		Corporate		Total
Three Months Ended March 31, 2020	Therapeutics		Research		and Other		Company
Total revenue	$	218	$	3,407	$	(2,218)	$	1,407
Cost of revenue		—		3,386		(2,117)		1,269
Research and development		7,778		—		(101)		7,677
General and administrative		—		753		5,447		6,200
Revaluation of contingent consideration		1,767		—		—		1,767
Loss from operations	$	(9,327)	$	(732)	$	(5,447)	$	(15,506)
Loss from discontinued operations	$	(257)	$	—	$	(1)	$	(258)

Contract

Corporate

Total
Three Months Ended March 31, 2020

Therapeutics

Research

and Other

Company
Total revenue

$
218

$
3,407

$
(2,218)

$
1,407
Cost of revenue

—

3,386

(2,117)

1,269
Research and development

9,545

—

(101)

9,444
General and administrative

—

753

5,447

6,200
Loss from operations

$
(9,327)

$
(732)

$
(5,447)

$
(15,506)
Loss from discontinued operations

$
(257)

$
—

$
(1)

$
(258)

Contract

Corporate

Total
Three Months Ended March 31, 2019

Therapeutics

Research

and Other

Company
Total revenue

$
—

$
5,190

$
(3,927)

$
1,263
Cost of revenue

—

5,037

(3,830)

1,207
Research and development

19,740

—

(97)

19,643
General and administrative

—

531

6,933

7,464
Loss from operations

$
(19,740)

$
(378)

$
(6,933)

$
(27,051)
Loss from discontinued operations

$
(9,415)

$
—

$
(869)

$
(10,284)

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Intersegment Revenue

Revenue for the contract research segment included ~~$2,218~~$1.7 million and ~~$3,927~~$2.2 million for services performed on behalf of the therapeutics segment for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. All intersegment revenue has been eliminated in the Company’s condensed consolidated statement of operations.

17. Legal Proceedings

Securities Class Action

On July 30, 2019, plaintiff Linda Rosi (“Rosi”) filed a putative class action complaint captioned Rosi v. Aclaris Therapeutics, Inc., et al. in the U.S. District Court for the Southern District of New York against the Company and certain of its executive officers. The complaint alleges that the defendants violated federal securities laws by, among other things, failing to disclose an alleged likelihood that regulators would scrutinize advertising materials related to ESKATA and find that the materials minimized the risks or overstated the efficacy of the product. The complaint seeks unspecified compensatory damages on behalf of Rosi and all other persons and entities that purchased or otherwise acquired the Company’s securities between May 8, 2018 and June 20, 2019.

On September 5, 2019, an additional plaintiff, Robert Fulcher (“Fulcher”), filed a substantially identical putative class action complaint captioned Fulcher v. 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.

On January 24, 2020, Fulcher filed a consolidated amended complaint in the Consolidated Securities Action, naming ~~two~~2 additional executive officers as defendants, extending the putative class period to August 12, 2019, and adding allegations concerning, among other things, alleged statements and omissions throughout the putative class period concerning ESKATA’s risks, tolerability and effectiveness. The ~~defendants’ deadline to answer, move against or otherwise respond to the consolidated amended complaint was originally scheduled for March 27, 2020, but was extended until April 17, 2020. The~~ defendants filed a motion to dismiss the consolidated amended complaint on April 17, 2020. Following briefing and oral argument on February 25, 2021, the motion was granted in part and denied in part on March 29, 2021, and the issues in dispute significantly narrowed. The defendants filed an answer to the remaining aspects of the consolidated amended complaint on April 19, 2021.

The Company and the other defendants dispute plaintiffs’ claims in the Consolidated Securities ~~Action and intend to defend~~Action. At this time, the ~~matter vigorously.~~Company cannot reasonably predict the outcome or potential loss, if any, that could result from this matter.

Stockholder Derivative Action

On November 15, 2019, plaintiff Keith Allred (“Allred”) filed a derivative stockholder complaint captioned Allred v. Walker et al. in the U.S. District Court for the Southern District of New York against certain of the Company’s directors and executive officers. The complaint alleges that the defendants, among other things, breached their fiduciary duties as directors and/or officers in connection with the claims alleged in the Consolidated Securities Action. The complaint seeks, among other things, unspecified compensatory damages on behalf of the Company.

On November 25, 2019, an additional plaintiff, Bruce Brown (“Brown”), filed a substantially identical complaint captioned Brown v. Walker et al. in the same court against the same defendants.

On December 12, 2019, the court consolidated the Allred and Brown actions under the caption In re Aclaris Therapeutics, Inc. Derivative Litigation (the “Consolidated Derivative Action”) and directed that future derivative cases filed in or transferred to the court arising out of substantially the same transactions or events be similarly consolidated. Thereafter, on January 11, 2020, the court stayed – subject to certain conditions – all deadlines in the

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Consolidated Derivative Action pending resolution of the defendants’ anticipated motion to dismiss the Consolidated Securities Action.

The ~~defendants dispute plaintiffs’ claims~~stay expired on April 27, 2021, but may be reinstated pending further developments in the

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Consolidated Securities Action. No further proceedings have yet occurred or been scheduled in the Consolidated Derivative ~~Action~~Action.

At this time, the Company cannot reasonably predict the outcome or potential loss, if any, that could result from this matter.

Product Liability Lawsuit

On December 18, 2020, plaintiff Daurie Mancini filed an amended complaint under the caption Daurie Mancini v. Aclaris Therapeutics, Inc. et al in the Superior Court of New Jersey Ocean County against the Company and ~~intend~~certain third parties alleging injuries as a result of the plaintiff’s alleged treatment with ESKATA in 2019. The amended complaint seeks unspecified compensatory and punitive damages. The Company filed a motion to dismiss the amended complaint on March 15, 2021. Briefing on the Company’s motion to dismiss has not been completed.

The Company disputes plaintiff’s claims and intends to defend the matter vigorously. At this time, the Company cannot reasonably predict the outcome or potential loss, if any, that could result from this matter.

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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. Factors that could cause or contribute to these differences include those below ~~and elsewhere~~ in this Quarterly Report on Form 10-Q ~~particularly in Part II – Item 1A, “Risk Factors,”~~and those in our Annual Report on Form 10-K, in ~~Part I, Item 1A,~~each case under the caption “Risk Factors,” and in our other filings with the Securities and Exchange Commission, or SEC. Statements made herein are as of the date of the filing of this Form 10-Q with the 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, ~~2019,~~2020, which are included in our Annual Report on Form 10-K filed with the SEC on February 25, ~~2020.~~2021.

Overview

We are a ~~physician-led~~clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases. ~~We currently have a pipeline of~~In addition to developing our novel drug candidates, ~~focused on immuno-inflammatory diseases, as well as one product approved by the U.S. Food and Drug Administration, or FDA, that~~ we are not currently distributing, marketing or selling, and other investigational drug candidates. In September 2019, we announced the completion of a strategic review of our business, as a result of which we refocused our resources on our immuno-inflammatory development programs. 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 and ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product.~~candidates.

