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
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 was 41,866,345.

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 and December 31, 2019	2
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019	3
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020and 2019	4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures about Market Risk	41
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6. Exhibits	45
Signatures	47

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACLARIS THERAPEUTICS, 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

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

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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)

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

3

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.

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ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(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.

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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 biopharmaceutical company focused on immuno-inflammatory diseases. The Company currently has a pipeline of 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 drug candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), the Company’s non-marketed FDA-approved product.  

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.  At March 31, 2020, the Company had cash, cash equivalents and restricted cash and marketable securities of $79,005 and an accumulated deficit of $469,113. 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, 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 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 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

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conditions or events that exist which raise substantial doubt about its ability to continue as a going concern within one year after the date of the issuance of these condensed consolidated financial statements.  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 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.

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

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

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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, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020 and 2019, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2020 and 2019, and the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 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 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, the results of its operations and comprehensive loss for the three months ended March 31, 2020 and 2019, its changes in stockholders’ equity for the three months ended March 31, 2020 and 2019 and its cash flows for the three months ended March 31, 2020 and 2019.  The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP.  The financial data and other information disclosed in these notes related to the three months ended March 31, 2020 and 2019 are unaudited. The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, 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 included in the Company’s annual report on Form 10-K filed with the SEC on February 25, 2020.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2019 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 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 pursuant 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 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 obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied.  At contract inception, the Company assesses the goods or services 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.  

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.  

9

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 related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as 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 performance and the achievement of certain regulatory and sales milestones.  The Company estimates the fair value of the 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.  The Company estimates 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 the Company’s 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%.  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 consideration and the passage of time. For example, 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 the Company’s 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 the Company’s condensed consolidated statement of operations.  

10

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.  

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, 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

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	21,277	$	—	$	—	$	21,277
Marketable securities		—		39,078		—		39,078
Total assets	$	21,277	$	39,078	$	—	$	60,355
Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	1,668	$	1,668
Total liabilities	$	—	$	—	$	1,668	$	1,668

As of March 31, 2020 and December 31, 2019, 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 Company’s marketable securities consisted of investments with maturities of more than three months and included commercial paper, corporate debt, asset-backed securities and government obligations, 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 is 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 and 2019, there were no transfers between Level 1, Level 2 and Level 3.  The increase in contingent consideration of $1,767 during the three months ended March 31, 2020 was the result of updates to the Company’s assumptions as a result of the successful completion of a Phase 1 clinical trial for ATI-450.  

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

	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

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

4. Property and Equipment, Net

Property and equipment, net consisted of the following:

		March 31,		December 31,
	2020		2019
Computer equipment	$	1,315	$	1,315
Finance lease right-of-use assets		435		435
Lab equipment		1,265		1,250
Furniture and fixtures		647		647
Leasehold improvements		889		889
Property and equipment, gross		4,551		4,536
Accumulated depreciation		(2,364)		(2,066)
Property and equipment, net	$	2,187	$	2,470

Depreciation expense was $298 and $402 for the three months ended March 31, 2020 and 2019, respectively.  

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5. Intangible Assets

Intangible assets consisted of the following:

		Gross Cost				Accumulated Amortization
	Remaining		March 31,		December 31,		March 31,		December 31,
	Life (years)	2020		2019		2020		2019
Other intangible assets	7.3		751		751		200		181
Total definite-lived intangible assets			751		751		200		181
IPR&D	na		6,629		6,629		—		—
Total intangible assets		$	7,380	$	7,380	$	200	$	181

As of March 31, 2020, 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

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6. Accrued Expenses

Accrued expenses consisted of the following:

		March 31,		December 31,
	2020		2019
Employee compensation expenses	$	1,419	$	3,321
Research and development expenses		2,322		2,857
Professional fees		166		168
Payable to EPI Health		5,241		—
Other		1,226		1,375
Total accrued expenses	$	10,374	$	7,721

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 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”).  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.  

8. Stockholders’ Equity

Preferred Stock

As of March 31, 2020 and December 31, 2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares of undesignated preferred stock.  There were no shares of preferred stock outstanding as of March 31, 2020 or December 31, 2019.

Common Stock

As of March 31, 2020 and December 31, 2019, 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.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to any preferential dividend rights of any series of preferred stock that may be outstanding.  No dividends have been declared through March 31, 2020.  

Warrants

In connection with the Loan and Security Agreement with SVB, the Company issued the Warrant to SVB.  The Warrant has 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 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.  

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 31 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, the number of shares of common stock that may be issued under the 2015 Plan was increased by 1,451,997 shares.  As of March 31, 2020, 1,299,002 shares remained available for grant 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 approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules.  The Company had 451,850 stock options and 47,590 RSUs outstanding as of March 31, 2020 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, no further grants can be made under the 2012 Plan.  The Company granted stock options to purchase a total of 1,140,524 shares under the 2012 Plan, of which 679,264 and 745,735 were outstanding as of March 31, 2020 and December 31, 2019, respectively.  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 and 2019 were as follows:

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

					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 was $0.93 per share.

Restricted Stock Units

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

		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

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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
	March 31,
	2020		2019
Cost of revenue	$	260	$	206
Research and development		816		1,594
General and administrative		2,377		2,472
Total stock-based compensation expense	$	3,453	$	4,272

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

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10. Net Loss per Share

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

	Three Months Ended
	March 31,
	2020		2019
Numerator:
Net loss	$	(15,586)	$	(37,565)
Denominator:
Weighted average shares of common stock outstanding		41,618,429		41,248,663
Net loss per share, basic and diluted	$	(0.37)	$	(0.91)

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

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

11. Leases

Operating Leases

Agreements for Office Space

In November 2017, the Company entered into 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 February 2019, the Company entered into a sublease agreement with a third party for 21,056 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,
Operating Leases:	2020		2019
Gross cost	$	5,213	$	5,213
Accumulated amortization		(633)		(480)
Other Assets	$	4,580	$	4,733
Other current liabilities	$	547		526
Other liabilities		3,404		3,548
Total operating lease liabilities	$	3,951	$	4,074

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

Finance Leases

Laboratory Equipment

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

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 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 March 31, 2020 and December 31, 2019, the Company had invoiced Mallinckrodt for $228 and $57, respectively, under the master services agreement.  Mr. Reasons had no financial interest in this transaction.  

13.Agreements Related to Intellectual Property

Asset Purchase Agreement – EPI Health, LLC

In October 2019, the Company sold RHOFADE to 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, 10 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 during the three months ended March 31, 2020 and 2019, respectively.  EPI Health has also agreed to pay the Company potential sales milestone payments of up to $20,000 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 which was comprised of $2,500 in cash and 253,208 shares of its common stock with a fair value of $2,200.  The Company also agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $75,000, 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, 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 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.  

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 the three months ended March 31, 2020 and 2019 due to the Company’s conclusion that a valuation allowance was required for 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,
	2020		2019
Accounts receivable, net	$	—	$	4,966
Discontinued operations - current assets	$	—	$	4,966
Accounts payable	$	306	$	1,705
Accrued expenses		2,353		2,452
Discontinued operations - current liabilities	$	2,659	$	4,157

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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 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.  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 and 2019 are summarized in the tables below:

			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 and $3,927 for services performed on behalf of the therapeutics segment for the three months ended March 31, 2020 and 2019, 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 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.

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

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 in the Consolidated Derivative Action and intend to defend the matter vigorously.

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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 be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” 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,” in our Annual Report on Form 10-K in Part I, Item 1A, “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, which are included in our Annual Report on Form 10-K filed with the SEC on February 25, 2020.

Overview

We are a physician-led biopharmaceutical company focused on immuno-inflammatory diseases.  We currently have a pipeline of 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 drug candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product.

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, orMK2, inhibitor compound, for the treatment of rheumatoid arthritis, which was allowed by the 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.  As an oral drug candidate, we are developing ATI-450 as a potential alternative to injectable anti-TNF/IL1/IL6 biologics for treating certain immuno-inflammatory diseases. We initiated a Phase 1 single and multiple ascending dose clinical trial in 77 healthy subjects in August 2019. 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 in a Phase 2a clinical trial for ATI-450 in subjects with moderate-to-severe rheumatoid arthritis in the first quarter of 2020. Due to the COVID-19 pandemic, we temporarily paused enrollment of subjects in the trial. At this time, we have decided to resume enrolling subjects at one clinical trial site. The initiation of additional clinical trial sites will be determined on an ongoing basis as the COVID-19 pandemic evolves. We previously anticipated reporting data from this trial in the second half of 2020; however, we expect that the reporting of the data may be delayed. We are also planning to initiate a Phase 2a clinical trial of ATI-450 in an additional immuno-inflammatory indication.

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We expect to submit an IND for ATI-1777, an investigational topical soft-Janus kinase, or JAK, inhibitor compound, for the treatment of atopic dermatitis in mid-2020.  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, we expect to initiate a Phase 1/2 clinical trial in subjects with atopic dermatitis in the second half of 2020 evaluating ATI-1777 as a potential treatment for moderate-to-severe atopic dermatitis.

We are also developing ATI-2138, our 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 of 2021.

We are pursuing strategic alternatives, including seeking a partner, to further develop, obtain regulatory approval and/or commercialize, as applicable, 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.

Since our inception, we have incurred significant operating losses.  Our net loss was $15.6 million for the three months ended March 31, 2020 and $161.4 million for the year ended December 31, 2019.  As of March 31, 2020, we had an accumulated deficit of $469.1 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.  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.  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 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.  In the near term, we expect to finance our operations through the sale of equity, debt financings or 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 of the COVID-19 coronavirus continues to rapidly evolve. We implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for all employees, thereby guarding the health and safety of our employees and enabling us to continue our focus on the development of our pipeline of drug candidates and providing contract research services to our clients. We are focused on ensuring continuity of our operations.  Due to the COVID-19 pandemic, we temporarily paused enrollment of subjects in our Phase 2a trial of ATI-450; however, at this time, we have decided to resume enrolling subjects at one clinical trial site. The initiation of additional clinical trial sites will be determined on an ongoing basis as the COVID-19 pandemic evolves.

If the COVID-19 coronavirus continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and prospects. 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, 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 potential impacts on our business, our preclinical and clinical development and regulatory activities.

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.  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.  

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.  Cost of revenue primarily includes:

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

● outsourced professional scientific services;

● depreciation of laboratory equipment;

● facility-related costs; and

● laboratory materials and supplies used to support the services provided.

Research and Development Expenses

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

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

● 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;

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

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

● depreciation of manufacturing equipment;

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

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

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

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

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 rheumatoid arthritis and other immuno-inflammatory diseases, continue the development of our preclinical compounds, and continue to identify, research 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 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 cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

● the number of clinical sites included in the trials;

● the length of time required to enroll suitable subjects;

● the number of subjects that ultimately participate in the trials;

● the number of doses subjects receive;

● the impact on the timing of our clinical trials due to the COVID-19 pandemic;

● the duration of subject follow-up; and

● 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.  We may elect to discontinue, delay or modify 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 for personnel in executive, administrative, finance, investor relations and legal functions, including stock-based compensation, travel expenses and recruiting expenses.  General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, insurance costs, as well as marketing expenses related to 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.

Other Income, Net

Other income, net consists of interest earned on our cash, cash equivalents and marketable securities, interest expense incurred on 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 included in our Annual Report on Form 10-K filed with the SEC on February 25, 2020.  

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 related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as 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 and the achievement of certain regulatory and sales milestones.  We estimate the fair value of the 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, 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.  

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.  

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 and 2019

	Three Months Ended March 31,
	2020	2019	Change
	(In thousands)
Revenues: