Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to those statements included later in this Annual Report on Form 10-K (this “Annual Report”). In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A. “Risk Factors,”and “Special Note Regarding Forward-Looking Statements.”

Overview

We are a clinical-stage biopharmaceutical company focused on developing novel small and large molecule product candidates for immuno-inflammatory diseases. Our proprietary KINect drug discovery platform combined with our preclinical development capabilities allows us to identify and advance potential product candidates that we may develop independently or in collaboration with third parties. In addition to identifying and developing our novel product candidates, we are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our novel product candidates. We also provide contract research services to third parties enabled by our early-stage research and development expertise.

Financial Overview

Since our inception, we have incurred significant net losses. Our net loss was $132.1 million for the year ended December 31, 2024 and $88.5 million for the year ended December 31, 2023. As of December 31, 2024, we had an accumulated deficit of $902.9 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical and clinical development. In addition, our product 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 product candidates. Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. As a result, we will need substantial additional funding to support our continuing operations.

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

Impact of Macroeconomic Conditions on Our Business

Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including inflationary pressure and geopolitical conflicts, have led to economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled “Risk Factors.”

Acquisition and License Agreements

Exclusive License Agreement with Biosion

In November 2024, we entered into an exclusive license agreement (the “Biosion Agreement”) with Biosion, Inc. (“Biosion”) pursuant to which we received the exclusive rights to develop, manufacture and commercialize bosakitug

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(ATI-045) and ATI-052 worldwide, excluding Mainland China, Macau, Hong Kong and Taiwan (“Greater China”). In connection with the Biosion Agreement, we also entered into a collaboration agreement (the “CTTQ Agreement”) with Biosion and Chia Tai Tianqing Pharmaceutical Group, Co., Ltd. (“CTTQ”), a licensee of bosakitug in Greater China.

As partial consideration for the rights and licenses under the Biosion Agreement and CTTQ Agreement, we agreed to, in the aggregate, (i) pay $30.0 million in upfront cash consideration, plus $4.5 million for the reimbursement of certain development costs, (ii) issue warrants (the “Warrants”) to purchase 14,281,985 shares of our common stock and (iii) pay $6.2 million for the reimbursement of certain development costs and drug product material as set forth in the Biosion Agreement. We determined that the transaction was an acquisition of assets with no alternative future use and therefore expensed as incurred the fair value of the consideration given of $85.6 million as a component of in-process research and development expense during the year ended December 31, 2024. We incurred $1.3 million in expenses related to this transaction which were expensed as incurred.

In addition, we agreed to pay, in the aggregate, (i) up to $125 million upon the achievement of specified regulatory milestones commencing with product approval, (ii) up to $795 million upon the achievement of specified sales milestones, (iii) a tiered low-to-mid single digit royalty based upon a percentage of annual net sales, subject to specified reductions as set forth in the Biosion Agreement, and (iv) a portion of any sublicense consideration received from the grant of any sublicense or similar rights under any of the rights or licenses granted to us under the Biosion Agreement. We will expense these payments in the period when either they are determined to be probable of occurring or when the payment is triggered.

The Warrants have an initial exercise price of $0.00001 per share, subject to adjustment as provided in the Warrants. The Warrants are immediately exercisable, subject to any applicable overseas direct investment filing that may be required for the holders. The Warrants will terminate when exercised in full. We classified the Warrants within equity because they are indexed to our own stock. We assigned an estimated fair value of $44.8 million to the Warrants, which was based on the fair value of our common stock on the date of issuance less the nominal exercise price of $0.00001 per share.

Royalty Purchase Agreement with OCM IP Healthcare Portfolio LP

In July 2024, we entered into a royalty purchase agreement with OCM IP Healthcare Portfolio LP, an investment vehicle for Ontario Municipal Employees Retirement System (“OMERS”). Under the royalty purchase agreement, we sold to OMERS a portion of the future royalty payments and the remaining anniversary milestones associated with our existing license to Eli Lilly and Company (“Lilly”), relating to OLUMIANT® (baricitinib) for the treatment of alopecia areata (see “—License Agreement with Eli Lilly and Company”). Under the terms of the royalty purchase agreement, we received an upfront payment of $26.5 million. In exchange, OMERS acquired a portion of the royalty payable by Lilly to us for worldwide net sales of OLUMIANT for the treatment of alopecia areata from April 1, 2024 through the remainder of the royalty term under our license agreement with Lilly, and 100% of the remaining anniversary milestone payments payable by Lilly to us under the license agreement. The royalty payments and milestones we sold to OMERS represent our entire financial interest in the Lilly license agreement after taking into account our other contractual third-party obligations.