ATI-450, an Investigational Oral MK2 Inhibitor

We submitted an Investigational New Drug Application, or IND, in April 2019 for ATI-450, an investigational oral, novel, small molecule selective mitogen-activated protein kinase-activated protein kinase 2, or MK2, inhibitor compound, for the treatment of rheumatoid arthritis, which was allowed by the U.S. Food and Drug Administration, or FDA, in May 2019. MK2 is a key regulator of pro-inflammatory mediators including TNFα, IL1β, IL6, IL8 and other essential pathogenic signals in chronic immuno-inflammatory diseases, as well as in ~~cancer.~~oncology. As an oral drug candidate, we are developing ATI-450 as a potential alternative to injectable anti-TNF/IL1/IL6 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases.

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

ATI-450 was also evaluated at 80mg and 120mg doses twice daily in a second Phase 1 clinical trial in healthy subjects (ATI-450-PKPD-102). Preliminary topline data from this trial showed that no dose-limiting toxicity was observed. Ex vivo analysis of blood samples from this Phase 1 trial showed that increased cytokine inhibition was achieved with these higher doses of ATI-450 relative to doses tested in the first Phase 1 trial. No serious adverse events were reported and all adverse events were mild to moderate. The most common adverse events (reported by 2 or more subjects who received ATI-450) were headache, dizziness, nausea, parasthesia and, in the post-dosing follow-up period of the trial, dry skin. These adverse events were all mild in severity. A final analysis of this trial is underway.

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Moderate to Severe Rheumatoid Arthritis

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

The final per-protocol analysis, which consisted of the 17 subjects who completed the treatment period (15 in the ~~first quarter~~treatment arm and two in the placebo arm), confirmed that ATI-450 demonstrated durable clinical activity, as defined by a marked and sustained reduction in DAS28-CRP and improvement of ~~2020. Due~~ACR20/50/70 responses over 12 weeks. ATI-450 was generally well tolerated. All adverse events were mild to moderate. The most common adverse events (each reported in 2 subjects) were urinary tract infection, or UTI, and ventricular extrasystoles, all of which were determined to be unrelated to treatment except for one UTI. Two subjects withdrew from the trial during the treatment period, one in the treatment arm and one in the placebo arm. The subject in the treatment arm withdrew due to palpitations, which were unrelated to the ~~COVID-19 pandemic, we temporarily paused enrollment of subjects~~trial medication, and an elevated creatine phosphokinase, or CPK, which was determined by the site investigator to be treatment-related. The subject in the ~~trial. At this time, we have decided~~placebo arm withdrew as a result of prohibited medication needed to ~~resume enrolling~~treat muscle strain. There was also one non-treatment-related serious adverse event (COVID-19) reported in the 4-week follow-up period of the trial in a subject who was no longer receiving treatment. The subject withdrew during the 4-week follow-up period of the trial.

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

We plan to submit for publication a full analysis of the Phase 2a data in a peer-reviewed scientific journal which will ~~be determined on an ongoing basis as the COVID-19 pandemic evolves. We previously anticipated reporting~~include data from ~~this~~other secondary and exploratory endpoints evaluated in the trial, including the 4-week follow-up data and a full analysis of MRI, pharmacodynamic and pharmacokinetic data.

Based on the results observed in the Phase 2a trial, we intend to progress ATI-450 into a Phase 2b trial in moderate to severe rheumatoid arthritis in the second half of ~~2020; however, we expect that the reporting~~2021.

Hidradenitis Suppurativa and Psoriatic Arthritis

As part of the ~~data may be delayed. We are~~planned expansion of our Phase 2 immuno-inflammatory clinical development programs, we also ~~planning~~plan to ~~initiate a~~progress ATI-450 into Phase ~~2a clinical trial of ATI-450~~2 trials in hidradenitis suppurativa and psoriatic arthritis.

ATI-1777, an ~~additional immuno-inflammatory indication.~~Investigational Topical “Soft” JAK 1/3 Inhibitor

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~~We expect to submit~~In June 2020, we submitted an IND for ATI-1777, an investigational topical ~~soft-Janus kinase, or~~“soft” JAK 1/3 inhibitor compound, for the treatment of moderate to severe atopic ~~dermatitis in mid-2020. Soft-JAK~~dermatitis. “Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure. ~~If the IND is allowed,~~

In October 2020, we ~~expect to initiate~~initiated a Phase ~~1/2~~2a, multicenter, randomized, double-blind, vehicle-controlled, parallel-group clinical trial to determine the efficacy, safety, tolerability and pharmacokinetics of ATI-1777 in 50 subjects with moderate to severe atopic dermatitis (ATI-1777-AD-201). We completed enrollment in March 2021 and expect data to be available in the second ~~half~~quarter of ~~2020 evaluating ATI-1777 as a potential treatment for moderate-to-severe atopic dermatitis.~~2021.

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ATI-2138, an Investigational ITJ Inhibitor

We are also developing ATI-2138, ~~our~~an investigational oral ITK/TXK/JAK3, or ITJ, inhibitor compound, as a potential treatment for psoriasis and/or inflammatory bowel disease, which are both T-cell mediated autoimmune diseases. The ITJ compound interrupts T cell signaling through the combined inhibition of ITK/TXK/JAK3 pathways in lymphocytes. We expect to file an IND for ATI-2138 in the ~~fourth quarter of 2020 or the first quarter~~second half of 2021.

Our Other Drug Candidates

We ~~are pursuing strategic alternatives, including seeking a partner,~~continue to ~~further develop, obtain regulatory approval and/or commercialize, as applicable,~~seek third-party partners for our dermatology investigational drug candidate A-101 45% Topical Solution as a potential treatment for common warts ~~ATI-501 and ATI-502, our JAK inhibitors, as potential treatments for alopecia, and ESKATA.~~(verruca vulgaris).

Financial Overview

Since our inception, we have incurred significant operating losses. Our net loss was ~~$15.6~~$28.8 million for the three months ended March 31, ~~2020~~2021 and ~~$161.4~~$51.0 million for the year ended December 31, ~~2019.~~2020. As of March 31, ~~2020,~~2021, we had an accumulated deficit of ~~$469.1~~$533.3 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical and clinical development. In addition, our drug candidates, even if they 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 and/or commercialize our drug ~~candidates or ESKATA.~~candidates. Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. We also expect to add additional personnel to support our expanding and advancing development pipeline. As a result, we will need substantial additional funding to support our continuing operations.

We have historically financed our operations primarily with sales of ~~our convertible preferred stock, as well as net proceeds~~equity securities and incurring indebtedness in the form of loans from ~~our initial public offering, or IPO, in October 2015, subsequent public offerings of, and a private placement of, our common stock, and borrowing debt.~~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 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 of one or more of our drug candidates.

