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 September 30, 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 October 31, 2020 was 42,919,291.

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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 September 30, 2020 and December 31, 2019			2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019			3

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019			4

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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			24

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			46

Item 6. Exhibits			46

Signatures			48

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)


	September 30,		December 31,
	2020		2019

Assets
Current assets:
Cash and cash equivalents	$	23,643	$	34,187
Restricted cash		1,753		1,750
Marketable securities		29,834		39,078
Accounts receivable, net		887		704
Prepaid expenses and other current assets		1,880		3,118
Discontinued operations - current assets		—		4,966
Total current assets		57,997		83,803
Property and equipment, net		1,920		2,470
Intangible assets		7,142		7,199
Other assets		4,843		4,825
Total assets	$	71,902	$	98,297
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,081	$	9,917
Accrued expenses		3,816		7,721
Current portion of lease liabilities		591		637
Discontinued operations - current liabilities		3,300		4,157
Total current liabilities		12,788		22,432
Other liabilities		3,134		3,736
Long-term debt, net		10,613		—
Contingent consideration		4,061		1,668
Deferred tax liability		549		549
Total liabilities		31,145		28,385
Stockholders’ Equity:
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at September 30, 2020 and December 31, 2019		—		—
Common stock, $0.00001 par value; 100,000,000 shares authorized at September 30, 2020 and December 31, 2019; 42,916,387 and 41,485,638 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		—		—
Additional paid‑in capital		532,170		523,505
Accumulated other comprehensive loss		(44)		(66)
Accumulated deficit		(491,369)		(453,527)
Total stockholders’ equity		40,757		69,912
Total liabilities and stockholders’ equity	$	71,902	$	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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenues:
Contract research	$	1,331	$	983	$	4,373	$	3,132
Other revenue		118		—		529		—
Total revenue		1,449		983		4,902		3,132

Costs and expenses:
Cost of revenue		1,189		826		3,847		3,028
Research and development		6,866		16,183		22,775		53,334
General and administrative		3,859		6,838		15,632		21,771
Goodwill impairment		—		—		—		18,504
Total costs and expenses		11,914		23,847		42,254		96,637
Loss from operations		(10,465)		(22,864)		(37,352)		(93,505)

Other expense, net		(194)		(274)		(205)		(589)
Loss from continuing operations		(10,659)		(23,138)		(37,557)		(94,094)
Loss from discontinued operations		—		(32,181)		(285)		(48,666)
Net loss	$	(10,659)	$	(55,319)	$	(37,842)	$	(142,760)

Net loss per share, basic and diluted	$	(0.25)	$	(1.34)	$	(0.90)	$	(3.46)
Weighted average common shares outstanding, basic and diluted		42,802,582		41,364,387		42,187,140		41,296,377

Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax of $0	$	(24)	$	(23)	$	(1)	$	41
Foreign currency translation adjustments		(36)		14		22		27
Total other comprehensive income (loss)		(60)		(9)		21		68
Comprehensive loss	$	(10,719)	$	(55,328)	$	(37,821)	$	(142,692)

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

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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		Income (Loss)		Deficit		Equity
Balance at December 31, 2019	41,485,638	$	—	$	523,505	$	(66)	$	(453,527)	$	69,912
Vesting of restricted stock units	346,582		—		(121)		—		—		(121)
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	$	—	$	527,215	$	47	$	(469,113)	$	58,149

Vesting of restricted stock units	858,894		—		(463)		—		—		(463)
Unrealized loss on marketable securities	—		—		—		(37)		—		(37)
Foreign currency translation adjustment	—		—		—		5		—		5
Stock-based compensation expense	—		—		3,309		—		—		3,309
Net loss	—		—		—		—		(11,597)		(11,597)
Balance at June 30, 2020	42,691,114	$	—	$	530,061	$	15	$	(480,710)	$	49,366

Vesting of restricted stock units	103,689		—		(95)		—		—		(95)
Issuance of common stock in connection with equity purchase agreement	121,584		—		263		—		—		263
Unrealized loss on marketable securities	—		—		—		(24)		—		(24)
Foreign currency translation adjustment	—		—		—		(35)		—		(35)
Stock-based compensation expense	—		—		1,941		—		—		1,941
Net loss	—		—		—		—		(10,659)		(10,659)
Balance at September 30, 2020	42,916,387	$	—	$	532,170	$	(44)	$	(491,369)	$	40,757