We recognized $1.9 million of non-cash royalty income during the year ended December 31, 2024.

License Agreement with Sun Pharmaceutical Industries, Inc.

In December 2023, we entered into an exclusive patent license agreement with Sun Pharmaceutical Industries, Inc. (“Sun Pharma”). Under the license agreement, we granted Sun Pharma exclusive rights under certain patents that we exclusively license from a third party. The patents relate to the use of deuruxolitinib, Sun Pharma’s JAK inhibitor, or other isotopic forms of ruxolitinib, to treat alopecia areata or androgenetic alopecia. Under the license agreement, Sun Pharma has paid us an upfront payment and certain regulatory payments, and has agreed to pay us other regulatory and commercial milestone payments upon the achievement of specified milestones set forth in the agreement, and a mid single-digit tiered royalty calculated as a percentage of Sun Pharma’s net sales. We have separate contractual obligations under which we have agreed to pay to third parties a portion of the consideration we may receive under the license agreement.

We recognized $3.0 million and $15.0 million of licensing revenue during the years ended December 31, 2024 and 2023, respectively.

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License Agreement with Pediatrix Therapeutics, Inc.

In November 2022, we entered into a license agreement with Pediatrix Therapeutics, Inc. (“Pediatrix”) under which we granted Pediatrix the exclusive rights to develop, manufacture and commercialize lepzacitinib in Greater China. Pediatrix has paid us an upfront payment, and has agreed to pay us development, regulatory and commercial milestone payments upon the achievement of specified milestones set forth in the agreement, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of lepzacitinib by Pediatrix in Greater China. A portion of the consideration received from Pediatrix is payable to the former Confluence equity holders as described below under the caption “—Agreement and Plan of Merger with Confluence.”

License Agreement with Eli Lilly and Company

In August 2022, we entered into a non-exclusive patent license agreement with Lilly. Under the license agreement, we granted Lilly non-exclusive rights under certain patents and patent applications that we exclusively license from a third party. The patents and patent applications relate to the use of baricitinib, Lilly’s JAK inhibitor, to treat alopecia areata. Under the license agreement, Lilly has paid us an upfront payment and regulatory and certain commercial milestone payments, and agreed to pay us anniversary payments and other commercial milestone payments upon the achievement of specified milestones as set forth in the agreement, and a low single-digit royalty calculated as a percentage of Lilly’s net sales of baricitinib for the treatment of alopecia areata. We have separate contractual obligations under which we have agreed to pay to third parties an amount equal to any regulatory and commercial milestone payments we receive under the Lilly license agreement, as well as a portion of the upfront consideration and a portion of the royalties we may receive under the license agreement. In July 2024, we entered into a royalty purchase agreement with OMERS pursuant to which we sold to OMERS a portion of our future royalty payments and the remaining anniversary milestones associated with the license to Lilly (see “—Royalty Purchase Agreement with OCM IP Healthcare Portfolio LP” above).

We recognized $13.2 million and $12.7 million of licensing revenue during the years ended December 31, 2024 and 2023, respectively.

Asset Purchase Agreement with EPI Health, LLC

In October 2019, we sold RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) to EPI Health, LLC (“EPI Health”) pursuant to an asset purchase agreement. In July 2023, EPI Health filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Through the bankruptcy process, EPI Health and its parent company, Novan, Inc., sold the RHOFADE assets to a third party, which excluded our asset purchase agreement with EPI Health and the outstanding amounts due. The sale was approved by the bankruptcy court in September 2023. As a result of the bankruptcy proceedings, all amounts that were due and outstanding by EPI Health have been fully reserved.

Agreement and Plan of Merger with Confluence

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

Under the Confluence Agreement, we have agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $75.0 million based upon the achievement of specified regulatory and commercial milestones set forth in the Confluence Agreement. In addition, we have agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition to the payments described above, if we sell, license or transfer any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, we will be obligated to pay the former Confluence equity holders a portion of any consideration received from such sale, license or transfer in specified circumstances.

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Discontinued Programs

We were previously developing zunsemetinib (ATI-450) as a potential treatment for various immuno-inflammatory diseases, including hidradenitis suppurativa, psoriatic arthritis, and rheumatoid arthritis. Following the results of the Phase 2 trials for these programs, we discontinued further development of our mitogen-activated protein kinase-activated protein kinase 2 (“MK2”)inhibitor programs in immuno-inflammatory diseases in 2023.

We were also previously exploring the use of ATI-2231, our second MK2 inhibitor, as a potential treatment for oncology diseases, but decided to pursue this with zunsemetinib due to its more advanced clinical development package.

Restructuring

In December 2023, our board of directors approved a reduction of our workforce by approximately 46%, which was completed as of December 31, 2024. For the year ended December 31, 2024, we incurred severance expenses of $2.7 million and made cash severance payments of $5.6 million to impacted employees. In the year ended December 31, 2023, we recorded a restructuring charge of $3.1 million, representing one-time termination benefits for employees with retention periods less than the sixty-day minimum retention period.

Components of Our Results of Operations

Revenue

Contract Research

We earn revenue from the provision of laboratory services. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered.

Licensing

Licensing revenue primarily consists of upfront consideration, royalties and milestone payments earned pursuant to license and acquisition agreements with third parties, as described above.

Cost and Expenses

Cost of Revenue

Cost of revenue consists of the costs incurred in connection with the provision of contract research services. Cost of revenue primarily includes:

● 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

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

● quality assurance and quality control costs;

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● outsourced professional scientific development services;

● medical affairs expenses related to our product candidates;

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

Research and development activities are central to our business model. Product 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 development of our product candidates and pursue our discovery programs. We expense research and development costs as incurred. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, clinical trial sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials and are tracked on a program-by-program basis. We do not allocate personnel costs or other indirect expenses to specific research and development programs.

The successful development of our product candidates is highly uncertain. 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 product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of discovery, as well as 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 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 product candidates. We may obtain unexpected results from our clinical trials or other development activities. We may elect to discontinue, delay or modify the development, including clinical trials, of some product candidates or focus on others. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product 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.

General and Administrative

General and administrative expenses consist principally of salaries and related costs, including stock-based compensation, for personnel in executive, administrative, finance and legal functions. General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, investor relations costs, business development costs, insurance costs and travel expenses.

Licensing

Licensing expenses consist of third-party contractual obligations incurred under license and acquisition agreements with third parties, as described above.

Revaluation of Contingent Consideration

Revaluation of contingent consideration consists of changes in the fair value of our contingent consideration liability between reporting dates.

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In-process Research and Development

In-process research and development (“IPR&D”) consists of expenses related to in-licensed assets with no future alternative use and impairment charges recorded for IPR&D intangible assets.

Other Income

Interest Income

Interest income primarily consists of interest earned on our cash, cash equivalents and marketable securities.

Non-cash Royalty Income

In July 2024, we entered into the royalty purchase agreement with OMERS pursuant to which we sold a portion of our royalties due to us under the license agreement with Lilly and received upfront proceeds of $26.5 million.

We evaluated the royalty purchase agreement under Accounting Standards Codification (“ASC”) 470 – Debt and concluded that the upfront payment should be accounted for as deferred income because the criteria for debt classification were not met. We apply the “units-of-revenue” method of recognizing income in the consolidated statements of operations and comprehensive loss and such amounts are included in non-cash royalty income.

Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reported period. 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.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Contingent Consideration

We record a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments. Significant judgement is involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of our contingent consideration liability can result from changes to one or more of these assumptions. These assumptions are highly dependent on the outcome and timing of the development of certain of our product candidates. We evaluate the fair value estimate of our contingent consideration liability on a quarterly basis with changes, if any, recorded as income or expense in our consolidated statement of operations. Any such changes could have a material impact on our financial results.

The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments. Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data. Probability of success assumptions ranged between 17% and 40% at December 31, 2024. Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value. The discount rate ranged between 7.4% and 8.7% depending on the year of each potential payment.

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During the year ended December 31, 2024, we adjusted estimated sales and the probability of success for certain product candidates. These changes, as well as the passage of time, partially offset by higher discount rates resulting from higher risk-free rates and changes in credit spreads, resulted in an overall increase of $2.5 million during the year ended December 31, 2024.

Stock-Based Compensation

We measure the compensation expense of stock-based awards granted to employees and directors using the grant date fair value of the award. We have issued stock options and restricted stock unit (“RSU”) awards with service-based vesting conditions, as well as with performance-based vesting conditions. We have not issued awards that include market-based conditions. For service-based awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service period. For performance-based awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service period beginning in the period that it becomes probable the performance conditions will occur. At each balance sheet date, we evaluate whether any performance conditions related to a performance-based award have changed. The effect of any change in performance conditions would be recognized as a cumulative catch-up adjustment in the period such change occurs, and any remaining unrecognized compensation expense would be recognized on a straight-line basis over the remaining requisite service period. The impact of forfeitures is recognized in the period in which they occur.

We measure the compensation expense of stock-based awards granted to consultants using the grant date fair value of the award. We recognize compensation expense over the period during which services are rendered by the consultant.

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. We estimate expected volatility based on our stock price's historical volatility, as we have determined that we have adequate historical data regarding the volatility of our own publicly-traded stock price. The expected term of our stock options has been determined using the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options we granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We use an expected dividend yield of zero because we have not paid cash dividends to date and have no intention of paying cash dividends in the future.

The fair value of each RSU is measured using the closing price of our common stock on the date of grant.

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Results of Operations

Comparison of Years Ended December 31, 2024 and 2023

Year Ended December 31,

Revenues:

Costs and expenses:

Revaluation of contingent consideration 2,500 (26,900) 29,400

Other income:

Non-cash royalty income 1,914 — 1,914

Income tax benefit — (367) 367

Revenue

Contract Research

Contract research revenue was $2.5 million and $3.0 million for the years ended December 31, 2024 and 2023, respectively, and was comprised of fees earned from the provision of laboratory services to our clients. The decrease was driven by lower overall hours billed, which was offset by a higher average billing rate.

Licensing

Licensing revenue was $16.2 million and $28.2 million for the years ended December 31, 2024 and 2023, respectively. The decrease was primarily driven by the upfront payment received under the Sun Pharma agreement during the year ended December 31, 2023, partially offset by the achievement of higher milestones under license agreements during the year ended December 31, 2024.

Cost and Expenses

Cost of Revenue

Cost of revenue was $2.8 million and $3.4 million for the years ended December 31, 2024 and 2023, respectively, and in each case related to providing laboratory services to our clients. Changes in cost of revenue generally correlate to changes in contract research revenue. Cost of revenue decreased during the year ended December 31, 2024 due to lower variable costs resulting from a decrease in hours billed, which was offset by an increase in termination benefits as a result of our restructuring that was announced in December 2023.

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Research and Development

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

Year Ended

December 31,

Bosakitug $ 299 $ — $ 299

Other research and development 1,031 4,992 (3,961)

ATI-2138

The decrease in expenses for ATI-2138 during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to a decrease in clinical development expenses associated with a Phase 1 MAD trial which was completed in September 2023, as well as a decrease in preclinical development activities. This decrease was partially offset by clinical development expenses associated with a Phase 2a trial that was initiated in August 2024.

ATI-052

Research and development expenses related to ATI-052 for the year ended December 31, 2024 primarily consisted of product candidate manufacturing costs and preclinical development activities. Because we in-licensed ATI-052 in 2024, there were no related expenses for the year ended December 31, 2023.

Lepzacitinib

The decrease in expenses for lepzacitinib during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to lower costs associated with preclinical development activities and costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis, which was initiated in May 2022 and was completed in January 2024.

Zunsemetinib

The decrease in expenses for zunsemetinib during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to a decrease in costs associated with Phase 2 clinical development activities which were completed in 2023 as well as a decrease in product manufacturing costs.

Personnel and stock-based compensation

The decrease in personnel and stock-based compensation expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to lower headcount, lower termination benefits and higher forfeiture credits as a result of our restructuring that was announced in December 2023.

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General and Administrative

The following table summarizes our general and administrative expenses:

Year Ended

December 31,

Other general and administrative 1,892 2,240 (348)

Total general and administrative expenses $ 22,203 $ 32,412 $ (10,209)

Personnel and stock-based compensation

The aggregate decrease in personnel and stock-based compensation expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to lower headcount and higher forfeiture credits.

Professional and legal fees

The decrease in professional and legal fees, including accounting, investor relations and corporate communication costs, during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by a decrease in accounting related expenses, which were partially offset by an increase in business development expenses.

Facility and support services

The decrease in facility and support services, including general office expenses, information technology costs and other expenses, during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by a decrease in rent expense and information technology expenses.

Bad debt

Bad debt expenses were related to our determination that amounts due to us as of December 31, 2023 pursuant to the asset purchase agreement with EPI Health are uncertain as a result of the bankruptcy filing by EPI Health in July 2023. There was no bad debt expense during the year ended December 31, 2024.

Licensing

The decrease in licensing expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by the upfront payment received under the Sun Pharma agreement during the year ended December 31, 2023, a portion of which was payable to third parties, partially offset by the achievement of higher milestones under license agreements during the year ended December 31, 2024.

Revaluation of Contingent Consideration

The revaluation of contingent consideration loss during the year ended December 31, 2024 was primarily due to changes in estimated sales levels and changes to the probability of success for certain product candidates, compared to the revaluation of contingent consideration gain during the year ended December 31, 2023 which was primarily due to the removal of estimated sales levels of zunsemetinib following our decision to discontinue further development of our MK2 inhibitor programs in immuno-inflammatory diseases.

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In-process Research and Development

In-process research and development expenses recorded during the year December 31, 2024 included the fair value of the consideration expensed in connection with the in-license of bosakitug and ATI-052, as well as transaction costs incurred as part of the transaction. During the quarter ended December 31, 2023, we performed an impairment analysis on the IPR&D intangible asset acquired from Confluence due to our decision to discontinue further development of the product candidate for immuno-inflammatory diseases. Our impairment analysis resulted in a fair value of the IPR&D intangible asset which was less than the carrying value and as a result, we recorded an impairment charge for the full balance of the IPR&D intangible asset during the year ended December 31, 2023.

Other Income

Interest Income

Interest income decreased during the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily due to lower interest income on investment portfolio balances.

Non-cash Royalty Income

Non-cash royalty income includes income related to the proceeds from the sale of future royalties to OMERS, recognized under the “units-of-revenue” method.

Liquidity and Capital Resources

Overview

Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our acquisition of Confluence, we did not generate any revenue. We have financed our operations over the last several years primarily through sales of our equity securities and incurring indebtedness in the form of loans from commercial lenders. We may engage in additional debt and equity financing transactions in order to raise funds. We may receive royalties and milestone payments from third-party licensing and acquisition agreements. In addition, to the extent we are able to consummate transactions with potential third-party partners to further develop, obtain marketing approval for and/or commercialize our product candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our liquidity.

As of December 31, 2024, we had cash, cash equivalents and marketable securities of $203.9 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.

We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, other than our contingent obligations under the Confluence Agreement, Biosion Agreement and CTTQ Agreement, which are summarized above under “Overview—Acquisition and License Agreements,” and our lease obligations.

Equity Financing

Private Placement

In November 2024, we closed a private placement in which we sold 35.6 million shares of our common stock for aggregate gross proceeds of $80.0 million. We paid placement agent and other fees of $5.1 million in connection with the private placement.

At-the-Market Facility

In April 2023, we sold 3.4 million shares of our common stock for aggregate gross proceeds of $27.5 million, pursuant to a sales agreement with Leerink Partners LLC (formerly SVB Securities LLC) and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023. We paid selling commissions of $0.8 million in connection with the sale.

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Cash Flows

Cash and cash equivalents were $24.6 million as of December 31, 2024 compared to $39.9 million as of December 31, 2023. We also had $179.3 million in short- and long-term marketable securities as of December 31, 2024 compared to $142.0 million as of December 31, 2023.

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

Year Ended

December 31,

Cash and cash equivalents beginning balance $ 39,878 $ 45,277

Net cash used in operating activities (20,075) (78,325)

Net cash (used in) provided by investing activities (69,769) 46,220

Net cash provided by financing activities 74,536 26,706

Cash and cash equivalents ending balance $ 24,570 $ 39,878

Operating Activities

Cash flow related to operating activities was the result of:

Year Ended

December 31,

Change in accounts receivable (20) 186

Change in prepaid expenses and other assets (4,855) (1,315)

Change in accounts payable and accrued expenses (8,130) 10,518

Change in deferred income 23,927 —

Net cash used in operating activities $ (20,075) $ (78,325)

Net cash used in operating activities decreased for the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily as a result of lower net losses after adjusting for non-cash items and proceeds from the royalty sale to OMERS. The change was partially offset by an increase in cash used for accounts payable and accrued expenses, which was due to the timing of payments to vendors and severance payments as a result of our restructuring announced in December 2023.

The increase in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly the result of in-process research and development expenses recorded in connection with the in-license of bosakitug and ATI-052.

Investing Activities

Cash flow related to investing activities was the result of:

Year Ended

December 31,

Purchases of property and equipment, net $ (121) $ (1,309)

Net cash (used in) provided by investing activities $ (69,769) $ 46,220

Net cash used in investing activities for the year ended December 31, 2024 was $69.8 million compared to net cash provided by investing activities during the year ended December 31, 2023 of $46.2 million. The change was primarily

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due to the consideration paid for the acquisition of in-licensed assets in connection with the Biosion Agreement and CTTQ Agreement and lower sales and maturities of marketable securities, partially offset by a reduction in purchases of marketable securities.

Financing Activities

Cash flow related to financing activities was the result of:

Year Ended

December 31,

Net cash provided by financing activities $ 74,536 $ 26,706

The increase in net cash provided by financing activities for the year ended December 31, 2024 compared to December 31, 2023 was primarily due to proceeds from our private placement in November 2024, offset by proceeds from sales under our at-the-market sales agreement in 2023.

Funding Requirements

We anticipate we will incur net losses in the near term as we continue the development of our product candidates and continue to discover and develop additional product candidates. We may not be able to generate revenue from these programs if, among other things, our clinical trials are not successful, the FDA does not approve our product candidates currently in clinical trials when we expect, or at all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our product candidates.

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, research and development expenses, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support the development of our product candidates, without taking into account any potential business development activities.

As a publicly traded company, we incur and will continue to incur significant legal, accounting and other similar expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the Nasdaq Stock Market LLC, requires public companies to implement specified corporate governance practices that could increase our compliance costs.

We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of our consolidated financial statements that appear in Item 8 of this Annual Report based on our current operating assumptions. We will require additional capital to develop our product candidates and to support our discovery efforts. Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions caused by a variety of factors including geopolitical tensions and inflationary pressures. If we are unable to raise sufficient additional capital or generate revenue from transactions with potential third-party partners for the development and/or commercialization of our product candidates, we may need to substantially curtail our planned operations.

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

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

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

See “Risk Factors” for additional risks associated with our substantial capital requirements.

Leases

We occupy space for our headquarters in Wayne, Pennsylvania under a lease agreement which has a term through February 2029. We also occupy office and laboratory space in St. Louis, Missouri under a sublease agreement which has a term through May 2029.

Our aggregate remaining lease payment obligation for these two spaces was $3.2 million as of December 31, 2024.

Agreement and Plan of Merger with Confluence

Under the Confluence Agreement, we agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $75.0 million based upon the achievement of specified regulatory and commercial milestones set forth in the Confluence Agreement. In addition, we have agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition to the payments described above, if we sell, license or transfer any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, we will be obligated to pay the former Confluence equity holders a portion of any consideration received from such sale, license or transfer in specified circumstances.

Exclusive License Agreement with Biosion; Collaboration Agreement with Biosion and CTTQ

Under the Biosion and CTTQ Agreements, we agreed to pay, in the aggregate, up to $920 million upon the achievement of specified regulatory and sales milestones. In addition, we have agreed to pay future royalty payments calculated as a low-to-mid single digit percentage of annual net sales, subject to specified reductions, as set forth in the Biosion Agreement. In addition to the payments described above, we have also agreed to pay a portion of any sublicense consideration received from the grant of any sublicense or similar rights under any of the rights or licenses granted to us under the Biosion Agreement.

R&D Obligations

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

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Segment Information

We have two reportable segments, therapeutics and contract research. The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases. The contract research segment earns revenue from the provision of laboratory services.

Recently Issued Accounting Pronouncements

In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” This standard requires disclosure of additional information about specific expense categories in the notes to financial statements on an annual and interim basis. This ASU becomes effective for annual periods beginning after December 15, 2026 and interim reporting periods within annual reporting periods beginning after December 15, 2027. We are currently assessing the impact of this ASU.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This standard enhances disclosures related to income taxes, including the rate reconciliation and information on income taxes paid. This ASU becomes effective for annual periods beginning after December 15, 2024. We are currently assessing the impact of this ASU.

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This standard requires disclosure of significant segment expenses and other segment items by reportable segment. We adopted ASU No. 2023-07 effective December 31, 2024, on a retrospective basis, the impact of which is limited to additional segment expense disclosures in the notes to our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 83

Consolidated Balance Sheets as of December 31, 2024 and 2023 85

Notes to Consolidated Financial Statements 89

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Aclaris Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Aclaris Therapeutics, Inc. and its subsidiaries (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive loss, of stockholders’ equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Fair Value of the Contingent Consideration Liability

As described in Notes 2 and 3 to the consolidated financial statements, the Company’s contingent consideration balance was $8.7 million as of December 31, 2024. The Company records a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments. Management evaluates fair value estimates of the contingent consideration liability on a quarterly basis using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payment. Changes in the fair value of the contingent consideration are recorded as income or expense in the Company’s consolidated statement of operations and comprehensive loss. Significant assumptions used in management’s estimates include the probability of achieving

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regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development and review of existing clinical data.

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

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for developing the fair value of the contingent consideration liability, (ii) evaluating the appropriateness of the probability weighted expected payment and Monte Carlo simulation valuation models, (iii) testing the completeness and accuracy of the underlying data used in the models, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the probability of achieving regulatory milestones and commencing commercialization. Evaluating management’s assumptions related to the probability of achieving regulatory milestones and commencing commercialization involved evaluating whether the assumptions were reasonable considering the agreements associated with the transaction as well as the consistency with industry information, the stage of product development and whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s probability-weighted expected payment and Monte Carlo simulation valuation models.

/s/PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

February 27, 2025

We have served as the Company’s auditor since 2015.

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ACLARIS THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, December 31,

Assets

Current assets:

Accounts receivable, net 318 298

Prepaid expenses and other current assets 12,039 9,452

Property and equipment, net 1,008 1,620

Liabilities and Stockholders’ Equity

Current liabilities:

Deferred income 3,890 —

Other current liabilities 2,683 2,628

Deferred income, net of current portion 20,038 —

Contingent consideration 8,700 6,200

Stockholders’ Equity:

Accumulated other comprehensive income (loss) 97 (106)

Total liabilities and stockholders’ equity $ 220,327 $ 197,405

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

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ACLARIS THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

Year Ended

December 31,

Revenues:

Costs and expenses:

Revaluation of contingent consideration 2,500 (26,900)

In-process research and development 86,905 6,629

Other income:

Non-cash royalty income 1,914 —

Income tax benefit — (367)

Net loss per share, basic and diluted $ (1.71) $ (1.27)

Other comprehensive income:

Unrealized gain on marketable securities, net of tax of $0 $ 203 $ 791

Total other comprehensive income 203 791

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

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ACLARIS THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

Accumulated

Common Stock Additional Other Total

Par Paid‐in Comprehensive Accumulated Stockholders’

Shares Value Capital Income (Loss) Deficit Equity

Unrealized gain on marketable securities — — — 791 — 791

Stock-based compensation expense — — 20,542 — — 20,542

Net loss — — — — (88,481) (88,481)

Unrealized gain on marketable securities — — — 203 — 203

Stock-based compensation expense — — 10,856 — — 10,856

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

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ACLARIS THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended

December 31,

Cash flows from operating activities:

Depreciation and amortization 807 863

Revaluation of contingent consideration 2,500 (26,900)

In-process research and development expense 86,905 6,629

Deferred taxes — (367)

Changes in operating assets and liabilities:

Accounts receivable (20) 186

Prepaid expenses and other assets (4,855) (1,315)

Accrued expenses and other liabilities (3,942) 11,991

Deferred income 23,927 —

Net cash used in operating activities (20,075) (78,325)

Cash flows from investing activities:

Purchases of property and equipment, net (121) (1,309)

Proceeds from sales and maturities of marketable securities 86,144 183,204

Net cash (used in) provided by investing activities (69,769) 46,220

Cash flows from financing activities:

Net cash provided by financing activities 74,536 26,706

Net decrease in cash and cash equivalents (15,308) (5,399)

Cash and cash equivalents at beginning of period 39,878 45,277

Cash and cash equivalents at end of period $ 24,570 $ 39,878

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

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ACLARIS THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Nature of Business

Overview

Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012. Aclaris Therapeutics, Inc. and its wholly owned subsidiaries are referred to collectively as the “Company.”

ACRS US Equity

ACRS · 10-K · period ended 2024-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

ACRS US Equity☆

ACRS · 10-K · period ended 2024-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

ACRS US Equity