~~Recent Developments~~

~~Loan and Security Agreement with Silicon Valley Bank~~

In March 2020, we entered into a Loan and Security Agreement, or the Loan and Security Agreement, with Silicon Valley Bank, or SVB, which provides for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020. In connection with the Loan and Security Agreement, we issued a warrant to SVB to purchase up to 460,251 shares of our common stock with a term of ten years and an initial exercise price of $0.956 per share.

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Impact of COVID-19 on Our Business

The ~~global outbreak~~impacts of the global COVID-19 ~~coronavirus continues~~pandemic continue to ~~rapidly~~ evolve. We have implemented a virtual operations strategy, including ~~telecommuting~~teleworking and other alternative work arrangements for ~~all~~our employees, ~~thereby guarding~~intended to protect the health and safety of our employees ~~and~~while enabling us to continue to develop our ~~focus on the development of our pipeline of~~ drug candidates and ~~providing~~provide contract research services to our clients. We are focused on ensuring the continuity of our operations. ~~Due~~However, COVID-19 has caused disruptions to our business. For example, due to the COVID-19 pandemic ~~we temporarily paused~~subject enrollment ~~of subjects~~ in our Phase 2a trial of ~~ATI-450; however, at this time,~~ATI-450 in subjects with cryopyrin-associated periodic syndrome was paused as a result of which, among other reasons, we ~~have~~ decided to ~~resume enrolling subjects at one clinical trial site. The initiation of additional clinical trial sites will be determined~~focus our efforts and resources on ~~an ongoing basis as the COVID-19 pandemic evolves.~~other immuno-inflammatory diseases.

If ~~the~~ COVID-19 ~~coronavirus~~ continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and ~~prospects.~~prospects, including the timing of our development programs and our clinical trials, including our trials of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis and the supply of active pharmaceutical ingredients and drug product for our clinical trials. The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the ~~ultimate~~ geographic spread of the disease, the duration of the ~~outbreak,~~pandemic, travel restrictions, quarantines, stay-at-home orders, social distancing requirements, business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the ~~disease.~~disease, including the administration of vaccines. Accordingly, we do not yet know the full extent of the potential impacts on our business, our preclinical and clinical development and regulatory activities.

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Acquisition and License Agreements

Agreement and Plan of Merger with Confluence

In August 2017, we entered into an Agreement and Plan of Merger, or 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, the Merger Sub merged with and into Confluence, with Confluence surviving as our wholly-owned subsidiary. We paid closing consideration of $10.3 million in cash and issued 349,527 shares of our common stock with a fair value of $9.7 million to the former Confluence equity holders.

In November 2018, a development milestone specified in the Confluence Agreement was achieved, as a result of which we paid the former Confluence equity holders $2.5 million in cash and issued 253,208 shares of our common stock with a fair value of $2.2 million. Under the Confluence Agreement, we also 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 October 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 an upfront payment of $35.0 million, $1.75 million of which was placed in escrow, and $0.2 million for inventory. 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.

Components of Our Results of Operations

Revenue

Contract Research

We earn revenue from the provision of laboratory ~~services to clients through Confluence Discovery Technologies, Inc., or Confluence, our wholly-owned subsidiary.~~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.

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Other Revenue

Other revenue consists of royalties earned on net sales of RHOFADE pursuant to the asset purchase agreement with EPI Health described above.

Cost of Revenue

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

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

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outsourced professional scientific services;

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depreciation of laboratory equipment;

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facility-related costs; and

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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:

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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;

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~~outsourced professional scientific development services;~~

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outsourced professional scientific development services;

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medical affairs expenses related to our drug ~~candidates, including investigator-initiated studies;~~candidates;

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

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depreciation of manufacturing equipment;

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

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

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laboratory materials and supplies used to support our research ~~activities; and~~

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~~non-cash charges related to the revaluation of contingent consideration.~~activities.

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 to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to ~~identify, research~~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, ~~investigator~~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, facilities or other indirect expenses, to specific research and 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:

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the number of clinical sites included in the trials;

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the length of time required to enroll suitable subjects;

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the number of subjects that ultimately participate in the trials;

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the number of doses subjects receive;

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

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the duration of subject follow-up; and

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the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our drug candidates, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. 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.

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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 ~~investor relations~~ and legal ~~functions, including stock-based compensation, travel expenses and recruiting expenses.~~functions. General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, investor relations costs, insurance costs ~~as well as marketing expenses related to~~and travel expenses.

Revaluation of Contingent Consideration

Revaluation of contingent consideration consists of changes in the fair value of our contract research service offerings. We anticipate that we will incur increased director and officer insurance premiums and legal expenses associated with defending the current lawsuits described in this report.contingent consideration liability between reporting dates.

Other Income (Expense), Net

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

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 generally accepted accounting principles in the United States. The preparation of these 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. 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. We evaluate our estimates and judgments on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Except as described below, ~~we believe~~ there have been no material changes to our significant accounting policies and use of estimates as disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, ~~2019~~2020 included in our Annual Report on Form 10-K filed with the SEC on February 25, ~~2020.~~2021.

~~Revenue Recognition~~

We account for revenue in accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.

To determine revenue recognition in accordance with ASC Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. We recognize revenue when collection of the consideration we are entitled to under a contract with a customer is probable. At contract inception, we assess the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct. We recognize revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied.

~~Contract Research~~

Revenue related to laboratory services is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts. Under ASC Topic 606, we elected to apply the “right to invoice” practical

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~~expedient when recognizing contract research revenue. We recognize contract research revenue in the amount to which we have the right to invoice.~~

~~Intangible Assets~~

Our intangible assets include both definite-lived and indefinite-lived assets. Definite-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. Our definite-lived intangible assets consist of a research technology platform acquired through the acquisition of Confluence. Our indefinite-lived intangible assets consist of an in-process research and development, or IPR&D, drug candidate also acquired through the acquisition of Confluence. IPR&D assets are considered indefinite-lived until the completion or abandonment of the associated research and development efforts. The cost of IPR&D assets is either amortized over their estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned.

Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, which we perform during the fourth quarter, or when indicators of an 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.

~~Leases~~

Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets. We evaluate leases at their inception to determine if they are an operating lease or a finance lease. A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term. Leases that do not meet the finance lease criteria are accounted for as an operating lease.

We recognize assets and liabilities for leases at their inception based upon the present value of all payments due under the lease. We use an implicit interest rate to determine the present value of finance leases, and our incremental borrowing rate to determine the present value of operating leases. We determine incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease. We recognize expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method. We include estimates for any residual value guarantee obligations under our leases in lease liabilities recorded on our condensed consolidated balance sheet.

Right-of-use assets are included in other assets and property and equipment, net on our condensed consolidated balance sheet for operating and finance leases, respectively. Obligations for lease payments are included in current portion of lease liabilities and other liabilities on our condensed consolidated balance sheet for both operating and finance leases.

Contingent Consideration

We initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the

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achievement of ~~certain~~the development, regulatory and commercial milestones, as well as estimated future ~~projected~~ sales ~~performance,~~

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~~resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition. The ultimate amount of future payments, if any, is based on criteria such as sales performance~~levels and the ~~achievement~~discount rates applied to calculate the present value of ~~certain regulatory and sales milestones.~~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. We ~~estimate~~evaluate the fair value estimate of ~~the~~our contingent consideration liability related to the achievement of regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. Significant assumptions used in our estimates include the probability of success of achieving regulatory and sales milestones, which are based upon an asset’s current stage of development and ranged between 4% and 15%. We evaluate fair value estimates of contingent consideration liabilities on a ~~periodic basis. Any change in fair value reflects new information about the likelihood of the payment of the contingent consideration and the passage of time. For example,~~quarterly basis with changes, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug, differ from our assumptions, then the fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent consideration, if any, ~~will be~~ recorded as income or expense in our condensed consolidated statement of ~~operations.~~ operations and which could have a material impact on our financial results.

The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments. Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing 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 4% and 40%. 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 5.9% and 8.1% depending on the year of each potential payment.

During the three months ended March 31, 2021, we updated assumptions for probability of success and estimated future sales levels as a result of the completion of a Phase 2a clinical trial of ATI-450 in subjects with moderate to severe rheumatoid arthritis. We also included estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for ATI-450. These updates resulted in a charge of $16.4 million.

Recently Issued Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant. None.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification, or ASC, 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.

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Results of Operations

Comparison of Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020

Three Months Ended March 31,


2020

2019

Change

(In thousands)

Revenues:

Contract research

$
1,189

$
1,263

$
(74)

Other revenue

218

—

218

Total revenue

1,407

1,263

144

Costs and expenses:

Cost of revenue

1,269

1,207

62

Research and development

9,444

19,643

(10,199)

General and administrative

6,200

7,464

(1,264)

Total costs and expenses

16,913

28,314

(11,401)

Loss from operations

(15,506)

(27,051)

11,545

Other income (expense), net

178

(230)

408

Loss from continuing operations

(15,328)

(27,281)

11,953

Loss from discontinued operations

(258)

(10,284)

10,026

Net loss

$
(15,586)

$
(37,565)

$
21,979


	Three Months Ended March 31,
(In thousands)	2021		2020		Change
Revenues:
Contract research	$	1,535	$	1,189	$	346
Other revenue		242		218		24
Total revenue		1,777		1,407		370

Costs and expenses:
Cost of revenue		1,202		1,269		(67)
Research and development		7,838		7,677		161
General and administrative		4,827		6,200		(1,373)
Revaluation of contingent consideration		16,439		1,767		14,672
Total costs and expenses		30,306		16,913		13,393
Loss from operations		(28,529)		(15,506)		(13,023)

Other income (expense), net		(225)		178		(403)
Loss from continuing operations		(28,754)		(15,328)		(13,426)
Loss from discontinued operations		—		(258)		258
Net loss	$	(28,754)	$	(15,586)	$	(13,168)

Revenue

Contract research revenue was $1.5 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively, and was comprised of fees earned from the provision of laboratory services. The $0.3 million increase was primarily driven by higher average billing rates. Other revenue for each of the three months ended March 31, 2021 and 2020 consisted of $0.2 million of royalties earned on net sales of RHOFADE.

Cost of Revenue

Cost of revenue was $1.2 million and $1.3 million for the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence. Other revenue consisted of $0.2 million of royalties earned on net sales of RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, pursuant to the asset purchase agreement with EPI Health, LLC, or EPI Health.

~~Cost of Revenue~~

~~Cost of revenue was $1.3 million and $1.2 million for the three months ended March 31, 2020 and 2019, respectively, was consistent year over year,~~ and related to providing laboratory services to our ~~clients through Confluence.~~clients.

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Research and Development Expenses

The following table summarizes our research and development expenses:

Three Months Ended

March 31,

2020

2019

Change

(In thousands)
ATI-450

$
1,994

$
2,235

$
(241)
ATI-1777

757

1,719

(962)
ATI-2138

501

901

(400)
Other JAK inhibitors

450

3,926

(3,476)
A-101 45% Topical Solution

480

5,460

(4,980)
Other research and development expenses

755

1,140

(385)
Personnel expenses

1,924

2,668

(744)
Stock-based compensation

816

1,594

(778)
Change in contingent consideration

1,767

—

1,767
Total research and development expenses

$
9,444

$
19,643

$
(10,199)


	Three Months Ended
	March 31,
(In thousands)	2021		2020		Change
ATI-450	$	2,073	$	1,976	$	97
ATI-1777		946		757		189
ATI-2138		1,383		301		1,082
Discovery		692		627		65
Other research and development		416		1,194		(778)
Personnel		1,452		2,006		(554)
Stock-based compensation		876		816		60
Total research and development expenses	$	7,838	$	7,677	$	161

~~Research and development expenses~~

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ATI-450

Expenses for ATI-450 ~~primarily consisted of preclinical development activities~~ during the three months ended March 31, ~~2019,~~2021 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with moderate to severe rheumatoid arthritis, drug product manufacturing expenses, and ~~clinical~~other development expenses. ATI-450 expenses during the three months ended March 31, 2020 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January ~~2020 and initial activities~~2020.

ATI-1777

Expenses for ~~a Phase 2a clinical trial~~ATI-1777 were higher during the three months ended March 31, ~~2020. Expenses for ATI-1777 were lower~~2021 compared to March 31, 2020 primarily due to ~~the completion of~~costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis which commenced in late 2020, partially offset by lower preclinical development activities.

ATI-2138

Expenses for ATI-2138 were lower as we completed early stage development work on candidate selection in 2019 and began preclinical development activities in the three months ended March 31, 2020. Expenses related to our other JAK inhibitors decreased primarily as a result of several Phase 2 clinical trials of ATI-501 and ATI-502 which were completed during 2019. Expenses related to A-101 45% Topical Solution decreased primarily due to our Phase 3 clinical trials, which were activehigher during the three months ended March 31, ~~2019~~2021 compared to March 31, 2020 primarily due to preclinical development activities and ~~were completed by~~IND-enabling studies.

Discovery and other research and development

Expenses related to discovery increased during the ~~end of 2019.~~three months ended March 31, 2021 compared to March 31, 2020 due to increased investment in our discovery-stage programs. Other research and development expenses, which primarily ~~included~~include expenses for our legacy dermatology assets and medical affairs activities, ~~as well as drug discovery,~~ were lower ~~primarily as a result of lower medical affairs related activities~~ during the three months ended March 31, ~~2020. Personnel expenses decreased~~2021 compared to March 31, 2020 due to ~~lower headcount primarily as~~ a ~~result of~~decrease in costs for our legacy dermatology assets following the ~~restructuring we announced~~decision to discontinue investment in ~~September 2019 and completed~~those programs. Additionally, travel expenses were lower during the three months ended March 31, ~~2020. The decrease in~~2021 compared to March 31, 2020 due to the COVID-19 pandemic.

Personnel and stock-based compensation ~~was primarily driven by a reduction in headcount. The increase in contingent consideration~~

Personnel expenses and stock-based compensation decreased during the three months ended March 31, 2021 compared to March 31, 2020 ~~was the result of updates~~due to ~~our assumptions as a result of the completion of a successful Phase 1 clinical trial for ATI-450.~~ lower headcount.

General and Administrative Expenses

The following table summarizes our general and administrative expenses:

Three Months Ended

March 31,

2020

2019

Change

(In thousands)
Personnel expenses

$
1,597

$
2,454

$
(857)
Professional and legal fees

1,117

1,280

(163)
Facility and support services

510

658

(148)
Other general and administrative expenses

599

600

(1)
Stock-based compensation

2,377

2,472

(95)
Total general and administrative expenses

$
6,200

$
7,464

$
(1,264)


	Three Months Ended
	March 31,
(In thousands)	2021		2020		Change
Personnel	$	959	$	1,597	$	(638)
Professional and legal fees		1,355		1,117		238
Facility and support services		398		510		(112)
Other general and administrative		563		599		(36)
Stock-based compensation		1,552		2,377		(825)
Total general and administrative expenses	$	4,827	$	6,200	$	(1,373)

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Personnel and stock-based compensation expenses decreased during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to lower headcount. Professional and legal fees ~~were consistent year-over-year, and~~ included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to ~~patents.~~patents and current lawsuits described in this report and were higher during the three months ended March 31, 2021 compared to March 31, 2020 primarily as a result of a non-cash write-off of previously capitalized expenses related to an equity line of credit which was terminated in January 2021. Facility and support services included general office expenses, information technology costs and other expenses, and ~~have~~ decreased during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to lower information technology ~~costs.~~costs resulting from lower headcount. Other general and administrative expenses were ~~consistent year-over-year,~~

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lower during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Revaluation of Contingent Consideration

The increase in revaluation of contingent consideration during the three months ended March 31, 2021 compared to March 31, 2020 primarily resulted from updates to the probability of success and ~~primarily included travel, insurance~~estimated future sales level assumptions as a result of the completion of a Phase 2a clinical trial of ATI-450 in subjects with moderate to severe rheumatoid arthritis and ~~marketing costs.~~ the inclusion of estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for ATI-450.

Other Income (Expense), net

~~Other~~The $0.4 million decrease in other income ~~for~~(expense), net during the three months ended March 31, 2021 compared to March 31, 2020 was ~~$0.2 million~~primarily due to higher interest expense and ~~included~~fees associated with outstanding debt balances and lower interest income earned on our cash and investments, partially offset by interest expense related to finance leases and premium finance arrangements. Other expense for the three months ended March 31, 2019 was $0.2 million and primarily included interest expense incurred on our debtassociated with ~~Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.~~ marketable securities.

~~Loss from Discontinued Operations~~

In September 2019, we announced the completion of a strategic review and our decisions to refocus on our immuno-inflammatory development programs and to actively seek partners for our commercial products. The condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to our commercial products as discontinued operations (see Note 15 to the condensed consolidated financial statements included in this report for more information).

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 did not generate any revenue. We have financed our operations over the last several years primarily through sales of our equity securities and incurring indebtedness in ~~public offerings~~the form of loans from commercial lenders. We may engage in additional debt and ~~a private placement transaction.~~equity financing transactions in order to raise funds. In ~~March 2020,~~addition, to the extent we ~~entered into the Loan and Security Agreement~~are able to consummate transactions with ~~SVB.~~ potential third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our liquidity.

As of March 31, ~~2020,~~2021, we had cash, cash equivalents and ~~restricted cash and~~ marketable securities of ~~$79.0~~$142.7 million. 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 term loan facility, lease obligations, and contingent obligations under ~~acquisition~~the Confluence Agreement, which is summarized above under “Overview—Acquisition and ~~intellectual property licensing agreements,~~License Agreements.”

Equity Financing

January 2021 Public Offering

In January 2021, we closed a public offering in which ~~are summarized below~~we sold 6,306,271 shares of common stock at a price to the public of $17.50 per share, for aggregate gross proceeds of $110.4 million. We paid underwriting discounts and commissions of $6.6 million, and also incurred expenses of $0.4 million in connection with the offering. As a result, the net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $103.3 million.

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

In August 2020, we entered into a purchase agreement, or the Purchase Agreement, with Lincoln Park Capital Fund, LLC, or Lincoln Park, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we could sell to Lincoln Park, at our discretion, up to $15.0 million of shares of our common stock over the 36-month term of the Purchase Agreement. Upon execution of the Purchase Agreement, we issued 121,584 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the

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Purchase Agreement. The commitment shares were valued using the closing price of our common stock on the effective date of the Purchase Agreement resulting in an aggregate fair value of $0.3 million. Through December 31, 2020, we sold 2,111,170 shares of our common stock to Lincoln Park under ~~“Contractual Obligations and Commitments~~.”the Purchase Agreement for net proceeds of $7.7 million. We terminated the Purchase Agreement in January 2021 in connection with the public offering of common stock described above. We did not sell any additional shares during the three months ended March 31, 2021 prior to terminating the Purchase Agreement.

Debt Financing

Loan and Security Agreement with Silicon Valley Bank

In March 2020, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB. The Loan and Security Agreement provides for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020. The Loan and Security Agreement is secured by substantially all of our assets other than intellectual property.

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provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%.

The Loan and Security Agreement includes a final payment fee equal to 5% of the original principal amount borrowed. We have the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for any prepayment on or prior to the first anniversary of March 30, 2020, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.

The Loan and Security Agreement contains a customary covenant that limits our ability, subject to specified exceptions, to incur additional indebtedness without the prior written consent of SVB.

Liquidity and Cash Flows

Cash and cash equivalents were $35.3 million as of March 31, 2021 compared to $22.1 million as of December 31, 2020. We also had $107.4 million in short- and long-term marketable securities as of March 31, 2021 compared to $32.1 million as of December 31, 2020.

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


	Three Months Ended March 31,
(In thousands)	2021		2020
Cash and cash equivalents beginning balance	$	22,063	$	35,937
Net cash used in operating activities		(12,232)		(6,805)
Net cash provided by (used in) investing activities		(75,314)		13,942
Net cash provided by financing activities		100,750		10,918
Cash and cash equivalents ending balance	$	35,267	$	53,992

Table of ~~the periods presented:~~Contents

Three Months Ended March 31,

2020

2019

(In thousands)
Net cash used in operating activities

$
(6,805)

$
(31,318)
Net cash provided by (used in) investing activities

13,942

8,616
Net cash provided by (used in) financing activities

10,918

(120)
Net increase (decrease) in cash and cash equivalents

$
18,055

$
(22,822)

Operating Activities

~~During~~Operating activities use of cash was the result of:



	Three Months Ended March 31,
(In thousands)	2021		2020
Net loss	$	(28,754)	$	(15,586)
Non-cash adjustments to reconcile net loss to net cash used in operating activities		19,402		5,796
Change in accounts payable and accrued expenses		(585)		(2,090)
Change in accounts receivable		(45)		4,737
Change in prepaid expenses and other assets		(2,250)		338
Net cash used in operating activities	$	(12,232)	$	(6,805)

Net cash used in operating activities increased for the three months ended March 31, 2021 compared to March 31, 2020 ~~operating activities used $6.8 million~~primarily as a result of ~~cash primarily resulting from our net loss~~larger charges related to revaluation of ~~$15.6 million, partially offset by non-cash adjustments of $5.6 million. Net cash provided by changes in our operating assets and liabilities~~contingent consideration during the three months ended March 31, ~~2020 consisted~~2021. The revaluation of contingent consideration was due to updates to assumptions including the probability of success and estimated future sales level assumptions as a result of the completion of a ~~$4.7 million decrease~~Phase 2a clinical trial of ATI-450 in ~~accounts receivable~~subjects with moderate to severe rheumatoid arthritis and ~~a $0.3 million decrease in prepaid expenses~~the inclusion of estimated future sales related to hidradenitis suppurativa and ~~other assets,~~psoriatic arthritis which ~~were~~are additional planned indications for ATI-450. The increase was partially offset by ~~a $2.1 million net decrease in accounts payable~~lower stock-based compensation and accrued expenses. The decrease in accounts receivable was primarily the result of cash received from Allergan Sales, LLC, or Allergan, related to sales of RHOFADE made during the year ended December 31, 2019. The decrease in prepaiddepreciation and amortization expenses and other assets was primarily due to amortization of the premiums for our corporate insurance policies, which we expense equally over the policy term. The net decrease in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of December 31, 2019, which were partially offset by cash received from Allergan of $5.2 million which related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health. Accordingly, the $5.2 million is payable to EPI Health, and is included in accrued expenses on our condensed consolidated balance sheet as of March 31, 2020. Expenses incurred, as of December 31, 2019, and paid during the three months ended March 31, ~~2020, primarily included employee annual merit bonuses, as well as expenses related~~2021 compared to preclinical development and Phase 1 clinical trial activities for ATI-450, and preclinical development activities for ATI-1777 and ATI-2138. Non-cash expenses of $5.8 million were composed of stock-based compensation expense of $3.5 million, a charge of $1.7 million related to theMarch 31, 2020.

The change in ~~contingent consideration and depreciation and amortization expense of $0.6 million.~~

During the three months ended March 31, 2019, operating activities used $31.3 million of cash primarily resulting from our net loss of $37.6 million, partially offset by non-cash adjustments of $7.1 million. Net cash provided by changes in our operating assets and liabilities during the three months ended March 31, 2019 consisted of an $8.3 million increase in accounts payable and accrued expenses and a $1.9 million decrease in prepaid expenses and other assets, which were offset by an $11.0 million increase in accounts receivable. The increase in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of March 31, ~~2019, as well as the timing of vendor invoicing and payments. Expenses incurred, but not yet paid, as of~~2021 compared to March 31, ~~2019 primarily included sales and marketing expenses related to the re-launch of RHOFADE, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical~~

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~~Solution, our Phase 2 clinical trials for ATI-501 and ATI-502 and pre-clinical development activities for ATI-450.~~2020. The ~~decrease~~change in prepaid expenses and other assets was due to research and development activities primarily related to pre-clinical development activities for ATI-450 which concluded during the three months ended March 31, 2019 and sales and marketing expenses related to our national sales meeting which was held during the three months ended March 31, 2019. The increasechanges in accounts receivable was primarily the result of cash received during the quarter ended March 31, 2020 from Allergan Sales, LLC related to sales of ~~RHOFADE. Non-cash~~RHOFADE that occurred after the date we sold RHOFADE to EPI Health. The change in changes in prepaid expenses ~~of $7.1 million were composed of $4.9 million of stock-based compensation expense~~ and ~~$2.2 million of depreciation~~other assets was primarily due to prepaid balances for drug product manufacturing agreements and ~~amortization expense.~~ other preclinical development contracts.

Investing Activities

~~During~~Cash flow from investing activities was the result of:


	Three Months Ended March 31,
(In thousands)	2021		2020
Purchases of property and equipment	$	—	$	(124)
Purchases of marketable securities		(85,814)		(8,869)
Proceeds from sales and maturities of marketable securities		10,500		22,935
Net cash provided by (used in) investing activities	$	(75,314)	$	13,942

Net cash used in investing activities for the three months ended March 31, 2021 resulted from purchases of marketable securities following our January 2021 public offering compared to net cash provided by investing activities for the three months ended March 31, 2020 ~~investing activities provided $13.9 million of cash, consisting of proceeds~~which resulted from ~~sales and~~ maturities of marketable securities used primarily to fund operations.

Table of ~~$22.9 million, partially offset~~Contents

Financing Activities

Financing activities use of cash was the result of:


	Three Months Ended March 31,
(In thousands)	2021		2020
Proceeds from issuance of common stock in connection with public offering, net of issuance costs	$	103,348	$	—
Proceeds from debt financing (including warrants), net of issuance costs		—		10,950
Restricted stock unit employee tax withholdings		(3,014)		—
Finance lease payments		—		(57)
Proceeds from exercise of employee stock options and the issuance of stock		416		25
Net cash provided by financing activities	$	100,750	$	10,918

Cash provided by ~~purchases of marketable securities of $8.9 million, and purchases of equipment of $0.1 million.~~

~~During~~financing activities increased for the three months ended March 31, ~~2019, investing activities provided $8.6 million of cash, consisting of proceeds from sales and maturities of marketable securities of $82.0 million,~~2021 compared to March 31, 2020 primarily due to our January 2021 public offering. The increase was partially offset by ~~purchases~~an increase in cash used for tax withholdings in connection with the vesting of ~~marketable securities of $73.1 million, and purchases of equipment of $0.3 million.~~restricted stock units.

~~Financing Activities~~

During the three months ended March 31, 2020, financing activities provided $10.9 million of cash and primarily included $10.9 million of net borrowings pursuant to the Loan and Security Agreement with SVB.

~~During the three months ended March 31, 2019, financing activities used $0.1 million of cash related to finance lease payments.~~

Funding Requirements

We anticipate we will incur net losses in the near term as we continue the clinical development of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to ~~identify, research~~discover and develop additional drug candidates. We may not be able to generate revenue from these programs if, among other things, our clinical trials are not successful, the FDA does not approve our drug candidates currently in clinical trials when we expect, or at 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 in the near term to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support the development 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 Stock Market LLC, requires public companies to implement specified corporate governance practices that ~~were not applicable to us prior to~~could increase our ~~IPO.~~compliance 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 condensed consolidated financial statements that appear in Item 1 of this Quarterly Report on Form 10-Q based on our current operating assumptions. We ~~expect that we~~ will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop our preclinical compounds, and to support our discovery efforts. Additional funds may not be available

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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 potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. 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.

We may raise additional capital through the sale of equity or 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 and development of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our funding requirements in the near term will depend on many factors, including:

●

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

●

the scope, progress, results and costs of preclinical development, laboratory testing and 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 technologies;

●

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

●

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

●

our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, and earn revenue from such arrangements; and

●

the revenue earned from our commercial products as a result of licenses to, or partnerships with, third parties.

Contractual Obligations and Commitments

We occupy space for our headquarters in Wayne, Pennsylvania under a sublease agreement which has a term through October 2023. In December 2020, we entered into a sub-sublease agreement under which we sub-subleased 8,115 square feet. The sub-sublease term runs concurrently with the original sublease agreement. We occupy office and laboratory space in St. Louis, Missouri under a sublease agreement which has a term through June 2029.

~~We lease laboratory equipment used in our laboratory space in St. Louis, Missouri under two capital lease financing arrangements which have terms through October~~In March 2020, ~~and December 2020.~~

~~Under the assignment agreement with the Estate of Mickey Miller pursuant to which~~ we acquired intellectual property, we have agreed to pay royalties on sales of ESKATA and 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 with KPT Consulting, LLC, we have agreed to make a remaining payment of $3.0borrowed $11.0 million upon the achievement of a specified commercial milestone. In addition, we have agreed to pay royalties on sales of ESKATA and related products at a low single-digit percentage of net sales, as defined in the agreement. In August 2019, we voluntarily discontinued the commercialization of ESKATA in the United States and withdrew the marketing authorizations we had previously received for the product in all countries outside of the United States.

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Under a license agreement with Rigel Pharmaceuticals, Inc., or Rigel, we have agreed to make remaining aggregate payments of up to $76.0 million upon the achievement of specified development milestones, such as clinical trials and regulatory approvals. Further, we have agreed to pay up to an additional $10.5 million to Rigel upon the achievement of a second set of development milestones. In addition, in connection with the amendment of the agreement in October 2019, we agreed to pay Rigel an amendment fee of $1.5 million in three installments of $500,000 in January 2020, April 2020 and July 2020. 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~~Loan and Security Agreement with SVB. Amounts borrowed under the ~~licensed JAK inhibitors at a high single digit percentage of annual net sales,~~Loan and Security Agreement are subject to ~~specified reductions.~~

Under a stock purchase agreement with the selling stockholders of one of our former subsidiaries, we 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 acquired 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 acquired patent rights. We are also obligated to make an annual payment of $0.1 millioninterest only through March 2022, after which amounts are creditable against any specified future payments that may be paid under the agreement. With respect to any covered products that we commercialize under the agreement, 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 agreement, 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 agreement, we will be obligated to pay Columbia a portion of any consideration we receive from such sublicenses in specified circumstances.

~~Under a merger agreement with Confluence, we are obligated~~required to make ~~remaining aggregate~~principal and interest payments through the maturity date of up to $75.0 million upon the achievement of specified 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 agreement, we will be obligated to pay a portion of any consideration we receive from such sublicenses in specified circumstances.March 2024.

We enter into contracts in the normal course of business with CROs and contract manufacturing organizations for clinical trials, preclinical ~~research~~ studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Segment Information

We have 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.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

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~~Emerging Growth Company Status~~

The JOBS Act 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our cash equivalents and marketable securities consist of money market funds, asset-backed debt securities, commercial paper, corporate debt securities 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 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 would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.

The Loan and Security Agreement with SVB provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%. To the extent that any present or future credit facilities that we enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we have such debt outstanding, our interest expense would increase. Based upon our debt outstanding of $11.0 million as of March 31, ~~2020,~~2021, a 100 basis-point increase in the interest rate on our loan with SVB would result in ~~approximately~~ $0.1 million of additional interest expense on an annualized basis.

The uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets during and subsequent to our quarter ended March 31, ~~2020.~~2021.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, refers to controls and procedures that are designed to ensure 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a 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 recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply 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 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

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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 of our disclosure controls and procedures as of March 31, ~~2020,~~2021, the end 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 our disclosure controls and procedures were effective as of such date at the reasonable assurance level.

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(b) Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during our fiscal quarter ended March 31, ~~2020~~2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are subject to litigation and claims arising in the ordinary course of business including intellectual property and product liability litigation, but, except as stated below, 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.

Securities Class Action

On July 30, 2019, plaintiff Linda Rosi, or 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 us and certain of our executive officers. The complaint alleges that the defendants violated federal securities laws by, among other things, failing to disclose an alleged likelihood that regulators would scrutinize advertising materials related to ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product, and find that the materials minimized the risks or overstated the efficacy of the product. The complaint seeks unspecified compensatory damages on behalf of Rosi and all other persons and entities that purchased or otherwise acquired our securities between May 8, 2018 and June 20, 2019.

On September 5, 2019, an additional plaintiff, Robert Fulcher, or 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, or together, the Consolidated Securities Action, and appointed Fulcher “lead plaintiff” for the putative class.

On January 24, 2020, Fulcher filed a consolidated amended complaint in the Consolidated Securities Action, naming two additional executive officers as defendants, extending the putative class period to August 12, 2019, and adding allegations concerning, among other things, alleged statements and omissions throughout the putative class period concerning ESKATA’s risks, tolerability and effectiveness. The ~~defendants’ deadline to answer, move against or otherwise respond to the consolidated amended complaint was originally scheduled for March 27, 2020, but was extended until April 17, 2020. The~~ defendants filed a motion to dismiss the consolidated amended complaint on April 17, 2020. Following briefing and oral argument on February 25, 2021, the motion was granted in part and denied in part on March 29, 2021, and the issues in dispute significantly narrowed. The defendants filed an answer to the remaining aspects of the consolidated amended complaint on April 19, 2021.

We and the other defendants dispute plaintiffs’ claims in the Consolidated Securities ~~Action and intend to defend the matter vigorously.~~Action.

Stockholder Derivative Action

On November 15, 2019, plaintiff Keith Allred, or Allred, filed a derivative stockholder complaint captioned Allred v. Walker et al. in the U.S. District Court for the Southern District of New York against certain of our directors and executive officers. The complaint alleges that the defendants, among other things, breached their fiduciary duties as

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directors and/or officers in connection with the claims alleged in the Consolidated Securities Action. The complaint seeks, among other things, unspecified compensatory damages on behalf of our company.

On November 25, 2019, an additional plaintiff, Bruce Brown, or Brown, filed a substantially identical complaint captioned Brown v. Walker et al. in the same court against the same defendants.

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On December 12, 2019, the court consolidated the Allred and Brown actions under the caption In re Aclaris Therapeutics, Inc. Derivative Litigation, or the Consolidated Derivative Action, and directed that future derivative cases filed in or transferred to the court arising out of substantially the same transactions or events be similarly consolidated. Thereafter, on January 11, 2020, the court stayed – subject to certain conditions – all deadlines in the Consolidated Derivative Action pending resolution of the defendants’ ~~anticipated~~then-anticipated motion to dismiss the Consolidated Securities Action.

The ~~defendants dispute plaintiffs’ claims~~stay expired on April 27, 2021, but may be reinstated pending further developments in the Consolidated Securities Action. No further proceedings have yet occurred or been scheduled in the Consolidated Derivative ~~Action and intend to defend the matter vigorously.~~Action.

In addition, from time to time, we are subject to litigation and claims arising in the ordinary course of business but, except as stated above, we are not currently a party to any material legal proceedings and we are not aware of any 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 as noted 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, ~~2019,~~2020, filed with the SEC on February 25, ~~2020.~~2021.

~~Risks Related to Our Business, Our Financial Position and Capital Needs~~

Our business has been adversely impacted and could continue to be adversely affected by the evolving and ongoing COVID-19 global pandemic in regions where we or third parties on which we rely have significant manufacturing facilities, concentrations of clinical trial sites or other business operations. The COVID-19 pandemic could adversely affect our operations, including at our headquarters, which is currently subject to a stay-at-home order, and at our clinical trial sites, as well as the business or operations of our manufacturers, CROs or other third parties with whom we conduct business.

Our business has been adversely affected by the effects of the recent and evolving COVID-19 pandemic, which was declared by the World Health Organization as a global pandemic. The COVID-19 pandemic has resulted in travel and other restrictions in order to reduce the spread of the disease, which, among other things, direct individuals to shelter at their places of residence, direct businesses and governmental agencies to cease non-essential operations at physical locations, prohibit certain non-essential gatherings, and order cessation of non-essential travel. In response to these public health directives and orders, we have implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for all employees. The effects of the stay-at-home order and our alternative work arrangement policies may negatively impact productivity, disrupt our business and delay our pre-clinical and clinical programs and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.

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Quarantines, stay-at-home, executive and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Some of our third-party manufacturers which we use for the supply of materials for our drug candidates or other materials necessary to manufacture drug product to conduct preclinical studies and clinical trials are located in countries affected by COVID-19, and should they experience disruptions, such as temporary closures or suspension of services, we would likely experience delays in advancing these studies and trials.

In addition, our clinical trials may be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some subjects may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, our ability to recruit and retain subjects and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact our clinical trial operations. For example, we temporarily paused enrollment of subjects in our Phase 2a trial of ATI-450. While we have decided to resume enrolling subjects at one clinical trial site and plan to initiate additional clinical trial sites on an ongoing basis as the COVID-19 pandemic evolves, we may not be able to initiate additional clinical trial sites or enroll subjects, which would cause delays in our clinical trial timeline.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and impact our ability to make scheduled payments pursuant to our Loan and Security Agreement with SVB. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.

The global pandemic of COVID-19 continues to rapidly evolve. The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines, social distancing requirements and business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. Accordingly, we do not yet know the full extent of the impacts on our business, our preclinical and clinical development and regulatory activities, healthcare systems or the global economy as a whole. However, these impacts could adversely affect our business, financial condition, results of operations and growth prospects.

In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 25, 2020.

~~We may not be able to generate sufficient cash to service our indebtedness, including the Loan and Security Agreement with SVB.~~

In March 2020, we entered into the Loan and Security Agreement with SVB, pursuant to which we borrowed $11.0 million. Our obligations under the Loan and Security Agreement are secured by substantially all of our assets except for our intellectual property, and we may not encumber our intellectual property without SVB’s prior written consent. The Loan and Security Agreement contains customary representations, warranties and covenants by us, which covenants, among other things, limit our ability, subject to specified exceptions, to convey, sell, lease, transfer, assign or otherwise dispose of our assets; engage in any business other than the businesses currently engaged in by us or reasonably related

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thereto; liquidate or dissolve; undergo specified change of control events; create, incur, assume or be liable for indebtedness; create, incur, allow or suffer any liens on our property; pay dividends and make other restricted payments; make investments; or enter into any material transactions with our affiliates. Our obligations under the Loan and Security Agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial condition. We may also enter into other debt agreements in the future which may contain similar or more restrictive terms.

Our ability to make scheduled monthly payments or to refinance our debt obligations depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and our performance are subject to certain financial and business factors, as well as prevailing economic and competitive conditions, including the impact of the COVID-19 pandemic some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, or that these actions would permit us to meet our scheduled debt service obligations. Failure to comply with the covenants and conditions of the Loan and Security Agreement could result in an event of default, which could result in an acceleration of amounts due under the Loan and Security Agreement. We may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and SVB could seek to enforce security interests in the collateral securing such indebtedness, which would harm our business.

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

Issuances of Common Stock upon the Exercise of Warrants

On January 15, 2021, we issued 388,119 shares of our common stock to one warrantholder upon the net exercise of warrants. The issuance of these securities was exempt from registration under Section 3(a)(9) of the Securities Act.

~~None.~~

Item 6. Exhibits


Exhibit No.		Document

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+~~		Third Amended and Restated Non-Employee Director Compensation Policy (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K (File No. 001-37581), filed with the SEC on February 25, 2020).

~~10.2~~		Loan and Security Agreement, by and among the Registrant, Confluence Discovery Technologies, Inc. and Silicon Valley Bank, dated as of March 30, 2020 (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 March 31, 2020).

~~10.3~~		Warrant to Purchase Stock, issued to Silicon Valley Bank, dated as of March 30, 2020 (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on March 31, 2020).

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~~10.4~~	~~��~~	Open Market Sale Agreement, dated March 13, 2020, by and between the Registrant and Jefferies LLC (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 March 13, 2020).

10.5*		~~Second Amendment to Sublease, dated as of April 29, 2020, by and between the Registrant and Auxilium Pharmaceuticals, LLC.~~

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

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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.
**	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.
+	~~Indicates management contract or compensatory plan.~~

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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: May 7, ~~2020~~2021	By:	/s/ Neal Walker
		Neal Walker
		President and Chief Executive Officer
		(On behalf of the Registrant)


Date: May 7, ~~2020~~2021	By:	/s/ Frank Ruffo
		Frank Ruffo
		Chief Financial Officer
		(Principal Financial Officer)

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	March 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	27,210	$	—	$	—	$	27,210
Marketable securities		—		25,013		—		25,013
Total assets	$	27,210	$	25,013	$	—	$	52,223


Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	3,435	$	3,435
Total liabilities	$	—	$	—	$	3,435	$	3,435


Year Ending December 31,
2020	$	56
2021		75
2022		75
2023		75
2024		75
Thereafter		195
Total	$	551