						Accumulated
	Common Stock			Additional		Other				Total
		Par		Paid‑in		Comprehensive		Accumulated		Stockholders’
	Shares	Value		Capital		Income (Loss)		Deficit		Equity
Balance at December 31, 2018	41,210,725	$	—	$	507,366	$	(69)	$	(292,173)	$	215,124
Vesting of restricted stock units	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

Exercise of stock options and vesting of restricted stock units	8,927		—		(18)		—		—		(18)
Unrealized gain on marketable securities	—		—		—		30		—		30
Foreign currency translation adjustment	—		—		—		27		—		27
Stock-based compensation expense	—		—		4,814		—		—		4,814
Net loss	—		—		—		—		(49,876)		(49,876)
Balance at June 30, 2019	41,278,570	$	—	$	516,836	$	8	$	(379,614)	$	137,230

Exercise of stock options and vesting of restricted stock units	102,241		—		53		—		—		53
Unrealized loss on marketable securities	—		—		—		(23)		—		(23)
Foreign currency translation adjustment	—		—		—		14		—		14
Stock-based compensation expense	—		—		3,320		—		—		3,320
Net loss	—		—		—		—		(55,319)		(55,319)
Balance at September 30, 2019	41,380,811	$	—	$	520,209	$	(1)	$	(434,933)	$	85,275

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)


	Nine Months Ended
	September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(37,842)	$	(142,760)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,773		6,089
Stock-based compensation expense		8,703		12,996
Change in fair value of contingent consideration		2,393		734
Goodwill impairment charge		—		18,504
Intangible asset impairment charge		—		27,638
Changes in operating assets and liabilities:
Accounts receivable		4,783		(13,003)
Prepaid expenses and other assets		1,303		3,880
Accounts payable		(5,448)		3,050
Accrued expenses		(5,441)		6,817
Net cash used in operating activities		(29,776)		(76,055)
Cash flows from investing activities:
Purchases of property and equipment		(445)		(1,347)
Purchases of marketable securities		(39,898)		(121,303)
Proceeds from sales and maturities of marketable securities		49,035		171,891
Net cash provided by investing activities		8,692		49,241
Cash flows from financing activities:
Proceeds from debt financing (including warrants), net of issuance costs		10,913		—
Finance lease payments		(128)		(392)
Deferred issuance costs		(242)		—
Proceeds from exercise of employee stock options and the issuance of stock		—		85
Net cash provided by (used in) financing activities		10,543		(307)
Net decrease in cash, cash equivalents and restricted cash		(10,541)		(27,121)
Cash, cash equivalents and restricted cash at beginning of period		35,937		57,019
Cash, cash equivalents and restricted cash at end of period	$	25,396	$	29,898
Supplemental disclosure of non-cash investing and financing activities:
Additions to property and equipment included in accounts payable	$	—	$	207
Operating lease asset recorded as a result of new accounting standard	$	—	$	2,132
Fair value of common stock issued in connection with equity purchase agreement	$	263	$	—

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

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 clinical-stage biopharmaceutical company focused on developing novel drug candidates for 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. 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. As of September 30, 2020, the Company had cash, cash equivalents, restricted cash and marketable securities of $55.2 million and an accumulated deficit of $491.4 million. Since inception, the Company has incurred net losses and negative cash flows from its operations. Prior to the acquisition of Confluence in August 2017, the Company had never generated revenue. There can be no assurance that profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing basis. In addition, development activities, including clinical and preclinical testing of the Company’s drug candidates, will require significant additional financing. The future viability of the Company is dependent on its ability to successfully develop its drug candidates and to generate revenue from identifying and consummating transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize its development assets or to raise additional capital to finance its operations. The Company will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop its preclinical compounds, and to support its discovery efforts.

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 reduced its workforce, 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 $11.0 million under a term loan facility with Silicon Valley Bank. In August 2020, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $15.0 million of shares of its common stock over the 36-month term of the Purchase Agreement.

The Company’s plans to further address its liquidity needs 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) identifying third-party partners to further develop, obtain marketing approval for and/or commercialize its drug candidates and ESKATA, which may generate

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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.

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

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“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 Company’s revenue, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations.

Reclassifications

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

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 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 the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, research and development expenses, contingent consideration and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The COVID-19 pandemic has resulted in a global slowdown in

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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 September 30, 2020, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, 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 September 30, 2020, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, its changes in stockholders’ equity for the three and nine months ended September 30, 2020 and 2019 and its cash flows for the nine months ended September 30, 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 and nine months ended September 30, 2020 and 2019 are unaudited. The results for the three and nine months ended September 30, 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, are stated at fair value. Total cash, cash equivalents and restricted cash as shown in the condensed consolidated statements of cashflows as of September 30, 2020 and 2019 includes $1.8 million and $0, respectively, of restricted cash, consisting of funds in escrow pursuant to the asset purchase agreement with EPI Health, LLC (“EPI Health”) (see Note 13). In October 2020, the cash in escrow was released to the Company in accordance with the asset purchase agreement.

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.

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

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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 and as such, recognizes revenue in the amount which it has the right to invoice. ASC Topic 606 also provides an optional exemption, which the Company has elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.

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 counterparty, 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 consist of a drug discovery technology platform the Company acquired through the acquisition of Confluence. 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. 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.

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

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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 resulting from the acquisition of Confluence based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, 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 payments 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 both achieving regulatory milestones and commencing commercialization, 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 candidate, 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.

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.

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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 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 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 Company adopted this standard as of January 1, 2020, the impact of which on its consolidated financial statements was not significant.

3. Fair Value of Financial Assets and Liabilities

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


	September 30, 2020
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	19,444	$	3,029	$	—	$	22,473
Marketable securities		—		29,834		—		29,834
Total assets	$	19,444	$	32,863	$	—	$	52,307


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


	December 31, 2019
(In thousands)	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

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As of September 30, 2020 and December 31, 2019, the Company’s cash equivalents consisted of a money market fund, which was valued based upon Level 1 inputs, and corporate debt securities, which were valued based upon Level 2 inputs. The Company’s marketable securities consisted of investments with maturities of more than three months and included commercial paper and corporate debt, asset-backed and U.S. government agency debt securities, which were valued based upon Level 2 inputs. In determining the fair value of its Level 2 investments, the Company relied on quoted prices for identical securities in markets that are not active. These quoted prices were obtained by the Company with the assistance of a third-party pricing service based on available trade, bid and other observable market data for identical securities. Quarterly, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of the quoted prices provided. The Company evaluates whether adjustments to third-party pricing is necessary and, historically, the Company has not made adjustments to quoted prices obtained from the third-party pricing service. During the nine months ended September 30, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3. The increase in contingent consideration of $2.4 million during the nine months ended September 30, 2020 was primarily due to updates to the Company’s assumptions as a result of the successful completion of a Phase 1 clinical trial for ATI-450 and the submission and allowance of an Investigational New Drug Application for ATI-1777.

As of September 30, 2020 and December 31, 2019, the fair value of the Company’s available for sale marketable securities by type of security was as follows:


	September 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gain		Loss		Value
Marketable securities:
Corporate debt securities	$	2,649	$	—	$	—	$	2,649
Commercial paper		20,469		—		—		20,469
Asset-backed securities		4,166		2		—		4,168
U.S. government agency debt securities		2,547		1		—		2,548
Total marketable securities	$	29,831	$	3	$	—	$	29,834


	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	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

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4. Property and Equipment, Net

Property and equipment, net consisted of the following:


		September 30,		December 31,
(In thousands)	2020		2019
Computer equipment	$	1,317	$	1,315
Finance lease right-of-use assets		435		435
Lab equipment		1,331		1,250
Furniture and fixtures		647		647
Leasehold improvements		1,127		889
Property and equipment, gross		4,857		4,536
Accumulated depreciation		(2,937)		(2,066)
Property and equipment, net	$	1,920	$	2,470

Depreciation expense was $0.3 million for each of the three months ended September 30, 2020 and 2019, and $0.9 million for each of the nine months ended September 30, 2020 and 2019.

5. Intangible Assets

Intangible assets consisted of the following: