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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Commission file number 001-37581
Incorporated under the Laws of the
State of Delaware
I.R.S. Employer Identification No.
46-0571712
ACLARIS THERAPEUTICS, INC.
640 Lee Road, Suite 200
Wayne, PA 19087
(484) 324-7933
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class:
Common Stock, $0.00001 par value
Name of Each Exchange on which Registered
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ◻ No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 Exchange Act). Yes ◻ No ☒
As of June 30, 2018, the last business day of the registrant’s last completed second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant was approximately $528.2 million based on the closing price of the registrant’s common stock, as reported by the Nasdaq Global Select Market, on such date.
As of March 15, 2019, 41,269,643 shares of common stock, $0.00001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2019 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or this Annual Report, contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, that involve substantial risks and uncertainties. The forward-looking
statements are contained principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere
in this Annual Report. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,”
“could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,”
“potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify
statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or achievements to be materially different from the information
expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each
forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination
of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-
looking statements include statements about:
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our plans to commercialize ESKATA and RHOFADE in the United States;
our plans to develop and commercialize our drug candidates;
the timing of our planned clinical trials of our drug candidates and the reporting of the results from these trials;
the timing of the submission of our NDA for A-101 45% Topical Solution for the treatment of common warts;
the timing of and our ability to obtain and maintain regulatory approvals for our drug candidates and products;
the clinical utility of our drug candidates;
our plans and expectations related to commercialization, marketing and manufacturing capabilities and strategy;
our expectations about the willingness of patients to pay out of pocket for procedures using ESKATA for the
treatment of raised SK;
our expectations about the willingness of health care providers to use ESKATA for the treatment of raised SK and
RHOFADE for the treatment of persistent facial erythema (redness) associated with rosacea;
our expectations regarding coverage and reimbursement of our products and drug candidates, if approved;
our plans to invest in a new research facility;
the timing of our IND submissions for our immuno-inflammation drug candidates;
our efforts to obtain five year NCE exclusivity from the FDA and a patent term extension from the USPTO for
ESKATA;
our intellectual property position;
our plans to in-license or acquire additional drug candidates for other dermatological conditions to build a fully
integrated biopharmaceutical company;
our plans to pursue partnerships with third parties to commercialize our products outside of the United States;
our expectations regarding competition;
our expectations regarding our continued reliance on third parties;
our expectations regarding the growth in the number of our employees and scope of operations;
our expectations regarding our use of capital; and
our estimates regarding future revenue, expenses and needs for additional financing.
You should refer to “Item 1A. Risk Factors” in this Annual Report for a discussion of important factors that may
cause our actual results to differ materially from those expressed or implied by our forward‑looking statements. As a result of
these factors, we cannot assure you that the forward‑looking statements in this Annual Report will prove to be accurate.
Furthermore, if our forward‑looking statements prove to be inaccurate, the inaccuracy may be material. In light of the
significant uncertainties in these forward‑looking statements, you should not regard these statements as a representation or
warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The
forward-looking statements in this Annual Report represent our views as of the date of this Annual Report. We anticipate that
subsequent events and developments may cause our views to change. However, while we may elect to update these forward-
looking statements at some point in the future, we undertake no obligation to publicly update any forward‑looking
statements, whether as a result of new information, future events or otherwise, except as required by law. You should,
therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this
Annual Report.
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All brand names or trademarks appearing in this Annual Report, including ESKATA, ESKERIELE, RHOFADE,
PHYSICIAN’S WART ASSESSMENT and THWART, are the property of their respective owners. Unless the context
requires otherwise, references in this report to “Aclaris,” the “Company,” “we,” “us,” and “our” refer to Aclaris Therapeutics,
Inc. and its subsidiaries.
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Table of Contents
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Matters
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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Item 1. Business
Overview
PART I
We are a physician-led biopharmaceutical company focused on dermatological and immuno-inflammatory
diseases. We have two commercial products and a diverse pipeline of drug candidates.
Our first commercial product, ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, is a
proprietary formulation of high-concentration hydrogen peroxide topical solution which was approved by the U.S. Food and
Drug Administration, or FDA, in December 2017 as an office-based prescription treatment for raised seborrheic keratosis, or
SK, a common non-malignant skin tumor. We launched ESKATA in the United States in May 2018. We also submitted a
Marketing Authorization Application, or MAA, for ESKATA in select countries in the European Union, Norway and Iceland
in July 2017 using a decentralized procedure. In February 2019, we received approval from the Swedish Medical Products
Agency to market ESKATA (hydrogen peroxide) cutaneous solution, 685 mg for the treatment in adults of SKs that are not
pedunculated and have up to a maximum diameter of 15 millimeters each. We have also received approval to market
ESKATA in the United Kingdom, Iceland and Belgium.
In November 2018, we acquired RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, which
includes an exclusive license to certain intellectual property for RHOFADE, as well as additional intellectual property, from
Allergan Sales, LLC, or Allergan. RHOFADE was approved by the FDA in January 2017 for the topical treatment of
persistent facial erythema (redness) associated with rosacea in adults. Persistent facial redness is the most common sign of
rosacea in most skin types.
We continue to develop our sales, marketing and product distribution capabilities for ESKATA and RHOFADE in
order to support our commercialization efforts in the United States. We plan to continue to deploy sales representatives in
approximately 50 territories in the United States which we believe will allow us to reach the health care providers in the
United States with the highest potential for prescribing ESKATA and RHOFADE to their patients.
We are also developing another high-concentration formulation of hydrogen peroxide, A-101 45% Topical Solution,
as a prescription treatment for common warts, also known as verruca vulgaris. On an annual basis, approximately 2.0 million
people in the United States are diagnosed with common warts.
Additionally, in 2015, we in-licensed exclusive, worldwide rights from Rigel Pharmaceuticals, Inc., or Rigel, to
certain inhibitors of the Janus kinase, or JAK, family of enzymes, for specified dermatological conditions, including alopecia
areata, or AA. AA is an autoimmune dermatologic condition typically characterized by patchy non-scarring hair loss on the
scalp and body. More severe forms of AA include total scalp hair loss, known as alopecia totalis, or AT, and total hair loss on
the scalp and body, known as alopecia universalis, or AU. We are also developing these JAK inhibitors for the treatment of
vitiligo, androgenetic alopecia, or AGA, also known as male or female pattern baldness, and atopic dermatitis.
In 2016, in connection with the acquisition of Vixen Pharmaceuticals, Inc., or Vixen, we acquired additional
intellectual property rights for the development and commercialization of certain JAK inhibitors for specified dermatological
conditions. We intend to continue to in-license or acquire additional drug candidates and technologies to build a fully
integrated biopharmaceutical company.
In 2017, we acquired Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.), or
Confluence. The acquisition of Confluence added small molecule drug discovery and preclinical development capabilities
that allowed us to bring early-stage research and development activities in-house that we previously outsourced to third
parties. We intend to leverage the proprietary KINect drug discovery platform to identify potential drug candidates that we
may develop independently or with partners. We also acquired several preclinical drug candidates, including additional
topical JAK inhibitors known as soft-JAK inhibitors, inhibitors of the MK-2 signaling pathway and inhibitors of interleukin-
2-inducible T cell kinase, or ITK. Soft-JAK inhibitors may be topically applied and active in the skin, but will be rapidly
metabolized and inactivated when they enter the bloodstream, which may result in significantly reduced systemic exposure.
We also earn revenue from Confluence’s provision of contract research services to third parties.
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Our intellectual property portfolio contains issued patents directed to methods of use for high-concentration
hydrogen peroxide compositions of at least 23% or more hydrogen peroxide, including ESKATA and A-101 45% Topical
Solution, issued patents directed to methods of treating erythema associated with rosacea by administering oxymetazoline
and pharmaceutical cream compositions of oxymetazoline, including RHOFADE and its approved use, and issued patents
directed to our JAK inhibitor drug candidates, ATI-501 and ATI-502.
Our Drug Candidates
We have utilized our experience to establish a pipeline of drug candidates in dermatological and immuno-
inflammatory diseases. Our pipeline of drug candidates is summarized in the table below:
A-101 45% Topical Solution for the Treatment of Common Warts
We are developing A-101 45% Topical Solution for the treatment of common warts. Although common warts are
generally not harmful and in most cases eventually clear without medical treatment, they may be painful and aesthetically
unattractive and are contagious. On an annual basis, approximately 2.0 million people in the United States are diagnosed
with common warts. As with SK lesions, cryosurgery is the most frequently used in-office treatment for common
warts. Common warts can also be removed with slow-acting, over-the-counter products containing salicylic acid. We are not
aware of any prescription drugs that have been approved by the FDA for the treatment of common warts.
We completed a Phase 2 clinical trial, WART-201, in August 2016 evaluating 40% and 45% concentrations of A-101
for the treatment of common warts, in which we observed statistically significant improvements in the mean change in the
PHYSICIAN’S WART ASSESSMENT, or PWA, score and in complete clearance of common warts in subjects treated with
the 45% concentration of A-101 compared to placebo. The PWA score is a four-point scale of the investigators assessment of
the severity of a target wart at a particular time point.
In June 2017, we commenced two additional Phase 2 clinical trials, WART-202 and WART-203, of A-101 45%
Topical Solution to assess the dose frequency in adult and pediatric subjects with common warts. Both trials evaluated the
safety and efficacy of A-101 45% Topical Solution as compared to placebo, or vehicle. The two randomized, double-blind,
vehicle-controlled trials were designed to understand the effects of dose frequency and to explore additional clinical
endpoints that are now being further evaluated in our Phase 3 development program. We enrolled a total of 316 subjects at
34 investigational centers in the United States across both trials.
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The WART-202 trial evaluated 157 subjects who self-administered either A-101 45% Topical Solution or placebo
once weekly through Day 56, for a total of 8 treatments. Each subject had between one and four warts at baseline. The trial
achieved its primary endpoint, which was mean change from baseline in the PWA score of the target wart at Day 56 (one
week after the last treatment). The mean reduction in PWA score at Day 56 on the target warts was 0.77 points in subjects
who received A-101 45% Topical Solution, compared to a reduction of 0.23 points for the target warts that received placebo,
a result that was also statistically significant (p<0.001).
The WART-203 trial evaluated 159 subjects who self-administered either A-101 45% Topical Solution or placebo
twice weekly through Day 56, for a total of 16 treatments. Each subject had between one and six warts at baseline. The
WART-203 trial achieved its primary endpoint, which was mean change from baseline in the PWA scale score at Day 56
(Visit 10 or one week after the last treatment). The mean reduction in PWA score at Day 56 on the target warts was 0.87
points in subjects who received A-101 45% Topical Solution, compared to a reduction of 0.17 points for the target warts that
received placebo, a result that was statistically significant (p<0.001).
In March 2018, we reported final results, which included a 3-month drug-free follow-up phase, from the WART-203
clinical trial. In addition, in April 2018, we concluded the WART-202 clinical trial, in which we evaluated a different dosing
regimen from the one used in the WART-203 clinical trial. In both of these clinical trials, subjects treated with A-101 45%
Topical Solution achieved clinically and statistically significant outcomes for the primary and secondary endpoints of each of
the trials. There were no treatment-related serious adverse events among subjects treated with A-101 45% Topical Solution.
Based on the results from these clinical trials, we held an end of Phase 2 meeting with the FDA. A twice-weekly
dosing regimen is being evaluated in our two Phase 3 pivotal clinical trials, which we refer to as THWART-1 and THWART-
2, of A-101 45% Topical Solution for the treatment of common warts, which we initiated in September 2018. We expect
approximately 1,000 patients will be enrolled in these two trials by the end of March 2019. We expect to report data from
both of these trials in the second half of 2019. In addition, in February 2019, we commenced an open-label safety extension
trial investigating A-101 45% Topical Solution for the treatment of common warts. If the results of these three ongoing trials
are positive, we expect to submit a New Drug Application, or NDA, to the FDA for A-101 45% Topical Solution for the
treatment of common warts in the first half of 2020.
ATI-501 and ATI-502 for the Treatment of AA and Other Dermatological Indications
We are developing our JAK inhibitors, ATI-501 and ATI-502, which we in-licensed from Rigel, as potential
treatments for AA and other dermatological indications. AA is an autoimmune dermatologic condition typically characterized
by patchy non-scarring hair loss on the scalp and body. More severe forms of AA include AT, which is total scalp hair loss,
and AU, which is total hair loss on the scalp and body. AA is estimated to affect up to 1.8% of people in the United States
and 2.0% of people globally at some point during their lifetime, with two-thirds of affected individuals being 30 years old or
younger at the time of disease onset. Treatment options for the less severe, patchy forms of AA include corticosteroids, either
topically applied or injected directly into the scalp where the bare patches are located, or the induction of an allergic reaction
at the site of hair loss using a topical contact sensitizing agent, an approach known as topical immunotherapy. The same
treatment options are utilized for the more severe forms of AA, although utilization of these treatment options for the more
severe forms of AA is limited due to limited efficacy, certain side effects, and their impracticality for extensive surface areas.
We are developing ATI-501 as an oral treatment for AA. We submitted an investigational new drug application, or
IND, to the FDA for ATI-501 for the treatment of AA in October 2016. Since the filing of the IND, we have conducted
several Phase 1 clinical trials to evaluate the pharmacokinetic and pharmacodynamic, or PK/PD, properties of various
formulations of ATI-501. Based on the results from these clinical trials, we selected an oral suspension and initiated a Phase
2 dose-response clinical trial of ATI-501 for the treatment of AA.
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We are developing ATI-502 as a topical treatment for AA, vitiligo, AGA and atopic dermatitis. We submitted an
IND to the FDA for ATI-502 for the treatment of AA in July 2017. The following table summarizes the status of our ongoing
Phase 2 clinical trials of ATI-501 and ATI-502, including their indications, trial objectives, number of subjects enrolled and
expected timing for receipt of preliminary results:
Drug Candidate
and Name of Trial
Indication
Objective
Subjects
Enrolled
Preliminary
Results Expected
ATI-501
AUAT-201
ATI-502
AA-201
AA-202
AA-203
AUATB-201
VITI-201
AGA-201
AD-201
AA
Dose-ranging
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2H 2019
AA
AA
AA
AA (Eyebrow)
Vitiligo
AGA
Atopic Dermatitis
Dose-ranging
PK/PD
Open-label study
Open-label study
Open-label study
Open-label study
Open-label study
(2)
129
11
80
12
34
31
22
(3)
(1)
2Q 2019
—
2021
—
2H 2019
2Q 2019
Mid-2019
(4)
(5)
(1)
(2)
(3)
(4)
half of 2019.
(5)
2019.
AA-202 interim data reported in June 2018.
Approximate number of subjects per protocol.
AUATB-201 interim data reported in December 2018.
VITI-201 6-month interim data expected in the second quarter of 2019 and 12-month data expected in the second
AGA-201 6-month data expected in the second quarter of 2019 and 12-month data expected in the second half of
JAK Inhibitors, ITK Inhibitors and MK-2 Inhibitors
In August 2017, we acquired Confluence. This acquisition added small molecule drug discovery and preclinical
development capabilities that allowed us to bring early-stage research and development activities in-house that we previously
outsourced to third parties. We also acquired several preclinical drug candidates as part of the acquisition, including soft-
JAK inhibitors, inhibitors of the MK-2 signaling pathway and ITK inhibitors. We expect to submit an IND to the FDA for
ATI-450, an MK-2 inhibitor, for rheumatoid arthritis in mid-2019. If the IND is allowed by the FDA, we expect to initiate a
Phase 1 and Phase 2 trial in the second half of 2019. We are considering developing ATI-450 for the treatment of rheumatoid
arthritis, psoriasis, hidradenitis suppurativa, cryopyrin-associated periodic syndrome
(CAPS), and pyoderma
gangrenosum. We expect to submit an IND to the FDA for ATI-1777, a soft-JAK inhibitor, by the end of the first half of
2020. We are considering developing ATI-1777 for the treatment of several dermatological conditions, including atopic
dermatitis, vitiligo and AA. We are considering developing our ITK inhibitors as a potential treatment for psoriasis,
inflammatory dermatoses, and inflammatory bowel disease.
Our Commercial Products
ESKATA for the Treatment of Raised Seborrheic Keratosis
ESKATA is the first FDA-approved drug for the treatment of raised SKs. SK lesions are among the most common
non-malignant skin tumors and one of the most frequent diagnoses made by dermatologists. SK lesions typically have a
waxy, scaly, slightly elevated appearance, and multiple lesions are often present. The lesions can vary in color from light tan
to dark brown or black and typically appear on the face, trunk and extremities. Though the lesions are non-malignant,
patients often elect to have their condition treated by a health care provider, either because the lesions have become inflamed
or because the patient feels they are cosmetically unattractive. SK lesions are usually treated by cryosurgery,
electrodesiccation, curettage or excision. Each of these methods may be painful or can result in pigmentary changes or
scarring at the treatment site.
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Our NDA for ESKATA for the treatment of raised SKs was approved by the FDA in December 2017. We launched
ESKATA in the United States in May 2018. We submitted an MAA in select countries in the European Union, Norway and
Iceland in July 2017 using a decentralized procedure. In February 2019, we received approval from the Swedish Medical
Products Agency to market ESKATA (hydrogen peroxide) cutaneous solution, 685 mg for the treatment in adults of SKs that
are not pedunculated and have up to a maximum diameter of 15 millimeters each. We have also received approval to market
ESKATA in the United Kingdom, Iceland and Belgium. We are seeking a commercial partner or partners to market the
medicine as an aesthetic skin treatment in various European countries with the brand name ESKATA in Finland, Iceland,
Netherlands, Norway, Portugal, Spain, Sweden, Czech Republic and Belgium, and the brand name ESKERIELE in Austria,
France, Germany, Ireland, Italy, and the United Kingdom.
In April 2018, we entered into an exclusive license agreement with Cipher Pharmaceuticals Inc., or Cipher, for the
rights to obtain regulatory approval of and commercialize A-101 40% Topical Solution, which we market under the brand
name ESKATA in the United States, in Canada for the treatment of SK, or the Cipher License Agreement. Under the Cipher
License Agreement, Cipher is responsible for obtaining marketing approval in Canada for A-101 40% Topical
Solution. Cipher submitted a New Drug Submission for A-101 40% Topical Solution for the treatment of raised SKs, which
was accepted for review by Health Canada in December 2018. We will supply Cipher with finished product, and, if
regulatory approval is obtained, Cipher will be responsible for distribution and commercialization of A-101 40% Topical
Solution in Canada. Additionally, Cipher is responsible for all expenses related to regulatory and commercial activities for
A-101 40% Topical Solution in Canada.
RHOFADE for the Treatment of Persistent Facial Erythema (Redness) Associated with Rosacea in Adults
In November 2018, we acquired from Allergan the worldwide rights to RHOFADE, which includes an exclusive
license to certain intellectual property for RHOFADE. RHOFADE is indicated for the topical treatment of persistent facial
erythema (redness) associated with rosacea in adults. Rosacea is a chronic disease characterized by enduring facial redness
and/or skin thickening. Other signs of rosacea include facial flushing, visible blood vessels (telangiectasia), blemishes
resembling acne (papules and pustules), and eye irritation. Burning or stinging, swelling (edema), and dry appearance may
accompany these signs. Persistent facial redness is the most common sign of rosacea in most skin types and, according to a
survey of 1,289 patients with rosacea conducted by the National Rosacea Society, affects 71% of patients with rosacea.
RHOFADE was approved by the FDA in January 2017, and it became commercially available in the United States
in May 2017.
Manufacturing and Supply
We do not have any manufacturing facilities. We rely on third parties for the manufacture of preclinical and clinical
supplies for all of our drug candidates. We also rely on third parties for the commercial manufacture of ESKATA and
RHOFADE.
We have entered into an exclusive, ten-year, automatically renewable supply agreement with PeroxyChem LLC, or
PeroxyChem, to provide hydrogen peroxide, the active pharmaceutical ingredient, or API, that can be used in ESKATA for
the treatment of raised SKs and a number of other specified dermatological indications. The ten-year term commenced on
the date of first commercial sale of ESKATA in the United States. We or PeroxyChem may terminate the supply agreement
with prior written notice immediately for specified financial reasons, after a 10-business day and 60-day cure period for
material monetary and material non-monetary breaches, respectively, and in the event of a force majeure event, that continues
for 90 consecutive days. In addition, we may terminate the PeroxyChem supply agreement, with prior written notice, for
PeroxyChem’s failure to supply API to us for more than 90 cumulative days in a year.
We have entered into an exclusive commercial supply agreement with James Alexander Corporation, or James
Alexander, for the manufacture of the finished dosage form of ESKATA. We must meet a minimum purchase requirement
each year through 2022. In the event that we do not meet the minimum purchase requirements, James Alexander may, at its
discretion, convert the agreement into a non-exclusive agreement. Additionally, during the term of the agreement, James
Alexander will not manufacture any competitive product, as defined in the agreement. The term of the agreement with James
Alexander is five years from the date of the first commercial sale of ESKATA in the United States and thereafter will be
renewed automatically for one-year periods. Either party may terminate the agreement for any reason upon 180 days prior
written notice. In addition, either party has the right to immediately terminate the supply agreement under certain
circumstances, including (i) the other party files for bankruptcy, (ii) the other party materially breaches the
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supply agreement and such breach is not cured within a specified period and (iii) any required license, permit or certificate
required of the other party to perform its obligations under the supply agreement is not approved or issued or is revoked by
an applicable governmental regulatory authority.
We are also party to a manufacturing and supply agreement with a third party for the finished dosage form of
RHOFADE.
Commercialization
We are commercializing ESKATA and RHOFADE ourselves in the United States, and intend to establish
partnerships with third parties to commercialize them outside the United States in countries where we have received, or in the
future may receive, approval. We are continuing to develop our sales, marketing and product distribution capabilities for
ESKATA and RHOFADE in order to support our commercialization efforts in the United States. We plan to continue to
deploy sales representatives in approximately 50 territories in the United States which we believe will allow us to reach the
health care providers in the United States with the highest potential for prescribing ESKATA and RHOFADE to their
patients. Our sales force is supported by sales and marketing management, internal sales and marketing, an advertising
campaign, and commercial product distribution.
We sell ESKATA to one wholesaler, McKesson Specialty Care Distribution, or McKesson, which in turn resells
ESKATA to health care providers. We have also entered into agreements with two group purchasing organizations, or GPOs,
and may enter into additional agreements with other GPOs and corporate accounts that provide for administrative fees and
discounted pricing in the form of volume-based rebates and chargebacks. We have no sales of ESKATA in countries outside
of the United States. We have a no returns policy for ESKATA.
We believe dermatologists will be inclined to adopt ESKATA to treat their patients with SK lesions not only because
of its clinical profile, but also because it may provide an expanded source of revenue for their practices. Dermatologists
expect declining reimbursements from third-party payors for providing medical services. In addition, a greater portion of the
cost of medical care has been shifted to patients, in the form of higher deductibles and co‑insurance. Collecting from patients
can be difficult and costly for physician practices. We believe many dermatologists are interested in expanding the cash-pay
aesthetic portion of their practices, meaning the portion of procedures that are not medically necessary and not reimbursed by
third-party payors, by treating new aesthetic patients and by offering new services to current aesthetic patients. Though SK
patients typically come into the dermatology practice seeking a medical diagnosis, we believe they often are willing to pay
for removal of SK lesions to improve appearance even after they learn that the lesions are non-malignant, and that removal
may not be reimbursed. In addition, since ESKATA can be administered by non-physician staff, we believe it could provide
incremental practice revenue with minimal time commitment by the dermatologist after the diagnosis is made.
We began commercializing RHOFADE in the United States in December 2018. We currently rely on Allergan to
distribute RHOFADE on our behalf pursuant to the terms of a transition services agreement while we develop our sales,
marketing and distribution capabilities to support the commercialization of RHOFADE in the United States. We sell
RHOFADE to wholesalers in the United States, which, in turn, distribute it to pharmacies that will ultimately fill patient
prescriptions. We may also enter into arrangements with health care providers, pharmacy benefit managers, third-party
payors, and GPOs which provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts,
with respect to the purchase of RHOFADE. We have no sales of RHOFADE in countries outside of the United States.
It is estimated that 16.0 million people in the United States suffer from rosacea. Persistent facial redness is the most
common sign of rosacea in most skin types. Although there are many branded and generic oral and topical medications
prescribed to treat the papules and pustules of rosacea, they are not indicated for the treatment of persistent facial redness.
We believe dermatologists tend to be particularly focused on the safety of pharmaceutical products because, while
skin diseases can have profound effects on patients’ quality of life, few are life-threatening. As a result, we believe that
dermatologists, as well as their patients, often prefer to use topical treatments when possible to limit the risk of systemic side
effects. Dermatologists also tend to place a high level of emphasis on products that are easy to use because they often manage
high volumes of patients. We believe this also contributes to a general preference for topical treatments. Finally, in our
experience, dermatologists tend to engage with sales and medical affairs personnel from the pharmaceutical industry
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regarding the scientific evidence supporting dermatology products and the challenges experienced by physicians and patients
in the use of these products. Dermatologists often rely on trusted relationships with scientifically oriented, customer-focused
sales representatives who can provide them with the necessary information to support their use of appropriate treatments.
Competition
The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong
emphasis on proprietary drugs. While we believe that our knowledge, experience and scientific resources provide us with
competitive advantages, we face potential competition from many different sources, including major pharmaceutical,
biotechnology and specialty pharmaceutical companies, academic institutions and governmental agencies and public and
private research institutions. Our products compete with, and any drug candidates that are approved and we successfully
develop and commercialize will compete with, existing treatments and new treatments that may become available in the
future.
The key competitive factors affecting the success of ESKATA for the treatment of raised SKs, are likely to be its
efficacy, safety, non-invasiveness, pain profile and ability to be administered by non-physician staff. With respect to
ESKATA for the treatment of raised SKs, we are aware of the following companies that have treatments or are developing
treatments for SK: BioLineRx Ltd. is developing an over-the-counter drug candidate targeting multiple skin conditions,
including SK; Skincential Sciences, Inc. currently markets a line of cosmetic products targeting skin conditions, including
SK; Epipharm, AG is developing a topical drug candidate targeting multiple skin conditions, including SK; and Pulse
Biosciences, Inc. is developing a device targeting multiple skin conditions, including SK. We are also aware of early
research being conducted with Akt inhibitors as a potential treatment for SK. None of these products have been approved by
the FDA for the treatment of SK in the United States.
With respect to RHOFADE for the treatment of persistent facial erythema (redness) due to rosacea, we are aware of
one other drug that is approved for this indication: MIRVASO (brimonidine) topical gel, 0.33%, which was approved by the
FDA in 2013, and which is currently marketed by Galderma Laboratories, L.P.
With respect to A-101 45% Topical Solution for the treatment of common warts, we are aware of the following
companies that have treatments or are developing treatments for common warts: Perrigo Company plc received a CE Mark
approval for BL-5010, which it licenses from BioLineRx Ltd., as a novel over-the-counter treatment for the non-surgical
removal of warts in the European Economic Area; and each of Nielsen BioSciences, Inc., Cutanea Lifesciences, Inc., Phio
Pharmaceuticals Corp. and Verrica Pharmaceuticals Inc. is developing a drug candidate for the treatment of common warts.
In addition, other drugs have been used off-label as treatments for common warts.
With respect to ATI-501 and ATI-502 for the treatment of AA, we anticipate competing with sensitizing agents such
as diphencyprone, and topical, intralesional and systemic corticosteroids, which have been found to occasionally reduce
symptoms of AA. Other treatments utilized for patchy AA include anthralin and minoxidil solution. We may also compete
with companies developing chemical agents to be used in topical immunotherapies, as well as companies developing
biologics, immunosuppressive agents, laser therapy, phototherapy, other JAK inhibitors and prostaglandin analogues to treat
AA.
With respect to ATI-502 for the treatment of vitiligo, we are aware of one other company, Incyte Corporation,
developing a topical JAK inhibitor for the treatment of vitiligo.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs
that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than ESKATA,
RHOFADE or any other drug that we may develop. Our competitors also may obtain FDA or other regulatory approval for
their drug candidates more rapidly than we may obtain approval for our drug candidates, which could result in our
competitors establishing a strong market position before we are able to enter the market. Many of the companies against
which we are competing, or against which we may compete in the future, have significantly greater financial resources and
expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory
approvals and marketing approved drugs than we do. Mergers and acquisitions in the pharmaceutical and biotechnology
industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or
early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with
large and established companies. These competitors also compete with us in recruiting
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and retaining qualified scientific and management personnel and establishing clinical trial sites and subject registration for
clinical trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.
Intellectual Property
Our success depends in large part upon our ability to obtain and maintain proprietary protection for our products and
drug candidates and to operate without infringing the proprietary rights of others. We seek to avoid the latter by monitoring
patents and publications that may affect our business, and to the extent we identify such developments, evaluate and take
appropriate courses of action. Our policy is to protect our proprietary position by, among other methods, filing patent
applications on inventions that are important to the development and conduct of our business with the U.S. Patent and
Trademark Office, or USPTO, and its foreign counterparts.
With respect to ESKATA and A-101 45% Topical Solution, we do not currently rely on licenses to any third party’s
intellectual property. We own two U.S. patents that include claims that cover the use of high-concentration hydrogen
peroxide of at least 23%, including ESKATA and A-101 45% Topical Solution, for the alleviation of SK and acrochordons.
The patents in Australia, New Zealand and India include claims that cover the use of high-concentration hydrogen peroxide
of at least 23%, including ESKATA and A-101 45% Topical Solution, for the alleviation of various skin conditions including
SK, acrochordons, corns, tags, acne, warts and rosacea. The patents in Germany, the United Kingdom, Mexico and Singapore
include claims that cover the use of high-concentration hydrogen peroxide of at least 23%, including ESKATA and A-101
45% Topical Solution for the alleviation of acrochordons. The issued patents relating to the use of ESKATA and A-101 45%
Topical Solution begin to expire in 2022, subject to any applicable patent term extension that may be available in a particular
country.
We also own three issued U.S. patents and pending U.S., European and other foreign patent applications directed to
various formulations comprising high-concentration hydrogen peroxide, including ESKATA and A-101 45% Topical
Solution dosing regimens for such formulations, applicators for use with such formulations, and methods of treating various
skin conditions, including SK and common warts, by the topical administration of such formulations. Our U.S. formulation,
method of use and applicator patents expire in 2035 and any claims that issue from the pending formulation applications will
expire in 2035, subject to any applicable patent term adjustment or extension that may be available in a particular country. In
addition, we own a U.S. and PCT patent application directed to the use of high-concentration hydrogen peroxide, including
ESKATA and A-101 45% Topical Solution, for the treatment of warts. We are in the process of filing national applications
from this PCT patent application in Europe and other foreign countries. Any claims that issue from these applications will
expire in 2037, subject to any applicable patent term adjustment or extension that may be available in a particular country.
With respect to our patent portfolio relating to RHOFADE, we exclusively license from Allergan a family of U.S.
patents and pending applications, including three issued U.S. patents directed to methods of treating erythema associated with
rosacea by administering alpha-1 adrenergic receptor agonists, including oxymetazoline, which cover the approved use of
RHOFADE, that expire between 2024 and 2028. We also own issued U.S. and European patents and pending U.S. and
European applications, and other foreign country patents and applications directed to pharmaceutical cream compositions of
oxymetazoline, including RHOFADE, that expire, or will expire, in 2031. We also own an issued U.S. patent and pending
U.S. and European applications, and other foreign country applications directed to methods of treating facial erythema by
topically administering once or twice daily 1% or 1.5% oxymetazoline hydrochloride, which cover the approved use of
RHOFADE, that expire, or will expire, in 2035. We also own a family of patents in the United States, Europe and other
foreign countries directed to methods of treating purpura by administering alpha-1 adrenergic receptor agonists, including
oxymetazoline, which expire in 2028 and 2029 and a family of patents and applications in the United States, Europe and
other foreign countries directed to methods of treating erythema associated with rosacea by administering oxymetazoline,
which expire, or will expire, in 2032. We also exclusively sublicense from Allergan certain patents and applications in the
United States and foreign countries owned by a third party for oxymetazoline for the treatment of rosacea or purpura by
topical application, which expire in 2024.
With respect to ATI-501 and ATI-502, we exclusively license from Rigel multiple families of patents and
applications relating to these compounds and the uses thereof in the field of dermatology. In particular, we exclusively
license patents and applications with claims that specifically cover the composition of matter for these compounds in the
United States, the European Union, and other major foreign markets. The issued patents specifically directed to these
compounds begin to expire in 2030, subject to any applicable patent term extension that may be available in a particular
country. We also exclusively license an issued U.S. patent and pending applications in the United States, Australia, Canada,
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the European Union and Japan with claims that cover the use of these compounds for the treatment of alopecia areata. The
U.S. patent, and any claims that issue from these applications, expire, or will expire, in 2034, subject to any applicable patent
term adjustment or extension that may be available in a particular country. We also licensed a family of patents and
applications that relate to ATI-501 and ATI-502 that expire in 2023, subject to any applicable patent term extension that may
be available in a particular country.
We also exclusively license patents and applications from Columbia University relating to the use of JAK inhibitors
to induce hair growth and treat hair loss disorders, including AA and AGA. In particular, we exclusively license multiple
U.S. patents with claims directed to the use of certain third-party JAK inhibitors for the treatment of hair loss disorders,
including AA and AGA, and inducing hair growth, which expires in 2031. We also exclusively license patents and
applications with claims directed to the use of certain JAK1, JAK2 or JAK3 inhibitors for the treatment of hair loss disorders,
including AA and AGA, and inducing hair growth in the U.S., the European Union, Japan and South Korea. Any claims that
issue from the pending applications begin to expire in 2031, subject to any applicable patent term adjustment or extension
that may be available in a particular country. In addition, we exclusively license patent applications in the United States and
other foreign countries directed to methods of inducing hair growth with JAK1, JAK2 or JAK3 inhibitors as well as
biomarkers for AA, which if claims issue, would expire in 2036, subject to any applicable patent term adjustment or
extension that may be available in a particular country.
With respect to our inhibitors of the MK-2 signaling pathway, we own one U.S. patent and pending applications in
the European Union and other foreign countries that cover ATI-450, our lead candidate. The U.S. patent expires in 2034 and
any claims that issue from the pending applications expire in 2034, subject to any applicable patent term adjustment or
extension that may be available in a particular country. We also own seven U.S. patents and pending foreign patent
applications directed to other inhibitors of the MK-2 signaling pathway, which expire or will expire between 2031 and 2034,
subject to any applicable patent term adjustment or extension that may be available in a particular country.
With respect to our soft-JAK inhibitors, we have filed two U.S. and PCT applications directed to various novel
inhibitors of JAK1 and/or JAK3 and methods of using the same. Any claims that may issue would expire in 2038, subject to
any applicable patent term adjustment or extension that may be available in a particular country.
With respect to our ITK inhibitors, we own multiple U.S. patents and pending applications in the United States and
foreign countries directed to novel inhibitors of ITK and methods of using the same. The patents and pending applications, if
issued, expire between 2035 and 2038, subject to any applicable patent term adjustment or extension that may be available in
a particular country.
We also use other forms of protection, such as trademark, copyright, and trade secret protection, to protect our
intellectual property, particularly where we do not believe patent protection is appropriate or obtainable. We aim to take
advantage of all of the intellectual property rights that are available to us and believe that this comprehensive approach will
provide us with proprietary positions for our products and drug candidates, where available.
Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in
various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from
country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the
country. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional
patent application. In the United States, a patent term may be shortened if a patent is terminally disclaimed over another
patent or as a result of delays in patent prosecution by the patentee, and a patent’s term may be lengthened by patent term
adjustment, which compensates a patentee for administrative delays by the USPTO in granting a patent or by patent term
extension, which compensates a patentee for delays at the FDA. The patent term of a European patent is 20 years from its
filing date; however, unlike in the United States, the European patent does not grant patent term adjustments. The European
Union does have a compensation program similar to patent term extension called supplementary patent certificate that would
effectively extend patent protection for up to five years.
We also protect our proprietary information by requiring our employees, consultants, contractors and other advisors
to execute nondisclosure and assignment of invention agreements upon commencement of their respective employment or
engagement. Agreements with our employees also prevent them from bringing the proprietary rights of third parties to us. In
addition, we also require confidentiality or service agreements from third parties that receive our confidential information or
materials.
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Acquisition and License Agreements
Assignment Agreement with the Estate of Mickey Miller and Finder’s Services Agreement with KPT Consulting, LLC
In August 2012, we entered into an assignment agreement, or, as amended, the Assignment Agreement, with the
Estate of Mickey Miller, or the Miller Estate, under which we acquired some of the intellectual property rights covering
ESKATA and A-101 45% Topical Solution. The assignment of intellectual property rights covers specified know-how, along
with modifications of, improvements to and variations on A-101 that meet defined chemical properties. Under this
agreement, we have the sole and exclusive right, but not the duty, to develop, obtain marketing approval for and
commercialize ESKATA and A-101 45% Topical Solution in various countries throughout the world. We are required to use
commercially reasonable efforts to develop and commercialize at least one product for at least one indication in the United
States. In connection with obtaining the assignment of the intellectual property from the Miller Estate, in August 2012 we
also entered into a separate finder’s services agreement, or the Finder’s Services Agreement, with KPT Consulting, LLC.
Under the terms of the Assignment Agreement and the Finder’s Services Agreement, we made aggregate upfront
payments of $0.6 million in 2012 and one-time milestone payments of $0.4 million in 2013 upon the dosing of the first
human subject with ESKATA in our Phase 2 clinical trial. There are no remaining potential milestone payments under the
Assignment Agreement. Under the Finder’s Services Agreement, we made a one-time milestone payment of $0.3 million in
February 2016 upon the dosing of the first human subject with ESKATA in our Phase 3 clinical trial, a one-time milestone
payment of $1.0 million in April 2017 upon the achievement of a specified regulatory milestone, and a one-time milestone
payment of $1.5 million in May 2018 upon the achievement of a specified commercial milestone. Under the terms of the
Finder’s Services Agreement, we are obligated to make an additional milestone payment of $3.0 million upon the
achievement of a specified commercial milestone. Under each of the Assignment Agreement and the Finder’s Services
Agreement, we are also obligated to pay royalties on sales of ESKATA or related products, at low single-digit percentages of
net sales, subject to reduction in specified circumstances. Both agreements will terminate upon the expiration of the last
pending, viable patent claim of the patents acquired under the Assignment Agreement, but no sooner than 15 years from the
effective date of the agreements.
License Agreement with Rigel
In August 2015, we entered into an exclusive, worldwide license and collaboration agreement with Rigel for the
development and commercialization of products containing two specified JAK inhibitors, ATI-501 and ATI-502, or the Rigel
License Agreement. Under this agreement, we intend to develop these JAK inhibitors for the treatment of AA and other
dermatological conditions. We are required to use commercially reasonable efforts to develop and commercialize at least one
product. We paid Rigel an upfront nonrefundable payment of $8.0 million and have agreed to make aggregate payments of up
to $80.0 million upon the achievement of specified pre-commercialization milestones, such as clinical trials and regulatory
approvals. Further, we have agreed to pay up to an additional $10.0 million to Rigel upon the achievement of a second set of
development milestones. With respect to any products we commercialize under the Rigel License Agreement, we will pay
Rigel quarterly tiered royalties on our annual net sales of each product at a high single-digit percentage of annual net sales,
subject to specified reductions, until the date that all of the patent rights for that product have expired, as determined on a
country-by-country and product-by-product basis or, in specified countries under specified circumstances, ten years from the
first commercial sale of such product.
The Rigel License Agreement terminates on the date of expiration of all royalty obligations unless earlier terminated
by either party for a material breach. We may also terminate the Rigel License Agreement without cause at any time upon
advance written notice to Rigel. Rigel, after consultation with us, will be responsible for maintaining and prosecuting the
patent rights, and we will have final decision-making authority regarding such patent rights for a product in the United States
and the European Union. To the extent that we jointly develop intellectual property, we will confer and decide which party
will be responsible for filing, prosecuting and maintaining those patent rights. The Rigel License Agreement also establishes
a joint steering committee composed of an equal number of representatives for each party, which will monitor progress of the
development of products.
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Stock Purchase Agreement with Vixen Pharmaceuticals, Inc.
In March 2016, we entered into a stock purchase agreement, or the Vixen Agreement, with Vixen and JAK1, LLC,
JAK2, LLC and JAK3, LLC, or together, the Selling Stockholders, and Shareholder Representative Services LLC, as the
representative of the Selling Stockholders. Pursuant to the Vixen Agreement, we acquired all shares of Vixen’s capital stock
from the Selling Stockholders, or the Vixen Acquisition. Following the Vixen Acquisition, Vixen became our wholly-owned
subsidiary. We paid $0.6 million upfront and issued an aggregate of 159,420 shares of our common stock to the Selling
Stockholders. We are obligated to make annual payments of $0.1 million through March 2022, with such amounts being
creditable against specified future payments that may be paid under the Vixen Agreement.
Under the Vixen Agreement, we agreed to use commercially reasonable efforts to develop and commercialize at
least one product for the treatment of AA in humans and at least one product for the treatment of AGA in humans, in each
case for commercial sale and distribution throughout the United States and such other areas of the world as we determine to
be commercially prudent. In the event we do not comply with these obligations, we are obligated to license, on a non-
exclusive basis, certain intellectual property rights related to the products to the Selling Stockholders or their designee, on
terms to be mutually agreed to by the parties, among other rights exercisable by the Selling Stockholders.
Under the Vixen Agreement, we are obligated to make aggregate payments of up to $18.0 million to the Selling
Stockholders upon the achievement of specified pre-commercialization milestones for three products in the United States, the
European Union and Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial
milestones. With respect to any commercialized products covered by the Vixen Agreement, we are obligated to pay low
single-digit royalties on net sales, subject to specified reductions, limitations and other adjustments, until the date that all of
the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in
specified circumstances, ten years from the first commercial sale of such product. If we sublicense any of Vixen’s patent
rights and know-how acquired pursuant to the Vixen Agreement, we will be obligated to pay a portion of any consideration
we receive from such sublicenses in specified circumstances.
License Agreement with Columbia University
As a result of the Vixen Acquisition, we became party to the Exclusive License Agreement, by and between Vixen
and the Trustees of Columbia University in the City of New York, or Columbia, dated as of December 31, 2015, or as
amended, the Columbia License Agreement. Pursuant to the Columbia License Agreement, we have an exclusive,
worldwide license under specified Columbia patent rights and a non-exclusive, worldwide license under specified Columbia
know-how in all fields to develop and commercialize a product that otherwise infringes a Columbia patent right or uses
Columbia know-how. Our rights to this Columbia intellectual property cover the use of specified JAK inhibitor compounds
for the potential treatment of AA, AGA and other dermatological conditions.
We are obligated to pay Columbia an annual license fee of $10,000, subject to specified adjustments for patent
expenses incurred by Columbia and creditable against any royalties that may be paid under the Columbia License
Agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified commercial
milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and
royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how,
subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired pursuant to the
Columbia License Agreement, we will be obligated to pay Columbia a portion of any consideration received from such
sublicenses in specified circumstances. The royalties, as determined on a country-by-country and product-by-product basis,
are payable until the date that all of the patent rights for that product have expired, the expiration of any market exclusivity
period granted by a regulatory body or, in specified circumstances, ten years from the first commercial sale of such product.
We have agreed to use commercially reasonable efforts to develop and commercialize at least one product. In the
event we do not comply with this obligation, Columbia has the option to terminate the license or convert the exclusive patent
license to a non-exclusive patent license. Further, in the event we do not comply with our obligations under the Vixen
Agreement to develop and commercialize products, our rights under the Columbia License Agreement may revert to a party
to be designated by the Selling Stockholders. Columbia is responsible for maintaining and prosecuting the patent rights,
giving due consideration to our reasonable comments related thereto.
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The Columbia License Agreement terminates on the date of expiration of all royalty obligations thereunder unless
earlier terminated by either party for a material breach, subject to a specified cure period. We may also terminate the
Columbia License Agreement without cause at any time upon advance written notice to Columbia.
Agreement and Plan of Merger with Confluence
In August 2017, we entered into an Agreement and Plan of Merger, or the Confluence Agreement, with Confluence,
Aclaris Life Sciences, Inc., our wholly-owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of the
equity holders of Confluence. Pursuant to the terms of the Confluence Agreement, the Merger Sub merged with and into
Confluence, with Confluence surviving as our wholly-owned subsidiary, resulting in our acquisition of 100% of the
outstanding shares of Confluence. We paid $10.3 million in cash and issued 349,527 shares of our common stock with a fair
value of $9.7 million to the Confluence equity holders.
In November 2018, we achieved a development milestone specified in the Confluence Agreement. The milestone
payment to the former Confluence equity holders was comprised of $2.5 million in cash and 253,208 shares of our common
stock with a fair value of $2.2 million. We also agreed to pay the former Confluence equity holders aggregate additional
contingent consideration of up to $75.0 million, based upon the achievement of certain regulatory and commercial milestones
set forth in the Confluence Agreement. In addition, we have agreed to pay the former Confluence equity holders specified
future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions,
limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a
country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of
such product. In addition, if we sell, license or transfer any of the intellectual property acquired from Confluence to a third
party, we will be obligated to pay the former Confluence equity holders a portion of any incremental consideration (in excess
of the development and milestone payments described above) that we receive from such sale, license or transfer in specified
circumstances.
Asset Purchase Agreement with Allergan
In November 2018, we closed the acquisition of the worldwide rights to RHOFADE, which includes an exclusive
license to certain intellectual property for RHOFADE, as well as additional intellectual property, from Allergan, pursuant to
the terms of the Asset Purchase Agreement dated as of October 15, 2018, or as amended, the Asset Purchase Agreement.
At the closing of the acquisition, we paid total cash consideration of approximately $66.1 million, consisting of
approximately $59.6 million paid to Allergan and $6.5 million placed in escrow. We have also agreed to pay Allergan a one-
time payment of $5.0 million upon the achievement of a specified development milestone related to the potential
development of an additional dermatology product. In addition, we have agreed to pay Allergan specified royalty payments,
ranging from a mid-single digit percentage to a mid-teen percentage of net sales, subject to specified reductions, limitations
and other adjustments, on a country-by-country basis until the date that the patent rights related to a particular product, such
as RHOFADE, have expired or, if later, November 30, 2028. In addition, we have agreed to assume the obligation to pay
specified royalties and milestone payments under agreements with Aspect Pharmaceuticals, LLC and Vicept Therapeutics,
Inc. Members of our management team, including Neal Walker, Frank Ruffo, Christopher Powala and Stuart Shanler, as well
as Stephen Tullman, the chairman of our board of directors, are former stockholders of Vicept Therapeutics, Inc., and Dr.
Shanler is also a current member of Aspect Pharmaceuticals, LLC. In their capacities as current or former holders of equity
interests in these entities, these individuals may be entitled to receive a portion of the potential future payments payable by
us.
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Government Regulation and Product Approval
Governmental authorities in the United States, at the federal, state and local level, and analogous authorities in other
countries extensively regulate, among other things, the research, development, testing, manufacture, safety surveillance,
efficacy, quality control, labeling, packaging, distribution, record keeping, promotion, storage, advertising, distribution,
marketing, sale, export and import, and the reporting of safety and other post-market information of products such as the ones
we are commercializing and developing. A drug candidate must be approved by the FDA before it may be legally promoted
in the United States and by comparable foreign regulatory authorities before marketing in other jurisdictions. The process of
obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and
regulations require the expenditure of substantial time and resources. Failure to comply with the applicable U.S. requirements
at any time during the product development process, approval process or after approval may subject an applicant and/or
sponsor to a variety of administrative or judicial sanctions, including refusal by regulatory authorities to approve
applications, withdrawal of an approval, imposition of a clinical hold, import/export delays, issuance of warning letters and
untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines,
refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought
by FDA and the Department of Justice or other governmental entities.
United States Government Regulation
NDA Approval Processes
In the United States, the FDA regulates drug and medical device products under the Federal Food, Drug, and
Cosmetic Act, or FDCA, and its implementing regulations. A-101 45% Topical Solution is comprised of both a drug
component (the hydrogen peroxide solution) and a pen-type applicator. The FDA’s Center for Drug Evaluation and Research
has primary jurisdiction over the premarket development, review and approval of our drug candidates. Accordingly, we are
investigating our drug candidates pursuant to IND applications and expect to seek approval through the NDA pathway. Based
on our discussions with the FDA to date, we do not anticipate that the FDA will require us to submit a separate marketing
application for the pen-type applicator that will be used with A-101 45% Topical Solution for the treatment of common
warts, but this could change during the course of the FDA’s review of the NDA.
An applicant seeking approval to market and distribute a new drug product in the United States must typically
undertake the following:
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completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s
good laboratory practice regulations;
submission to the FDA of an IND which must take effect before clinical trials may begin;
approval by an independent institutional review board, or IRB, representing each clinical site before clinical testing
may be initiated at the clinical site;
performance of adequate and well-controlled clinical trials in accordance with good clinical practice, or GCP,
regulations to establish the safety and efficacy of the proposed drug product for each indication;
preparation and submission to the FDA of an NDA;
review of the NDA by a FDA advisory committee, if applicable;
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the
product or its components are produced to assess compliance with current good manufacturing practices, or cGMP,
and regulations to assure that the facilities, methods and controls are adequate to preserve the product’s identity,
strength, quality and purity;
payment of user fees and securing FDA approval of the NDA; and
compliance with any post-approval requirements, including potential requirements for a risk evaluation and
mitigation strategy and post-approval studies required by the FDA.
Once a drug candidate is identified for development, it enters the preclinical or nonclinical testing stage. Preclinical
studies include laboratory evaluations of product chemistry, pharmacology, toxicity and formulation. An IND sponsor must
submit the results of the preclinical studies, together with manufacturing information and analytical data, to the FDA as part
of the IND. Some preclinical studies may continue even after the IND is submitted. In addition to including the results of the
preclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the
parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first
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phase lends itself to an efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA,
unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA
must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life
of an IND, and may affect one or more specific clinical trials or all clinical trials conducted under the IND.
All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with
current GCP regulations. They must be conducted under protocols detailing the objectives of the trial, dosing procedures,
research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must
be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to
the FDA annually. Sponsors also must timely report to FDA serious and unexpected adverse reactions, any clinically
important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure,
or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug.
An IRB at each institution participating in the clinical trial must review and approve the protocol before the clinical trial
commences at that institution and must also approve the information regarding the trial and the consent form that must be
provided to each research subject or the subject’s legal representative, monitor the study until completed and otherwise
comply with IRB regulations.
Clinical trials are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance,
absorption, metabolism, distribution and elimination. In the case of some products for severe or life-threatening
diseases, such as cancer, and especially when the product may be inherently too toxic to ethically administer to
healthy volunteers, the initial human testing is often conducted in patients who already have the condition.
Phase 2. Clinical trials are performed on a limited patient population intended to identify possible adverse effects
and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage.
Phase 3. If a drug candidate is found to be potentially effective and to have an acceptable safety profile in Phase 2
clinical trials, the clinical trial program will be expanded to Phase 3 clinical trials to further evaluate dosage, clinical
efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These studies
are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product
approval and labeling claims.
Phase 4 clinical trials are conducted after approval to gain additional experience from the treatment of patients in the
intended therapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval
regulations, or when otherwise requested by the FDA in the form of post-market requirements or commitments. Failure to
promptly conduct any required Phase 4 clinical trials could result in withdrawal of approval.
Clinical trials are inherently uncertain, and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed.
The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research
subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of
a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the
drug has been associated with unexpected serious harm to patients. In some cases, clinical trials are overseen by an
independent group of qualified experts organized by the trial sponsor, which is called the clinical monitoring board or data
safety monitoring board. This group provides authorization for whether or not a trial may move forward at designated check
points. These decisions are based on the limited access to data from the ongoing trial.
During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points.
These points may be prior to the submission of an IND, at the end-of-Phase 2 and before an NDA is submitted. Meetings at
other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data
gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at
the end-of-Phase 2 to discuss their Phase 2 clinical trial results and present their plans for the pivotal Phase 3 clinical trial or
trials that they believe will support the approval of the new drug.
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Concurrent with clinical trials, sponsors usually complete additional animal safety studies and also develop
additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing
commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of
consistently producing quality batches of the drug and the manufacturer must develop methods for testing the quality, purity
and potency of the drug. Additionally, appropriate packaging must be selected and tested, and stability studies must be
conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its proposed shelf-life.
The results of product development, preclinical studies and clinical trials, along with descriptions of the
manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are
submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to
the payment of user fees, but a waiver of such fees may be obtained under specified circumstances. The FDA reviews all
NDAs submitted for a period of 60 days to ensure that they are sufficiently complete for substantive review before it accepts
them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be
resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it
for filing.
During the approval process, the FDA also will determine whether a risk evaluation and mitigation strategy, or
REMS, is necessary to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the
application must submit a proposed REMS, and the FDA will not approve the application without an approved REMS, if
required. A REMS can substantially increase the costs of obtaining approval. The FDA could also require a special warning,
known as a boxed warning, to be included in the product label in order to highlight a particular safety risk.
Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA reviews an NDA to
determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is
cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the
application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory
committee, but it generally follows such recommendations. NDAs receive either standard or priority review. A drug
representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. A
priority review designation is intended to direct overall attention and resources to the evaluation of such applications, and to
shorten the FDA’s goal for taking action on the NDA from ten months to six months from FDA filing of the NDA. After the
FDA evaluates the NDA and conducts inspections of manufacturing facilities where the drug product and/or its API will be
produced, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing
of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the
review cycle of the application is complete, and the application is not ready for approval. A Complete Response Letter may
require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and
time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Even if such data and
information are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval.
Post-approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by
the FDA and other governmental agencies, including, among other things, requirements relating to recordkeeping, periodic
reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the
product. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not
maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with
a product may result in restrictions on the product or even complete withdrawal of the product from the market. After
approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review and approval. There also are continuing, annual user fee
requirements for products and the establishments at which such products are manufactured, as well as new application fees
for certain supplemental applications. In addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing
of a product based on the results of these post-marketing programs.
Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required
to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced
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inspections by the FDA and some state agencies for compliance with GMP regulations and other laws. The FDA has
promulgated specific requirements for drug cGMPs and device cGMPs embodied in the Quality System Regulation. Changes
to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA
regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and
documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use.
Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to
maintain cGMP compliance.
Failure to comply with the applicable U.S. requirements at any time during the product development process or
approval process, or after approval, may subject us to administrative or judicial sanctions, any of which could have a material
adverse effect on us. These sanctions could include:
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refusal to approve pending applications;
withdrawal of an approval;
imposition of a clinical hold;
warning letters;
product seizures or detention, or refusal to permit the import or export of products;
restrictions on the marketing or manufacturing of the product;
total or partial suspension of production or distribution or product recalls; or
injunctions, fines, disgorgement, or civil or criminal penalties.
The FDA strictly regulates the marketing, labeling, advertising and promotion of drug products that are placed on
the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved
label. However, companies may share truthful and not misleading information that is otherwise consistent with the product’s
FDA approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of
off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the
statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition,
FDA regulations and guidance are often issued revised or reinterpreted by the agency in ways that may significantly affect
our business and our products. It is impossible to predict whether legislative changes will be enacted, or whether FDA
regulations, guidance or interpretations will be issued or changed or what the impact of such changes, if any, may be.
Non-patent Exclusivity
The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first
applicant to obtain approval of an NDA for a new chemical entity, or NCE. A drug is an NCE if the FDA has not previously
approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of
the drug substance. If market exclusivity is granted for an NCE, during the exclusivity period, the FDA may not accept for
review or approve an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for
another version of such drug where the applicant does not own or have a legal right of reference to all the data required for
approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-
infringement to one of the patents listed with the FDA by the innovator NDA holder.
The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new
clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by
the FDA to be essential to the approval of the application, for example new indications, dosages, dosage forms or strengths of
an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and
prohibits the FDA from approving an ANDA, or a 505(b)(2) NDA submitted by another company with overlapping
conditions associated with the new clinical investigations for the three-year period. Clinical investigation exclusivity does
not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year
exclusivity will not delay the submission or approval of an NDA for the same drug. However, an applicant submitting an
NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-
controlled clinical trials necessary to demonstrate safety and effectiveness.
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Regulation Outside of the United States
In addition to regulations in the United States, we will be subject to regulations of other countries governing our
business activities, including, our clinical trials and the commercial sale and distribution of our product. Even if we obtain
FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the
United States before we can commence clinical trials in such countries and approval of the regulators of such countries or
economic areas, such as the European Union before we may market products in those countries or areas. The approval
process and requirements governing the conduct of clinical trials, product licensing and promotion, pricing and
reimbursement vary greatly by geographic region, and the time may be longer or shorter than that required for FDA approval.
In the European Economic Area, or EEA, which is composed of the 28 Member States of the European Union plus
Norway, Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing
Authorization, or MA.
There are two types of MAs:
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The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the
opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or
EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for
certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal
products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral
diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in
the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in
the interest of public health in the European Union. Under the Centralized Procedure, the maximum timeframe for
the evaluation of a marketing authorization application is 210 days (excluding clock stops, when additional written
or oral information is to be provided by the applicant in response to questions asked by the CHMP). Accelerated
evaluation might be granted by the CHMP in exceptional cases, when the authorization of a medicinal product is of
major interest from the point of view of public health and, in particular, from the viewpoint of therapeutic
innovation. Under the accelerated procedure, the standard 210 days review period is reduced to 150 days.
National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their
respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure.
Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be
recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a
National MA in any Member State at the time of application, it can be approved simultaneously in various Member
States through the Decentralized Procedure.
In the EEA, upon receiving marketing authorization, new chemical entities generally receive eight years of data
exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory authorities in
the EEA from referencing the innovator’s data to assess a generic application. During the additional two-year period of
market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but no
generic product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a product
will be considered by the EEA’s regulatory authorities to be a new chemical entity, and products may not qualify for data
exclusivity.
Other Health Care Laws
Health care providers, physicians and third-party payors in the United States and elsewhere will play a primary role
in the recommendation and prescription of ESKATA, RHOFADE and any other drug candidates for which we obtain
marketing approval. Our arrangements with third-party payors, health care professionals and customers may expose us to
broadly applicable fraud and abuse and other health care laws and regulations, including, without limitation, the federal Anti-
Kickback Statute and the federal civil False Claims Act, that may constrain the business or financial arrangements and
relationships through which we sell, market and distribute any drugs for which we obtain marketing approval. In addition, we
may be subject to transparency laws and patient privacy regulation by the federal government and by the U.S. states and
foreign jurisdictions in which we conduct our business.
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The federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug
manufacturer (or a party acting on its behalf) to knowingly and willfully, directly or indirectly, solicit, receive, offer, or pay
any remuneration that is intended to induce the referral of business, including the purchase, order, or lease of any good,
facility, item or service for which payment may be made under a federal health care program, such as Medicare or Medicaid.
The term "remuneration" has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been
interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers,
formulary managers, and beneficiaries on the other. Although there are a number of statutory exceptions and regulatory safe
harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices
that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be
subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular
applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback
Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all
its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of
an arrangement involving remuneration is to induce referrals of federal health care covered business, the Anti-Kickback
Statute has been violated. Violations of this law are punishable by up to five years in prison, and can also result in criminal
fines, civil money penalties, administrative penalties and exclusion from participation in federal health care programs.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and
Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the
Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute
or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law
that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the federal civil False Claims Act.
Federal false claims and false statement laws, including the federal civil False Claims Act, prohibits, among other
things, any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal
programs, including Medicare and Medicaid, claims for items or services, including drugs, that are false or fraudulent or not
provided as claimed. Entities can be held liable under these laws if they are deemed to "cause" the submission of false or
fraudulent claims by, for example, providing inaccurate billing or coding information to customers, promoting a product off-
label, or for providing medically unnecessary services or items. In addition, our activities relating to the sale and marketing
of our products are subject to scrutiny under this law. Penalties for the federal civil False Claims Act violations may include
up to three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false
claim, the potential for exclusion from participation in federal health care programs, and, although the federal civil False
Claims Act is a civil statute, False Claims Act violations may also implicate various federal criminal statutes. For example,
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created federal criminal statutes that
prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health
care benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a health care
benefit program, willfully obstructing a criminal investigation of a health care offense, and knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for health care benefits, items or services. Like the Anti-Kickback Statute, the
Affordable Care Act amended the intent standard for the health care fraud statute under HIPAA such that a person or entity
no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is
determined to have presented or caused to be presented a claim to a federal health program that the person knows or should
know is for an item or service that was not provided as claimed or is false or fraudulent.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply
regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to
the extent that our product is sold in a foreign country, we may be subject to similar foreign laws.
In addition, legislation imposing marketing restrictions and transparency requirements on pharmaceutical
manufacturers has been enacted at the state and federal levels. For example, the Affordable Care Act imposed, among other
things, annual reporting requirements for covered manufacturers for certain payments and other transfers of value provided to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their
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immediate family members. Failure to submit timely, accurately and completely the required information for all payments,
transfers of value and ownership or investment interests may result in civil monetary penalties for "knowing
failures." Certain states also mandate implementation of compliance programs, impose restrictions on drug manufacturer
marketing practices, require registration of certain employees engaged in marketing activities in the location, and/or require
the tracking and reporting of gifts, compensation and other remuneration to physicians.
Because we are commercializing and intend to commercialize products that are reimbursed under a federal health
care program and other governmental health care programs, we intend to continue to develop a comprehensive compliance
program that establishes internal controls to facilitate adherence to the rules and program requirements to which we will or
may become subject. Although the development and implementation of compliance programs designed to establish internal
controls and facilitate compliance can mitigate the risk of investigation, prosecution, and penalties assessed for violations of
these laws, or any other laws that may apply to us, the risks cannot be entirely eliminated. If our operations are found to be in
violation of any of such laws or any other governmental regulations, we may be subject to significant penalties, including,
without limitation, administrative, civil, and criminal penalties, damages, fines, disgorgement, contractual damages,
reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from
participation in federal and state health care programs, additional reporting requirements and oversight if we become subject
to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and
individual imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
We may also be subject to data privacy and security regulation by both the federal government and the states in
which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical
Health Act, or HITECH, and their implementing regulations, including the final omnibus rule published on January 25, 2013,
mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common
health care transactions, as well as standards relating to the privacy and security of individually identifiable health
information, which require the adoption of administrative, physical and technical safeguards to protect such information.
Among other things, HITECH makes HIPAA’s security standards directly applicable to "business associates", namely
independent contractors or agents of HIPAA covered entities that create, receive or obtain protected health information in
connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal
penalties that may be imposed against covered entities and business associates, and gave state attorneys general new
authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek
attorneys’ fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and
security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which
differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to
comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties.
Health Care Reform
In the United States, there have been and continue to be a number of significant legislative initiatives to contain
health care costs. For example, in March 2010, the Affordable Care Act was passed, which has had, and is expected to
continue to have, a significant impact on the health care industry. The Affordable Care Act was designed to expand coverage
for the uninsured and at the same time containing overall health care costs. With regard to pharmaceutical products, among
other things, the Affordable Care Act expanded and increased industry rebates for drugs covered under Medicaid programs;
addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are
calculated for drugs that are inhaled, infused, instilled, implanted or injected; extended the rebate program to individuals
enrolled in Medicaid managed care organizations; established annual fees and taxes on manufacturers of certain branded
prescription drugs; made changes to the coverage requirements under the Medicare prescription drug benefit; and established
a new Medicare Part D coverage gap discount program, in which manufacturers, as a condition for their outpatient drugs to
be covered under Medicare Part D, must agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand
drugs to eligible beneficiaries during their coverage gap period. Moreover, the Affordable Care Act provided incentives to
programs that increase the federal government’s comparative effectiveness research and implemented payment system
reforms including a national pilot program on payment bundling meant to encourage hospitals, physicians and other
providers to improve the coordination, quality and efficiency of certain health care services.
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Since its enactment there have been judicial and Congressional challenges to, as well efforts by the Trump
Administration to repeal or replace certain aspects of the Affordable Care Act. For example, since January 2017, President
Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements
mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and
replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills
affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and
Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment
imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a
year that is commonly referred to as the “individual mandate”. Additionally, on January 22, 2018, President Trump signed a
continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Affordable Care Act-
mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual
fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt
medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amended the Affordable Care
Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut
hole”. In July 2018, the Centers for Medicare & Medicaid Services, or CMS, published a final rule permitting further
collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under
the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the
method CMS uses to determine this risk adjustment. On December 14, 2018, a Texas U.S. District Court Judge ruled that the
Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of
the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as the Trump Administration and
CMS, has stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision,
subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted.
For example, in August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things,
created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The
Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for fiscal
years 2012 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes
aggregate reductions in Medicare payments to providers of 2% per fiscal year, which went into effect beginning on April 1,
2013 and, due to subsequent legislative amendments to the statute, including the BBA, will stay in effect through 2027,
unless additional Congressional action is taken. Additionally, in January 2013, the American Taxpayer Relief Act of 2012
was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, cancer
treatment centers and imaging centers. Moreover, the Drug Supply Chain Security Act imposes new obligations on
manufacturers of pharmaceutical products related to product tracking and tracing. Legislative and regulatory proposals have
been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.
More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices
for their marketed products. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted
federal and state legislation designed to, among other things, bring more transparency to product pricing, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement
methodologies for products. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019 contains
further drug price control measures that could be enacted during the 2019 budget process or in other future legislation,
including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part
B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-
income patients. Further, the Trump Administration released a “Blueprint”, or plan, to lower drug prices and reduce out of
pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating
power of certain federal health care programs, incentivize manufacturers to lower the list price of their products, and reduce
the out-of-pocket costs of drug products paid by consumers. The Department of Health and Human Services, or HHS, has
already started the process of soliciting feedback on some of these measures and, at the same time, is immediately
implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow
Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018,
CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and
biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement
the Wholesale Acquisition Cost, or list price, of that drug or biological product. On January 31, 2019, the HHS Office of
Inspector General proposed modifications to the federal Anti-Kickback Statute discount safe harbor for the
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purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will affect discounts paid
by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers working
with these organizations. While some of these and other proposed measures may require authorization through additional
legislation to become effective, Congress and the Trump Administration have both stated that they will continue to seek new
legislative and/or administrative measures to control drug costs. At the state level, legislatures have become increasingly
active in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost
disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk
purchasing.
The Affordable Care Act, as well as other federal and state health care reform measures that have been and may be
adopted in the future, could harm our future revenue. Additional legislative actions may be taken in the future which may
change current regulations, guidance and interpretations. The impact of such actions on our business, if any, cannot presently
be determined.
The Hatch Waxman Amendments to the FDC Act
Orange Book Listing
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose
claims cover the applicant’s product or a method of using the product. Upon approval of a drug, each of the patents listed in
the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence
Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential
competitors in support of approval of an ANDA or an application covered by Section 505(b)(2) of the FDCA. An ANDA
provides for marketing of a drug product that has the same active ingredients, generally in the same strengths and dosage
form, as the listed drug and has been shown through pharmacokinetic, or PK, testing to be bioequivalent to the listed drug.
Drugs approved in this way are commonly referred to as "generic equivalents" to the listed drug, and can often be substituted
by pharmacists under prescriptions written for the original listed drug. Other than the requirement for bioequivalence testing,
ANDA applicants are generally not required to conduct, or submit results of, preclinical studies or clinical tests to prove the
safety or effectiveness of their drug product. Section 505(b)(2) applications provide for marketing of a drug product that may
have the same active ingredients as the listed drug and contains full safety and effectiveness data as an NDA, but at least
some of this information comes from studies not conducted by or for the applicant. This alternate regulatory pathway enables
the applicant to rely, in part, on the FDA’s findings of safety and efficacy for an existing product, or published literature, in
support of its application. The FDA may then approve the new drug candidate for all or some of the labeled indications for
which the referenced product has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
The ANDA or Section 505(b)(2) applicant is required to certify to the FDA concerning any patents listed for the
approved product in the FDA’s Orange Book. Specifically, the applicant must certify that: (i) the required patent information
has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date
and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product.
The ANDA or Section 505(b)(2) applicant may also elect to submit a statement certifying that its proposed ANDA label does
not contain, or carves out, any language regarding a patented method of use rather than certify to such listed method of use
patent. If the applicant does not challenge the listed patents by filing a certification that the listed patent is invalid or will not
be infringed by the new product, the ANDA or Section 505(b)(2) application will not be approved until all the listed patents
claiming the referenced product have expired.
A certification that the new product will not infringe the already approved product’s listed patents, or that such
patents are invalid, is called a Paragraph IV certification. If the ANDA or Section 505(b)(2) applicant has provided a
Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and
patent holders once the ANDA or Section 505(b)(2) application has been accepted for filing by the FDA. The NDA and
patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The
filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the
FDA from approving the ANDA or Section 505(b)(2) application until the earliest of 30 months, expiration of the patent,
settlement of the lawsuit, and a decision in the infringement case that is favorable to the ANDA or Section 505(b)(2)
applicant. This prohibition is generally referred to as the 30-month stay. Thus, approval
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of an ANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the
applicant makes and the reference drug sponsor’s decision to initiate patent litigation.
The ANDA or Section 505(b)(2) application also will not be approved until any applicable non-patent exclusivity
listed in the Orange Book for the referenced product has expired.
Patent Term Extension
In the United States, after NDA approval, owners of relevant drug patents may apply for up to a five year patent
extension, which provides patent term restoration as compensation for the patent term lost during the FDA regulatory review
process for the first permitted commercial marketing of a drug product. The Drug Price Competition and Patent Term
Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration
of the patent. The allowable patent term extension is calculated as half of the drug’s testing phase, which is the time between
the IND submission becoming effective and the NDA submission, and all of the review phase, which is the time between
NDA submission and approval, up to a maximum extension of five years. The time can be shortened if the FDA determines
that the applicant did not pursue approval with due diligence. Patent extension cannot extend the remaining term of a patent
beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be
extended.
Similar provisions are available in the European Union and other foreign jurisdictions to extend the term of a patent
that covers an approved drug. For example, in Japan, it may be possible to extend the patent term for up to five years and in
the European Union, it may be possible to obtain a supplementary patent certificate that would effectively extend patent
protection for up to five years.
Coverage and Reimbursement
We do not expect third-party payors to cover and reimburse health care providers who use ESKATA on patients for
the treatment of raised SKs. Third-party payors generally do not reimburse the provider for the product used to remove non-
malignant lesions, including SK. In addition, they do not generally reimburse providers for the procedure removing such
lesions, since the procedure is considered to be cosmetic in nature, unless there is a medical need to remove the lesion such as
confirming a diagnosis with a biopsy or treating SK that are causing the patient physical discomfort. We anticipate that in
some cases, ESKATA may be used to remove SK lesions that are inflamed and causing the patient discomfort. Any reduction
in reimbursement for the procedure to remove inflamed SK may result in a higher percentage of patients needing to pay out
of pocket for treatment with ESKATA. Accordingly, the commercial success of ESKATA depends on the extent to which
patients are willing to pay out of pocket for the in-office procedure using our product. By contrast, in the case of RHOFADE,
we believe our success will depend on continued coverage and adequate reimbursement, and in the case of A-101 45%
Topical Solution for the treatment of common warts or our other drug candidates, if approved, on obtaining and maintaining
coverage and adequate reimbursement, for a prescription treatment or in the absence of coverage and adequate
reimbursement, on the extent to which patients will be willing to pay out of pocket for our prescription drug products.
Third-party payors determine which prescription drug products they will cover and establish reimbursement levels.
Reimbursement by a third-party payor may depend upon a number of factors, including: the third-party payor’s determination
that a product is safe, effective, and medically necessary; appropriate for the specific patient; cost-effective; supported by
peer-reviewed medical journals or current clinical practice guidelines; and whether there are competitive products, either
branded or generic, and the pricing of those products. Many private third-party payors, such as managed care plans, manage
access to drug products’ coverage partly to control costs for their plans, and may use drug formularies and medical policies to
limit their exposure. Obtaining and maintaining favorable reimbursement can be a time-consuming and expensive process,
and we may not be able to negotiate or continue to negotiate reimbursement or pricing terms for our products with third-party
payors at levels that are profitable to us, or at all.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party
payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine
reimbursement amounts. Accordingly, these updates could impact the demand for RHOFADE or A-101 45% Topical
Solution for the treatment of common warts or our other drug candidates, if approved. Our products may not be considered
cost effective, and government and third-party private health insurance coverage and reimbursement may not be available to
patients or sufficient to allow us to sell our products on a competitive and profitable basis. Our results of
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operations could be adversely affected by the Affordable Care Act and by other health care reforms that may be enacted or
adopted in the future. In addition, increasing emphasis on managed care in the United States will continue to put pressure on
the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we or any potential partners
could receive for any of our products and could adversely affect our profitability.
Foreign governments also have their own health care reimbursement systems, which vary significantly by country
and region, and we cannot be sure that coverage and adequate reimbursement will be made available with respect to our
products under any foreign reimbursement system. In some foreign countries, including major markets in the European
Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take up to 12 months or longer after the receipt of regulatory marketing
approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a
pharmacoeconomic study that compares the cost-effectiveness of our product to other available therapies. Such
pharmacoeconomic studies can be costly and the results uncertain. Our business could be harmed if reimbursement of our
products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.
Employees
As of December 31, 2018, we had 169 full-time and part-time employees. All of our employees are located in the
United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We
consider our relationship with our employees to be good.
Corporate Information
We were incorporated under the laws of the State of Delaware in July 2012. Our principal executive offices are
located at 640 Lee Road, Suite 200, Wayne, PA 19087. Our telephone number is (484) 324-7933. We completed our initial
public offering in October 2015 and our common stock is listed on the Nasdaq Global Select Market under the symbol
“ACRS”.
Available Information
Our internet website address is www.aclaristx.com. In addition to the information contained in this Annual Report,
information about us can be found on our website. Our website and information included in or linked to our website are not
part of this Annual Report.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through
our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and
Exchange Commission, or SEC.
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Item 1A. Risk Factors
Our business is subject to numerous risks. You should carefully consider the following risks and all other
information contained in this Annual Report, as well as general economic and business risks, together with any other
documents we file with the SEC. If any of the following events actually occur or risks actually materialize, it could have a
material adverse effect on our business, operating results and financial condition and cause the trading price of our common
stock to decline.
Risks Related to Our Business, Our Financial Position and Capital Needs
We have incurred significant losses since our inception. We expect to incur losses over the next several years and
may never achieve or maintain profitability.
We have a limited operating history. Since inception, we have incurred significant net losses. We incurred net losses
of $132.7 million and $68.5 million for the years ended December 31, 2018 and 2017, respectively. As of December 31,
2018, we had an accumulated deficit of $292.2 million. We have financed our operations since inception primarily from sales
of our convertible preferred stock and, beginning with our initial public offering in October 2015, from public offerings and a
private placement of our common stock. We currently have two products, ESKATA and RHOFADE, that generate revenue
from product sales.
We have devoted substantially all of our financial resources and efforts to the development of our drug candidates,
including preclinical studies and clinical trials, and beginning in 2017, to the commercialization of our products. Our net
losses may fluctuate significantly from quarter to quarter and year to year. We expect to continue to incur significant
expenses and operating losses over the next several years as we:
·
·
·
·
·
·
continue to commercialize ESKATA and RHOFADE in the United States;
continue our ongoing clinical trials evaluating A-101 45% Topical Solution for the treatment of common warts and
pursue marketing approvals for A-101 45% Topical Solution and for any other drug candidates that successfully
complete clinical trials;
initiate and continue clinical trials of our other drug candidates, including ATI-501 for the treatment of AA and ATI-
502 for the treatment of AA, vitiligo, AGA and atopic dermatitis;
continue to develop our preclinical drug candidates, including ATI-450, an MK-2 inhibitor, ATI-1777, a soft-JAK
inhibitor, and our ITK inhibitors;
seek to discover and develop additional drug candidates;
continue to develop a commercialization infrastructure and scale up external manufacturing and distribution
capabilities to commercialize our products and any drug candidates for which we may obtain marketing approval;
seek to in-license or acquire additional drug candidates for other dermatological conditions;
adapt our regulatory compliance efforts to incorporate requirements applicable to marketed drugs;
·
·
· maintain, expand and protect our intellectual property portfolio;
hire additional clinical, manufacturing and scientific personnel;
·
add operational, financial and management information systems and personnel, including personnel to support our
·
drug development and commercialization efforts; and
incur additional legal, accounting, investor relations and other administrative expenses in operating as a public
company.
·
To become and remain profitable, we must succeed in commercializing our products and developing and eventually
commercializing drug candidates that generate significant revenue. This will require us to be successful in a range of
challenging activities, including completing preclinical testing and clinical trials of our drug candidates, obtaining marketing
approval, and manufacturing, marketing and selling any products and drug candidates for which we have obtained and may
obtain marketing approval, as well as discovering and developing additional drug candidates. We are only in the early stages
of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenue that is
significant enough to achieve profitability.
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For ESKATA, RHOFADE and for any drug candidates for which we are successful in obtaining marketing approval,
our revenue is and will continue to be dependent, in part, upon the size of the markets in the territories for which we gain
marketing approval, the accepted price for the product, the ability to obtain coverage and reimbursement, if any, and whether
we own the commercial rights for that territory. If the number of our addressable patients is not as significant as we estimate,
the indication approved by regulatory authorities is narrower than we expect, or the treatment population is narrowed by
competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of such drug
products, even if approved.
Because of the numerous risks and uncertainties associated with drug development, we are unable to accurately
predict the timing or amount of expenses or when, or if, we will be able to achieve profitability. If we are required by
regulatory authorities to perform studies in addition to those expected, or if there are any delays in the initiation and
completion of our clinical trials or the development of any of our drug candidates, our expenses could increase.
Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual
basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to
raise capital, expand our business, maintain our development efforts, obtain marketing approvals for our drugs, diversify our
offerings or continue our operations. A decline in the value of our company could also cause you to lose all or part of your
investment.
We will need substantial additional funding to meet our financial obligations and to pursue our business
objectives. If we are unable to raise capital when needed, we could be forced to curtail our planned operations and the
pursuit of our growth strategy.
Identifying potential drug candidates and conducting preclinical testing and clinical trials is a time-consuming,
expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results
required to obtain marketing approval and achieve product sales. We expect to continue to incur significant expenses and
operating losses over the next several years as we continue to commercialize ESKATA and RHOFADE and conduct clinical
trials of and seek marketing approval for our drug candidates. In addition, ESKATA and RHOFADE, and our drug
candidates, if approved, may not achieve commercial success. In addition, if we obtain marketing approval for A-101 45%
Topical Solution for the treatment of common warts or any other drug candidates that we develop, we expect to incur
additional significant commercialization expenses related to product sales, marketing, distribution and manufacturing. We
also expect an increase in our expenses associated with creating additional infrastructure to support our continuing operations
as a public company.
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As of December 31, 2018, we had cash, cash equivalents and marketable securities of $168.0 million. We believe
that our existing cash, cash equivalents and marketable securities as of the date of this Annual Report will enable us to fund
our operating expenses and capital expenditure requirements for a period greater than 12 months from the date of this report
based on our current operating assumptions. These assumptions may prove to be wrong, and we could use our available
capital resources sooner than we expect. Changes may occur beyond our control that would cause us to consume our
available capital before that time, including changes in and progress of our development activities, acquisitions of additional
products or drug candidates, and changes in regulation. Our future capital requirements will depend on many factors,
including:
·
·
·
·
·
·
·
·
·
·
the extent to which we in-license or acquire additional drug candidates and technologies;
the number and development requirements of the drug candidates that we may pursue;
the costs, timing and outcome of regulatory review of our drug candidates;
the scope, progress, results and costs of preclinical development, laboratory testing and conducting pre-clinical and
clinical trials for our drug candidates;
the cost of commercializing ESKATA and RHOFADE and the costs and timing of future commercialization
activities, including drug manufacturing, marketing, sales and distribution, for any of our drug candidates for which
we receive marketing approval;
the revenue received from commercial sales of ESKATA and RHOFADE and any of our drug candidates for which
we receive marketing approval;
the progress of obtaining marketing approval for ESKATA in select countries in the European Union and Norway;
our ability to establish collaborations to commercialize ESKATA and RHOFADE outside the United States;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our
intellectual property rights and defending any intellectual property-related claims; and
the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future
products or drug candidates, if any, as a result of licenses to, or partnership or collaborations with, third parties.
We expect that we will require additional capital to complete the clinical trials for and potentially commercialize A-
101 45% Topical Solution for the treatment of common warts, to complete the clinical development of ATI-501 and ATI-502,
to develop our preclinical compounds, to support our discovery efforts, and to pursue in-licenses or acquisitions of other drug
candidates. We also expect to incur significant expenses related to the commercialization of ESKATA and RHOFADE,
including product manufacturing, sales, marketing, advertising and distribution costs. In addition, in 2019 we plan to invest
in a new research facility for our drug discovery operations. 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. If we are unable to raise sufficient additional capital, we could be forced to curtail
our planned operations and the pursuit of our growth strategy.
We may not be able to generate sufficient cash to service our indebtedness, including the Loan and Security
Agreement with Oxford.
In October 2018, we entered into a loan and security agreement, or the Loan and Security Agreement, with Oxford
Finance LLC, or Oxford, pursuant to which we borrowed $30.0 million on October 31, 2018, and can draw an additional
$35.0 million until March 31, 2019. Our obligations under the Loan and Security Agreement are secured by substantially all
of our assets except for our intellectual property, and we may not encumber our intellectual property without Oxford's prior
written consent. The Loan and Security Agreement contains negative covenants restricting our activities, including
limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments
and other specified business transactions. The Loan and Security Agreement also contains specified financial covenants
related to us achieving specified minimum consolidated revenues in future periods. Our obligations under the Loan and
Security Agreement are subject to acceleration upon the occurrence of specified events of default, including a material
adverse change in our business, operations or financial or other condition. We may also enter into other debt agreements in
the future which may contain similar or more restrictive terms.
Our ability to make scheduled monthly payments or to refinance our debt obligations depends on numerous factors,
including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts
and our performance are subject to certain financial and business factors, as well as prevailing economic and competitive
conditions, some of which may be beyond our control. We cannot assure you that we will maintain a level of
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cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest
on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or
restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, or that
these actions would permit us to meet our scheduled debt service obligations. Failure to comply with the covenants and
conditions of the Loan and Security Agreement, including our failure to achieve the minimum revenue covenants, could
result in an event of default, which could result in an acceleration of amounts due under the Loan and Security Agreement.
We may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make
any accelerated payments, and Oxford could seek to enforce security interests in the collateral securing such indebtedness,
which would harm our business.
Because our long-term indebtedness bears interest at rates that fluctuate with changes in certain prevailing
short-term interest rates, we are vulnerable to interest rate increases.
Our long-term indebtedness bears interest at a fluctuating interest rate based on the London interbank offered rate
for deposits of U.S. dollars (LIBOR). LIBOR tends to fluctuate based on general interest rates, rates set by the Federal
Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic
conditions. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends
to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of
calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction
with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index,
calculated with a broad set of short-term repurchase agreements backed by treasury securities. It is not possible to predict the
effect of these changes, other reforms or the establishment of alternative reference rates in the United States or elsewhere. To
the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making
interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be
adversely affected.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to
relinquish rights to our technologies, products or drug candidates.
Until such time, if ever, as we can generate substantial revenue, we expect to finance our cash needs through a
combination of equity offerings, debt financings and license and collaboration agreements. To the extent that we raise
additional capital through the sale of equity securities or convertible debt securities, your ownership interest will be diluted,
and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common
stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or
declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing
arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams,
products or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional
funds through equity or debt financings or other arrangements with third parties when needed, we may be required to delay,
limit, reduce or terminate our drug development or future commercialization efforts or grant rights to third parties to develop
and market technologies, products or drug candidates that we would otherwise prefer to develop and market ourselves.
We have a limited operating history and a limited history of commercializing drugs, which may make it difficult
for you to evaluate the success of our business to date and to assess our future viability.
We commenced operations in 2012, and our operations to date have been largely focused on raising capital,
developing ESKATA for the treatment of raised SKs, including undertaking preclinical studies and conducting clinical trials,
and acquiring new drug candidates and related intellectual property. We launched ESKATA in the United States in May 2018
and acquired RHOFADE in November 2018. We have had limited time to demonstrate our ability to successfully
manufacture a drug on a commercial scale, or arrange for a third party to do so on our behalf, or conduct sales and marketing
activities necessary for successful commercialization of these products. Consequently, any predictions you make about our
future success or viability may not be as accurate as they could be if we had a longer operating history or
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a longer history of commercializing drugs. We may also encounter unforeseen expenses, difficulties, complications, delays
and other known or unknown factors in achieving our business objectives.
Our estimates of variable consideration related to revenue recognition from product sales are difficult to
estimate, and if our estimates differ significantly from actual product sales, we will be required to record an adjustment in
a subsequent period.
Our estimates of variable consideration related to revenue recognition from product sales are difficult to estimate as
they are based on multiple assumptions which may prove to be incorrect. For example, we pay certain third-party payors
rebates with respect to the utilization of RHOFADE which are based on contractual percentages applied to the amount of
RHOFADE prescribed to patients who are covered by the plan or the organization with which the third-party payor
contracts. We have a savings card program to provide assistance to eligible patients with out-of-pocket costs for the patient’s
usage of RHOFADE. Reductions to product sales for the savings card program are estimated based on actual and expected
program utilization. We recognize revenue from product sales at the point the customer obtains control, which generally
occurs upon delivery, and also
is
include estimates of variable consideration
recognized. Components of variable consideration include trade discounts and allowances, product returns, government
rebates, discounts and rebates, other incentives such as patient co-pay assistance, and other fee for service amounts. Our
estimates of variable consideration are based on assumptions relating to, among other things, the mix of patients who
purchase RHOFADE who are fully insured, underinsured and uninsured and the utilization of our savings card program,
rebates, discounts and other pricing concessions and fees. If our estimates of variable consideration differ significantly from
actual product sales, we will be required to record an adjustment in a subsequent period to reported product sales and
earnings.
the same period revenue
in
Our business and operations would suffer in the event of computer system failures, cyber-attacks or a deficiency
in our cyber-security.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which
we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and
electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization,
or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through
cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have
increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of
our drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical
trials could result in delays in our marketing approval efforts and significantly increase our costs to recover or reproduce the
data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or
inappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, damage
to our reputation, and the further development or commercialization of our drug candidates could be delayed.
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Risks Related to the Development of Our Drug Candidates
If we are unable to successfully develop, receive marketing approval for and commercialize our drug candidates,
or experience significant delays in doing so, our business will be harmed.
We have invested significant efforts and financial resources in the development of our drug candidates and the
identification of potential drug candidates. Our ability to generate substantial revenue from our drug candidates will depend
heavily on the successful development, marketing approval and eventual commercialization of these drug candidates. The
success of any drug candidates that we develop, including A-101 45% Topical Solution, ATI-501 and ATI-502, will depend
on several factors, including:
·
·
·
·
·
·
·
·
·
successful completion of preclinical studies and our clinical trials;
successful development of our manufacturing processes for any of our drug candidates that receive marketing
approval;
receipt of timely approvals from applicable regulatory authorities;
commercial launch of our drug candidates, if approved;
acceptance of our drug candidates, if approved, by patients, the medical community and third-party payors, and
willingness of patients to pay out of pocket for our drug candidates when third-party payor coverage and
reimbursement is limited or unavailable;
our success in educating physicians and patients about the benefits, administration and use of our drug candidates, if
approved;
the prevalence and severity of adverse events experienced with our drug candidates;
the availability, perceived advantages, cost, safety and efficacy of alternative treatments for the proposed indications
of our drug candidates;
obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity for our drug
candidates and otherwise protecting our rights in our intellectual property portfolio;
· maintaining compliance with regulatory requirements, including current good manufacturing practices, or cGMPs;
·
· maintaining a continued acceptable safety, tolerability and efficacy profile of our drugs following approval.
competing effectively with other treatment procedures; and
Whether marketing approval will be granted is unpredictable and depends upon numerous factors, including the
substantial discretion of the regulatory authorities. Our drug candidates’ success in clinical trials will not guarantee marketing
approval. If, following submission, our NDA for any drug candidate is not accepted for substantive review, or even if it is
accepted for substantive review, the FDA or other comparable foreign regulatory authorities may require that we conduct
additional studies or clinical trials, provide additional data, take additional manufacturing steps, or require other conditions
before they will reconsider or approve our application. If the FDA or other comparable foreign regulatory authorities require
additional studies, clinical trials or data, we would incur increased costs and delays in the marketing approval process, which
may require us to expend more resources than we have available. In addition, the FDA or other comparable foreign
regulatory authorities may not consider sufficient any additional required studies, clinical trials, data or information that we
perform and complete or generate, or we may decide to abandon the program.
It is possible that our drug candidates currently in development will never obtain marketing approval, even if we
expend substantial time and resources seeking such approval. If we do not achieve one or more of these factors in a timely
manner or at all, we could experience significant delays or an inability to successfully commercialize our drug candidates,
which would harm our business.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur
additional costs or experience delays in completing, or ultimately be unable to complete, the development and
commercialization of our drug candidates.
The risk of failure for our drug candidates is high. It is impossible to predict when or if any of our drug candidates
will prove effective or safe in humans or will receive marketing approval. Before obtaining regulatory approval for the sale
of any drug candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate
the safety and efficacy of our drug candidates in humans for use in the target indication. Clinical testing is expensive, difficult
to design and implement, can take many years to complete and is inherently uncertain as to outcome.
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A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical
trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily
predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and
many companies that have believed their drug candidates performed satisfactorily in preclinical studies and clinical trials
have nonetheless failed to obtain marketing approval of their drugs.
We may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent
our ability to receive marketing approval or commercialize our drug candidates, including:
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regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or
conduct a clinical trial at a prospective trial site;
we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical
trial protocols with prospective trial sites or prospective contract research organizations, or CROs, the terms of
which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
clinical trials of our drug candidates may produce negative or inconclusive results, including failure to demonstrate
statistical significance, and we may decide, or regulators may require us, to conduct additional clinical trials or
abandon drug development programs;
the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment
in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials or fail to
return for post-treatment follow-up at a higher rate than we anticipate;
our drug candidates may have undesirable side effects or other unexpected characteristics, causing us or our
investigators, regulators or institutional review boards to suspend or terminate the trials;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to
us in a timely manner, or at all;
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical
development for various reasons, including noncompliance with regulatory requirements or a finding that the
participants are being exposed to unacceptable health risks;
the cost of clinical trials of our drug candidates may be greater than we anticipate; and
the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug
candidates may be insufficient or inadequate.
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We could also encounter delays if a clinical trial is suspended or terminated by us, by the institutional review boards
of the institutions in which such trials are being conducted, by the data safety monitoring board for such trial or by the FDA
or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors,
including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection
of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical
hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in
governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience
delays in the completion of, or termination of, any clinical trial of our drug candidates, the commercial prospects of our drug
candidates will be harmed, and our ability to generate product revenues from any of these drug candidates will be delayed. In
addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate development and
approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may
harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a
delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing approval of
our drug candidates. If we are required to conduct additional clinical trials or other testing of our drug candidates beyond
those that we currently contemplate, if we are unable to successfully complete clinical trials of our drug candidates or other
testing, if the results of these trials or tests are not favorable or if there are safety concerns, we may:
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be delayed in obtaining marketing approval for our drug candidates;
not obtain marketing approval at all;
obtain marketing approval for indications or patient populations that are not as broad as intended or desired;
obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings;
be subject to additional post-marketing testing requirements; or
have the drug removed from the market after obtaining marketing approval.
Our drug development costs will also increase if we experience delays in testing or marketing approvals. We do not
know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be
completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during
which we may have the exclusive right to commercialize our drug candidates or allow our competitors to bring drugs to
market before we do and impair our ability to successfully commercialize our drug candidates.
If we experience delays or difficulties in the enrollment of subjects in clinical trials, our receipt of necessary
marketing approvals could be delayed or prevented.
Successful and timely completion of clinical trials will require that we enroll a sufficient number of subjects. Subject
enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the
patient population. Trials may be subject to delays as a result of subject enrollment taking longer than anticipated or subject
withdrawal. We may not be able to initiate or continue clinical trials for our drug candidates if we are unable to locate and
enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory
authorities outside the United States. We cannot predict how successful we will be at enrolling subjects in future clinical
trials. Subject enrollment is affected by other factors including:
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the eligibility criteria for the trial in question;
the perceived risks and benefits of the drug candidate in the trial;
the availability of drugs approved to treat the skin disease in the trial;
the efforts to facilitate timely enrollment in clinical trials;
the patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment; and
the proximity and availability of clinical trial sites for prospective patients.
Our inability to enroll a sufficient number of subjects for clinical trials would result in significant delays and could
require us or them to abandon one or more clinical trials altogether. Enrollment delays in these clinical trials may result in
increased development costs for our drug candidates, which would cause the value of our company to decline and limit our
ability to obtain additional financing. Furthermore, we rely on and expect to continue to rely on CROs and clinical
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trial sites to ensure the proper and timely conduct of our clinical trials and we will have limited influence over their
performance.
Our clinical trials may fail to demonstrate the safety and efficacy of our drug candidates, or serious adverse or
unacceptable side effects may be identified during the development of our drug candidates, which could prevent or delay
marketing approval and commercialization, increase our costs or necessitate the abandonment or limitation of the
development of some of our drug candidates.
Before obtaining marketing approvals for the commercial sale of our drug candidates, we must demonstrate through
lengthy, complex and expensive preclinical testing and clinical trials that our drug candidates are both safe and effective for
use in each target indication, and failures can occur at any stage of testing. Clinical trials often fail to demonstrate safety and
efficacy of the drug candidate studied for the target indication.
If our drug candidates are associated with side effects in clinical trials or have characteristics that are unexpected,
we may need to abandon their development or limit development to more narrow uses in which the side effects or other
characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. The FDA or an institutional
review board may also require that we suspend, discontinue, or limit our clinical trials based on safety information. Such
findings could further result in regulatory authorities failing to provide marketing authorization for our drug candidates.
Many drug candidates that initially showed promise in early stage testing have later been found to cause side effects that
prevented further development of the drug candidate.
Additionally, if we or others identify undesirable side effects caused by our drugs, a number of potentially
significant negative consequences could result, including:
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regulatory authorities may withdraw approval to market such product;
regulatory authorities may require additional warnings on the labels;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
we could be sued and held liable for harm caused to patients; and
our reputation and physician or patient acceptance of our products may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug
candidate and could significantly harm our business, results of operations and prospects.
Changes in methods of drug candidate manufacturing or formulation may result in additional costs or delay.
As drug candidates are developed through preclinical studies to late-stage clinical trials towards approval and
commercialization, it is common that various aspects of the development program, such as manufacturing methods and
formulation, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they
will not achieve these intended objectives, and may also require additional testing, FDA notification or FDA approval. Any
of these changes could cause our drug candidates to perform differently and affect the results of planned clinical trials or
other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the
conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of
our drug candidates and jeopardize our ability to commence sales and generate revenue.
We may not be successful in our efforts to increase our pipeline of drug candidates, including by in-licensing or
acquiring additional drug candidates for other dermatological conditions.
A key element of our strategy is to build and expand our pipeline of drug candidates. In addition, we intend to in-
license or acquire additional drug candidates for other dermatological conditions to build a fully integrated biopharmaceutical
company. We may not be able to identify or develop drug candidates that are safe, tolerable and effective. Even if we are
successful in continuing to build our pipeline, the potential drug candidates that we identify, in-license or acquire may not be
suitable for clinical development, including as a result of being shown to have harmful side effects or other characteristics
that indicate that they are unlikely to be drugs that will receive marketing approval and achieve market acceptance.
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We may expend our limited resources to pursue a particular drug candidate or indication and fail to capitalize on
drug candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and management resources, we focus on development programs and drug
candidates that we identify for specific indications. As such, we are currently primarily focused on the development of A-101
45% Topical Solution for the treatment of common warts, ATI-501 and ATI-502 for the treatment of AA and ATI-450 for the
treatment of rheumatoid arthritis. As a result, we may forego or delay pursuit of opportunities with other drug candidates or
for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to
fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future
development programs and drug candidates for specific indications may not yield any commercially viable drugs. If we do
not accurately evaluate the commercial potential or target market for a particular drug candidate, we may relinquish valuable
rights to that drug candidate through collaboration, licensing or other royalty arrangements in cases in which it would have
been more advantageous for us to retain sole development and commercialization rights to such drug candidate.
Risks Related to the Commercialization of ESKATA, RHOFADE and Our Drug Candidates
ESKATA, RHOFADE and any of our drug candidates that receive marketing approval may fail to achieve the
degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary
for commercial success.
ESKATA, RHOFADE and any of our drug candidates that receive marketing approval, may fail to gain sufficient
market acceptance by physicians, patients, third-party payors and others in the medical community. If ESKATA, RHOFADE
and our drug candidates do not achieve an adequate level of acceptance, we may not generate significant revenue and we may
not become profitable. The degree of market acceptance of ESKATA, RHOFADE and, if approved, any drug candidate, will
depend on a number of factors, including:
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the efficacy, safety and potential advantages compared to alternative treatments;
our ability to offer our products for sale at competitive prices;
the convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new treatments and of physicians to prescribe these treatments;
our ability to retain a sales force in the United States;
the strength of marketing and distribution support;
the willingness of patients to pay out of pocket for procedures using ESKATA for the treatment of raised SKs;
the availability of third-party payor coverage and adequate reimbursement;
the prevalence and severity of any side effects; and
any restrictions on the use of our products together with other medications.
We have a savings card program for RHOFADE to provide assistance to eligible patients with out-of-pocket costs
for the patient’s usage of RHOFADE. Changes to or elimination of the savings card program could adversely affect the
frequency with which health care providers prescribe RHOFADE, the availability of RHOFADE at pharmacies and the
demand for and use of RHOFADE by patients.
If we are unable to establish effective sales, marketing and distribution capabilities for ESKATA and RHOFADE,
or a drug candidate that may receive marketing approval, we may not be successful in commercializing ESKATA or
RHOFADE or those drug candidates if and when they are approved.
To achieve commercial success for ESKATA and RHOFADE and any drug candidate for which we may obtain
marketing approval, we will need to build a focused sales and marketing infrastructure to market or co-promote ESKATA and
RHOFADE and, if approved, some of our drug candidates in the United States. We have begun this process and have hired a
sales force for ESKATA and RHOFADE, but there are risks involved with establishing our own sales, marketing and
distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay
any drug launch. If the commercial launch of a drug candidate for which we recruit a sales force and establish marketing
capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred
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these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our
sales and marketing personnel. Factors that may inhibit our efforts to commercialize our drugs on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to health care providers or persuade adequate numbers of health care
providers to prescribe our products;
the lack of complementary drugs to be offered by sales personnel, which may put us at a competitive disadvantage
relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we are unable to establish our own effective sales, marketing and distribution capabilities and enter into
arrangements with third parties to perform these services, our revenue and our profitability, if any, are likely to be lower than
if we were to sell, market and distribute any drugs that we develop ourselves. In addition, we may not be successful in
entering into arrangements with third parties to sell, market and distribute our drug candidates or may be unable to do so on
terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the
necessary resources and attention to sell and market our drugs effectively. If we do not establish effective sales, marketing
and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in
commercializing our products or drug candidates.
We face substantial competition, which may result in others discovering, developing or commercializing drugs
before or more successfully than we do.
The development and commercialization of new drugs is highly competitive. We face competition with respect to
our current products, and will face competition with respect to any drug candidates that we may seek to develop or
commercialize in the future, from many different sources, including major pharmaceutical, biotechnology and specialty
pharmaceutical companies, academic institutions and governmental agencies and public and private research institutions.
With respect to ESKATA for the treatment of raised SKs, we are aware of two biopharmaceutical companies
developing drug candidates which target SK, one company that is developing a device to target SK, and another company
that currently markets a line of cosmetic products targeting skin conditions, including SK. We are also aware of early
research being conducted with Akt inhibitors as a potential treatment for SK.
With respect to RHOFADE for the treatment of persistent facial erythema (redness) due to rosacea, we are aware of
one other drug that is approved for this indication: MIRVASO (brimonidine) topical gel, 0.33%, which was approved by the
FDA in 2013, is currently marketed by Galderma Laboratories, L.P.
With respect to A-101 45% Topical Solution for the treatment of common warts, we are aware of one company that
received a CE Mark approval for an over-the-counter treatment for the non-surgical removal of warts, and four companies
developing drug candidates for the treatment of common warts. In addition, other drugs have been used off-label as
treatments for common warts.
With respect to ATI-501 and ATI-502 for the treatment of AA, we anticipate competing with sensitizing agents such
as diphencyprone, and topical, intralesional and systemic corticosteroids, which have been found to occasionally reduce
symptoms of AA. Other treatments utilized for patchy AA include anthralin and minoxidil solution. We may also compete
with companies developing chemical agents to be used in topical immunotherapies, as well as companies developing
biologics, immunosuppressive agents, laser therapy, phototherapy, other JAK inhibitors and prostaglandin analogues to treat
AA.
With respect to ATI-502 for the treatment of vitiligo, we are aware of one other company developing a topical JAK
inhibitor for the treatment of vitiligo.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs
that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than ESKATA,
RHOFADE or any other drug that we may develop. Our competitors also may obtain FDA or other regulatory approval for
their drugs more rapidly than we may obtain approval for our drug candidates, which could result in our competitors
establishing a strong market position before we are able to enter the market.
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Many of the companies against which we are competing, or against which we may compete in the future, have
significantly greater financial resources and expertise in research and development, manufacturing, preclinical and clinical
development, obtaining regulatory approvals and marketing approved drugs than we do. Mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number
of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and
retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical
trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.
We expect third-party payors generally will not cover the use of ESKATA for the treatment of raised SKs and,
accordingly, our success will be dependent upon the willingness of patients to pay out of pocket for ESKATA.
We do not expect third-party payors to cover and reimburse providers who use ESKATA on patients for the
treatment of raised SKs. Third-party payors generally do not reimburse the provider for the product used to remove non-
malignant lesions, including SK. In addition, they do not generally reimburse providers for the procedure removing such
lesions, since the procedure is considered to be cosmetic in nature, unless there is a medical need to remove the lesion such as
confirming a diagnosis with a biopsy or treating SK that are causing the patient physical discomfort. We anticipate that in
some cases, ESKATA will be used to remove SK lesions that are inflamed and causing the patient discomfort. Any reduction
in reimbursement for the procedure to remove inflamed SK may result in a higher percentage of patients needing to pay out
of pocket for ESKATA. Accordingly, the commercial success of ESKATA depends on the extent to which patients will be
willing to pay out of pocket for the in-office procedure.
The success of RHOFADE and A-101 45% Topical Solution for the treatment of common warts or our other drug
candidates, if approved, will depend significantly on coverage and adequate reimbursement or the willingness of patients
to pay for these products.
In the case of RHOFADE, we believe our success will depend on continued coverage and adequate reimbursement,
and in the case of A-101 45% Topical Solution for the treatment of common warts or our other drug candidates, if approved,
on obtaining and maintaining coverage and adequate reimbursement, for a prescription treatment or in the absence of
coverage and adequate reimbursement, on the extent to which patients will be willing to pay out of pocket for our
prescription drug products.
Third-party payors determine which prescription drug products they will cover and establish reimbursement levels.
Reimbursement by a third-party payor may depend upon a number of factors, including: the third-party payor’s determination
that a product is safe, effective, and medically necessary; appropriate for the specific patient; cost-effective; supported by
peer-reviewed medical journals or current clinical practice guidelines; and whether there are competitive products, either
branded or generic, and the pricing of those products. Many private third-party payors, such as managed care plans, manage
access to drug products’ coverage partly to control costs for their plans, and may use drug formularies and medical policies to
limit their exposure. Obtaining and maintaining favorable reimbursement can be a time-consuming and expensive process,
and we may not be able to negotiate or continue to negotiate reimbursement or pricing terms for our products with third-party
payors at levels that are profitable to us, or at all.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party
payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine
reimbursement amounts. Accordingly, these updates could impact the demand for RHOFADE or A-101 45% Topical
Solution for the treatment of common warts or our other drug candidates, if approved. Our products may not be considered
cost effective, and government and third-party private health insurance coverage and reimbursement may not be available to
patients or sufficient to allow us to sell our products on a competitive and profitable basis. Our results of operations could be
adversely affected by the Affordable Care Act and by other health care reforms that may be enacted or adopted in the
future. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of
pharmaceutical products. Cost control initiatives could decrease the price that we or any potential partners could receive for
any of our products and could adversely affect our profitability. We cannot predict how pending and future health care
legislation will impact our business, and any changes in coverage and reimbursement that further restricts coverage of our
products or drug candidates could harm our business.
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Foreign governments also have their own health care reimbursement systems, which vary significantly by country
and region, and we cannot be sure that coverage and adequate reimbursement will be made available with respect to our
products under any foreign reimbursement system. In some foreign countries, including major markets in the European
Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take up to 12 months or longer after the receipt of regulatory marketing
approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a
pharmacoeconomic study that compares the cost-effectiveness of our product to other available therapies. Such
pharmacoeconomic studies can be costly and the results uncertain. Our business could be harmed if reimbursement of our
products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization
of any of our products or drug candidates that we may develop.
We face an inherent risk of product liability exposure related to the testing of our drug candidates in human clinical
trials and an even greater risk relating to the commercialization of ESKATA and RHOFADE. If we cannot successfully
defend ourselves against claims that our drug candidates or drugs caused injuries, we will incur substantial liabilities.
Regardless of merit or eventual outcome, product liability claims may result in:
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decreased demand for our products or any drug candidates that we may develop;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigation;
substantial monetary awards paid to trial participants or patients;
loss of revenue;
reduced resources of our management to pursue our business strategy;
product recall or withdrawal from the market or labeling, marketing or promotional restrictions; and
the inability to commercialize our products or any drug candidates that we may develop.
We currently hold $10 million in product liability insurance coverage in the aggregate, with a per incident limit of
$10 million, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly
expensive. We may need to increase our insurance coverage and we may not be able to maintain insurance coverage at a
reasonable cost or in an amount adequate to satisfy any liability that may arise.
Risks Related to Our Dependence on Third Parties
We will rely on third parties to conduct our future clinical trials for drug candidates, and those third parties may
not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We engage CROs to conduct clinical trials of our drug candidates. We expect to continue to rely on third parties,
such as clinical data management organizations, medical institutions and clinical investigators, to conduct those clinical
trials. If any of our relationships with these third parties terminate, we may not be able to timely enter into arrangements with
alternative third parties or to do so on commercially reasonable terms, if at all. In addition, any third parties conducting our
clinical trials will not be our employees, and except for remedies available to us under our agreements with such third parties,
we cannot control whether or not they devote sufficient time and resources to our clinical programs. If these third parties do
not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if
the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be
able to obtain marketing approval for or successfully commercialize our drug candidates. Consequently, our results of
operations and the commercial prospects for our drug candidates would be harmed, our costs could increase substantially and
our ability to generate revenue could be delayed significantly.
Switching or adding CROs involves substantial cost and requires management time and focus. In addition, there is a
natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our
ability to meet our desired clinical development timelines. Though we intend to carefully manage our relationships with our
CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or
challenges will not have a material adverse impact on our business, financial condition and prospects.
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We rely on these parties for execution of our preclinical studies and clinical trials, and generally do not control their
activities. Our reliance on these third parties for research and development activities will reduce our control over these
activities but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our
clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA
requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording
and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post
the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes.
Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. If we or any of our CROs fail to
comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, EMA
or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our
marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority
will determine that any of our clinical trials complies with GCP regulations. In addition, our clinical trials must be conducted
with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat
clinical trials, which would delay the marketing approval process.
We also rely on other third parties to store and distribute drug supplies for the commercialization of ESKATA and
RHOFADE and for our clinical trials. Any performance failure on the part of our distributors could delay clinical
development or marketing approval of our drug candidates or commercialization of our drugs, producing additional losses
and depriving us of potential revenue.
We contract with third parties for the manufacture of commercial quantities of ESKATA and RHOFADE and for
the supply of our drug candidates for preclinical and clinical testing. This reliance on third parties increases the risk that
we will not have sufficient quantities of ESKATA, RHOFADE or our drug candidates or such quantities at an acceptable
cost, which could delay, prevent or impair our development or commercialization efforts.
We do not have any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for
the manufacture of commercial quantities of ESKATA and RHOFADE and supply of our drug candidates for preclinical and
clinical testing. For example, we have entered into an exclusive, ten-year, automatically renewable supply agreement with
PeroxyChem, a manufacturer of hydrogen peroxide, to provide the active pharmaceutical ingredient that can be used in
ESKATA for the treatment of raised SKs, a manufacturing and supply agreement with a third party for the finished dosage
form of RHOFADE, and an exclusive commercial supply agreement with James Alexander for the manufacture of the
finished dosage form of ESKATA. This reliance on third parties increases the risk that we will not have sufficient quantities
of our products or drug candidates at an acceptable cost and/or quality, which could delay, prevent or impair our ability to
timely conduct our clinical trials or our other development or commercialization efforts.
The facilities used by our contract manufacturers to manufacture our products and drug candidates must be
approved by the FDA or other regulatory authorities pursuant to inspections that will be conducted after we submit our NDA
or comparable marketing application to the FDA or other regulatory authority. We do not have control over a supplier’s or
manufacturer’s compliance with laws, regulations and applicable cGMP standards and other laws and regulations, such as
those related to environmental health and safety matters. If our contract manufacturers cannot successfully manufacture
material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able
to secure and maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability
of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a
comparable foreign regulatory authority does not approve these facilities for the manufacture of our drug candidates or if it
withdraws any such approval for our products or drug candidates in the future, we may need to find alternative
manufacturing facilities, which would significantly impact our ability to commercialize our products and to develop, obtain
regulatory approval for or market, if approved, our drug candidates.
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We may be unable to establish any agreements with future third-party manufacturers or to do so on acceptable
terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers
entails additional risks, including:
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reliance on the third party for regulatory compliance and quality assurance;
the possible breach of the manufacturing agreement by the third party;
the possible misappropriation of our proprietary information, including our trade secrets and know-how;
the possible increase in costs by our third party suppliers for the active pharmaceutical ingredients in ESKATA and
RHOFADE;
the possible increase in costs by our manufacturers for the finished dosage forms of ESKATA and RHOFADE; and
the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for
us.
Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements
outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations
could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension
or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely affect supplies of our products.
Our products and drug candidates that we may develop may compete with other products and drug candidates for
access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that
might be capable of manufacturing for us. Any performance failure on the part of our existing or future manufacturers could
delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a
second source for the components of ESKATA or RHOFADE.
If our current contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers.
We may incur added costs and delays in identifying and qualifying any such replacement.
We expect to continue to depend on third-party contract manufacturers for the foreseeable future. Our current and
anticipated future dependence upon others for the manufacture of our products and drug candidates may adversely affect our
future profit margins and our ability to commercialize any drug candidates that receive marketing approval on a timely and
competitive basis.
We may seek collaborations with third parties for the development or commercialization of our drug candidates.
If those collaborations are not successful, we may not be able to capitalize on the market potential of these drug
candidates.
We may seek third-party collaborators for the development and commercialization of our drug candidates, including
for the commercialization of any of our drug candidates that are approved for marketing outside the United States. Our likely
collaborators for any collaboration arrangements include large and mid-size pharmaceutical companies, regional and national
pharmaceutical companies and biotechnology companies. If we do enter into any such arrangements with any third parties,
we will likely have limited control over the amount and timing of resources that our collaborators dedicate to the
development or commercialization of our drug candidates. Our ability to generate revenue from these arrangements will
depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.
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Collaborations involving our drug candidates would pose the following risks to us:
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collaborators have significant discretion in determining the efforts and resources that they will apply to these
collaborations;
collaborators may not perform their obligations as expected;
collaborators may not pursue development and commercialization of any drug candidates that achieve marketing
approval or may elect not to continue or renew development or commercialization programs based on clinical trial
results, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition,
that divert resources or create competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or
abandon a drug candidate, repeat or conduct new clinical trials or require a new formulation of a drug candidate for
clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly
with our products or drug candidates if the collaborators believe that competitive products are more likely to be
successfully developed or can be commercialized under terms that are more economically attractive than ours;
drug candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their
own products or drug candidates, which may cause collaborators to cease to devote resources to the
commercialization of our drug candidates, if approved;
a collaborator with marketing and distribution rights to one or more of our drug candidates that achieve marketing
approval may not commit sufficient resources to the marketing and distribution of such drug candidates;
disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the
preferred course of development, might cause delays or termination of the research, development or
commercialization of drug candidates, might lead to additional responsibilities for us with respect to drug
candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
collaborators may not properly maintain or defend our or their intellectual property rights or may use our or their
proprietary information in such a way as to invite litigation that could jeopardize or invalidate such intellectual
property or proprietary information or expose us to potential litigation;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and
potential liability; and
collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to
raise additional capital to pursue further development or commercialization of the applicable drug candidates.
Collaboration agreements may not lead to development or commercialization of drug candidates in the most
efficient manner or at all. If a present or future collaborator of ours were to be involved in a business combination, the
continued pursuit and emphasis on our drug development or commercialization program could be delayed, diminished or
terminated.
If we are not able to establish collaborations, we may have to alter our development and commercialization plans.
Our drug development programs and the potential commercialization of our drug candidates will require substantial
additional capital. For some of our drug candidates, we may decide to collaborate with pharmaceutical and biotechnology
companies for the development and potential commercialization of those drug candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a
collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms
and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors
may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities
outside the United States, the potential market for the subject drug candidate, the costs and complexities of manufacturing
and delivering such drug candidate to patients, the potential of competing products, the existence of uncertainty with respect
to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the
challenge and industry and market conditions generally. The collaborator may also consider alternative drug candidates or
technologies for similar indications that may be available to collaborate on and whether such
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a collaboration could be more attractive than the one with us for our drug candidate. Collaborations are complex and time-
consuming to negotiate and document. In addition, there have been a significant number of recent business combinations
among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to
do so, we may have to curtail the development of such drug candidate, reduce or delay its development program or one or
more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing
activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we
elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain
additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may
not be able to further develop our drug candidates or bring them to market and generate revenue.
Our sublease could terminate if the master lease is terminated for any reason, thus terminating our rights to our
corporate headquarters.
We sublease space for our corporate headquarters. While the term of the sublease extends until October 2023, if for
any reason the master lease is terminated or expires prior to October 2023, our sublease will also automatically terminate. In
such an event, we would need to obtain a new direct lease with the master landlord or negotiate and enter into a new lease for
office space at a different location, which we may not be able to do on commercially reasonable terms, if at all.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain patent protection for our products or drug candidates, or if the scope of
the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and
drugs similar or identical to ours, and our ability to successfully commercialize our technology, products and drug
candidates may be impaired.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and
other countries with respect to our products and drug candidates. We seek to protect our proprietary position by filing patent
applications in the United States and abroad related to our products and drug candidates.
The patent prosecution process is expensive and time-consuming, however, and we may not be able to file and
prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we
will fail to identify patentable aspects of our development output before it is too late to obtain patent protection. We may not
have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents
licensed to third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent
with the best interests of our business.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex
legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign
countries may not protect our rights to the same extent as the laws of the United States or vice versa. For example, European
patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of
discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and
other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot
know with certainty whether we or our licensors were the first to make the inventions claimed in our patents or pending
patent applications, or that we or our licensors were the first to file for patent protection of such inventions. As a result, the
issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and
future patent applications may not result in patents being issued that protect our technology or drugs, in whole or in part, or
which effectively prevent others from commercializing competitive technologies and drugs. Changes in either the patent laws
or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow
the scope of our patent protection.
Moreover, we may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark
Office, or USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or
interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such
submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to
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commercialize our technology or drugs and compete directly with us, without payment to us, or result in our inability to
manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of
protection provided by our patents and patent applications that we own, or license is threatened, it could dissuade companies
from collaborating with us to license, develop or commercialize current or future drug candidates.
Even if our patent applications that we own or license issue as patents, they may not issue in a form that will provide
us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any
competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative
technologies or drugs in a non-infringing manner. For example, the patents and patent applications that we exclusively
license from Columbia University that are primarily directed to methods of treating hair loss disorders with JAK inhibitors
may not issue, have issued and or may issue with claims directed to the use of specific JAK inhibitors that we do not intend
to commercialize, or may not issue with claims directed to the use of JAK inhibitors that our competitors may commercialize.
In addition, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our
patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss
of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in
part, which could limit our ability to stop others from using or commercializing similar or identical technology and drugs, or
limit the duration of the patent protection of our technology and drugs. Our issued U.S. patents, with claims directed to
treatment of SK and acrochordons with high-concentration hydrogen peroxide of at least 23%, including ESKATA and A-101
45% Topical Solution, are scheduled to expire in 2022, and our issued U.S. patents with claims directed to high-concentration
hydrogen peroxide formulations, including ESKATA and A-101 45% Topical Solution, and methods of use and applicators
for the same are scheduled to expire in 2035. The issued U.S. patents that we exclusively license from Allergan relating to
methods of treating erythema associated with rosacea by topically administering oxymetazoline or other alpha-1
adrenoreceptor agonists, which cover the approved use of RHOFADE, expire between January 2024 and May 2028. The
issued U.S. patent that covers cream formulations of oxymetazoline, including RHOFADE, expires in December 2031. The
issued U.S. patents relating to methods of treating facial erythema associated with rosacea by topically administering once or
twice daily 1% or 1.5% oxymetazoline expire in June 2035. The patents and applications that we exclusively sublicense from
Allergan that may relate to RHOFADE expire in May 2024. Certain issued U.S. patents relating to our JAK inhibitors, ATI-
501 and ATI-502, are scheduled to expire in 2023 and additional U.S. patents, with claims specifically directed to such JAK
inhibitors, are scheduled to expire in 2030. The issued U.S. and Japanese patents that we exclusively license from Columbia
University with claims directed to the use of third party JAK inhibitors for the treatment of hair loss disorders, including AA
and AGA, and inducing hair growth, expire in 2031. We currently do not have any patents issued directed to our soft-JAK
inhibitors, but any claims that may issue would expire in 2038. Our issued U.S. patent covering our lead inhibitors of the
MK-2 signaling pathway inhibitor, expires in 2034 and other issued patents covering different MK-2 signaling pathway
inhibitors expire in 2031 and 2032. Our issued patents covering our novel inhibitors of ITK expire between 2035 and 2038.
Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents
protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patent
portfolio may not provide us with sufficient rights to exclude others from commercializing drugs similar or identical to ours.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could
be expensive, time-consuming and unsuccessful. Further, our issued patents could be found invalid or unenforceable if
challenged in court.
Competitors may infringe our issued patents or other intellectual property. Our pending applications cannot be
enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from
such applications. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be
expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert
counterclaims against us alleging that we infringe their patents or that our patents are invalid or unenforceable. Grounds for a
validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty,
obviousness, non-enablement or insufficient written description. Grounds for an unenforceability assertion could be an
allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a
misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, in post-grant
proceedings such as ex parte reexaminations, inter partes review, or post-grant review, or oppositions or similar
administrative proceedings outside the United States, in parallel with litigation or, even outside the context of litigation. The
outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the
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validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent
examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or
unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products and drug candidates.
Such a loss of patent protection would harm our business.
In such a proceeding, a court or administrative board may decide that a patent of ours is invalid or unenforceable, in
whole or in part, construe the patent's claims narrowly or refuse to stop the other party from using the technology at issue on
the grounds that our patents do not cover the technology. An adverse result in any such proceeding could put one or more of
our patents at risk of being invalidated or interpreted narrowly. We may find it impractical or undesirable to enforce our
intellectual property against some third parties. For instance, we are aware of third parties that have marketed high-
concentration hydrogen peroxide solutions over the internet for the treatment of SK and warts. These parties do not appear to
have regulatory authority, and we have not authorized them in any way to market these products. However, to date we have
refrained from seeking to enforce our intellectual property rights against these third parties due to the transient nature of their
activities.
Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to
determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require
us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be
harmed if the prevailing party does not offer us a license on commercially reasonable terms.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property
litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of
litigation.
We are aware that a third party generic pharmaceutical company completed a Phase 3 clinical trial in March 2018
evaluating the reduction in erythema in adults with moderate to severe facial erythema associated with rosacea with a 1%
oxymetazoline topical cream in comparison to an oxymetazoline reference listed drug. While conducting such a clinical trial
may not be an act of patent infringement in the United States, such a clinical trial could serve as the basis for the third party
to file an ANDA or 505(b)(2) application for a generic of RHOFADE that relies in whole or in part on studies conducted by
Allergan, which could trigger a potential patent infringement lawsuit. If we were to bring a patent infringement lawsuit
against such a third party for infringing any of the U.S. patents relating to methods of treating erythema associated with
rosacea by topically administering oxymetazoline that we exclusively license from Allergan, we may be required to join
Allergan as a party to such a lawsuit. In addition, if we were to bring a patent infringement lawsuit against a third party for
infringing certain patents that we sublicense from Allergan relating to the use of oxymetazoline for treating rosacea or
purpura by topical application, we may also be required to join Allergan and another third party as parties to such a lawsuit.
Any such lawsuit could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims or a
finding of non-infringement and the approval of a generic version of RHOFADE sooner than anticipated.
With respect to ATI-501 and ATI-502, if we do not elect to exercise our first right to do so, Rigel may enforce the
licensed patents relating to ATI-501 and ATI-502 against any infringing third party in the field of dermatology. In addition,
Rigel has the first right, but not the obligation, to enforce the licensed patents relating to ATI-501 and ATI-502 against any
infringing party outside of the field of dermatology. With respect to the licensed patents from Columbia University, Columbia
University has the first right to initiate, control and defend any proceedings related to the validity, enforceability or
infringement of the licensed patent rights and in doing so, has no obligation to assert more than one licensed patent in one
jurisdiction against a third party. With respect to the licensed patents from Columbia University, if Columbia University does
not elect to exercise its first right to do so, we may enforce the licensed patent rights relating to an infringement of the
licensed patent rights against any infringing third party.
The RHOFADE patents that we exclusively license from Allergan are subject to a cross-license agreement with a
third party, which place obligations and limitations on our ability to prosecute, maintain and enforce such patents solely
as they relate to an alpha adrenoreceptor agonist that is not oxymetazoline.
We exclusively license from Allergan a family of U.S. patents and applications relating to methods of treating
erythema associated with rosacea by topically administering oxymetazoline or other alpha-1 adrenoreceptor agonists, which
expire between January 2024 and May 2028. This patent family covers the approved use of RHOFADE. This patent family is
also subject to an exclusive license granted by Allergan to a third party, which places obligations and limitations
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on our ability to prosecute, maintain and enforce such patents solely as they relate to an alpha adrenoreceptor agonist that is
not oxymetazoline.
If we breach our license agreement with Rigel, it could compromise our development and commercialization
efforts for our JAK inhibitors ATI-501 and ATI-502.
In August 2015, we entered into an exclusive license agreement with Rigel, which grants us the rights to certain patent
rights and other intellectual property owned by them relating to the JAK inhibitors ATI-501 and ATI-502 in the field of
dermatology. If we materially breach or fail to perform any provision under this license agreement, including failure to make
payments to Rigel when due for royalties and failure to use commercially reasonable efforts to develop and commercialize a
JAK inhibitor, Rigel has the right to terminate our license, and upon the effective date of such termination, our right to
practice the licensed Rigel’s patent rights and other intellectual property would end. Any uncured, material breach under the
license agreement could result in our loss of rights to practice the patent rights and other intellectual property licensed to us
under the license agreement with Rigel.
If we breach our agreement with the Selling Stockholders of Vixen, it could compromise our development and
commercialization efforts for our JAK inhibitors.
In March 2016, we entered into a stock purchase agreement with the stockholders of Vixen, pursuant to which we
purchased all of the stock of Vixen and assumed its license agreement with Columbia University. If we fail to use
commercially reasonable efforts to develop and commercialize a JAK inhibitor for AA and a JAK inhibitor for AGA, the
license agreement with Columbia University will be transferred to the Selling Stockholders of Vixen following any adverse
resolution of any dispute relating thereto. Upon the effective date of such transfer, our right to practice the licensed
Columbia University patent rights and know-how would end.
If we breach our agreement with Columbia University, it could compromise our development and commercialization
efforts for our JAK inhibitors.
In March 2016, as part of the Vixen acquisition, we assumed a license agreement with Columbia University, which
grants us the right under certain patent rights and know-how owned by Columbia University relating to the use of JAK
inhibitors to treat hair-loss disorders. If we materially breach or fail to perform any provision under this license agreement,
including failure to make payments to Columbia University when due for royalties and failure to use commercially
reasonable efforts to develop and commercialize a licensed product, Columbia University has the right to terminate our
license, and upon the effective date of such termination, our right to practice the licensed Columbia University patent rights
and know-how would end. Any uncured, material breach under the license agreement could result in our loss of rights to
practice the patent rights and know-how licensed to us under the license agreement, and, to the extent such patent rights and
know-how relate to our JAK inhibitors, it could compromise our development and commercialization efforts for ATI-501 or
ATI-502.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our products and drug candidates in all countries throughout the world
would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less
extensive than those in the United States. For example, the use of ESKATA for the treatment of raised SKs is currently
covered by patents in the United States, Australia, India and New Zealand, but not in the European Union or other countries.
The use of A-101 45% Topical Solution for the treatment of warts is currently covered by issued patents in the United States,
Australia, India and New Zealand, but not in the European Union or other countries. A U.S. patent is issued, and patent
applications are pending in the United States, the European Union and other foreign countries directed to high-concentration
hydrogen peroxide formulations, including ESKATA and A-101 45% Topical Solution and methods of use. With respect to
RHOFADE, the family of patents and applications relating to methods of treating erythema associated with rosacea by
topically administering oxymetazoline or other alpha-1 adrenoreceptor agonists, which expire between January 2024 and
May 2028, is not filed outside of the United States. Accordingly, the patent protection for RHOFADE outside of the United
States is based upon a family of patents and applications in the United States, the European Union and other major foreign
markets that cover certain cream formulations of oxymetazoline, including RHOFADE, which expires in December 2031 and
a family of patents and applications in the United States, the European Union and other major foreign markets relating to
methods of treating facial erythema associated with rosacea by topically administering once or twice daily 1% or 1.5%
oxymetazoline, which expires in June 2035. The approved use of RHOFADE
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may also be covered by certain patents and applications in the United States, the European Union and other major foreign
markets that expire in May 2024, which we exclusively sublicense from Allergan.
Our JAK inhibitors, ATI-501 and ATI-502, are currently covered in patents and applications in the United States, the
European Union, and other major foreign markets. Additionally, U.S. and Japanese patents have issued in the patent portfolio
licensed from Columbia University, which are directed to the use of certain third party JAK inhibitors for the treatment of
hair loss disorders and applications are pending in the United States, the European Union, Japan and South Korea. In
addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state
laws in the United States. Consequently, we may not be able to prevent third parties from practicing our invention in such
countries. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop
their own products and may export otherwise infringing products to territories where we have patent protection, but
enforcement rights are not as strong as those in the United States. These products may compete with our products and drug
candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in
foreign jurisdictions. The legal systems of some countries do not favor the enforcement of patents and other intellectual
property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to
enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any
lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.
Many countries, including European Union countries, India, Japan and China, have compulsory licensing laws
under which a patent owner may be compelled under specified circumstances to grant licenses to third parties. In those
countries, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party,
which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly,
our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial
advantage from the intellectual property that we develop or license.
We may need to license intellectual property from third parties, and such licenses may not be available or may
not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to the
development of our products and drug candidates. For example, we exclusively license patents from Allergan related to the
use of alpha-1 adrenergic agonists for the treatment of erythema related to rosacea, which cover the approved use of
RHOFDADE, and we exclusively license intellectual property from Rigel in the field of dermatology related to our JAK
inhibitors, ATI-501 and ATI-502. We also exclusively license intellectual property from Columbia University related to the
use of JAK inhibitors for the treatment of hair loss disorders. It may be necessary for us to use the patented or proprietary
technology of third parties to commercialize our products and drug candidates, in which case we would be required to obtain
a license from these third parties on commercially reasonable terms, or our business could be harmed, possibly materially.
Our third-party licensors may develop JAK inhibitors, including those related to our drug candidates, outside of
the field of dermatology.
We exclusively license intellectual property from Rigel in order to develop, use, manufacture, sell and
commercialize ATI-501 and ATI-502 in the field of dermatology. Rigel has retained the rights under such intellectual
property to develop, use, manufacture, sell and commercialize ATI-501 and ATI-502 outside of the field of dermatology. If
Rigel were to commercialize such JAK inhibitors outside the field of dermatology, such a product could possibly be used off-
label for a dermatology indication, which could negatively impact sales of our drug candidates, if approved. Rigel also
retained the intellectual property rights to develop, use, manufacture, sell and commercialize other structurally similar JAK
inhibitors. If Rigel commercializes a structurally similar JAK inhibitor, such a product could directly compete with our drug
candidates, if approved.
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Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the
outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability to develop, manufacture, market and sell our products or drug
candidates and use our proprietary technologies without infringing the proprietary rights of third parties. There is
considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or
threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our drugs
and technology, including interference or derivation proceedings before the USPTO. Numerous U.S. and foreign issued
patents and pending patent applications owned by third parties exist in the fields in which we are developing our drug
candidates. Third parties may assert infringement claims against us based on existing patents or patents that may be granted
in the future.
If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from
such third party to continue developing and marketing our drugs and technology. However, we may not be able to obtain any
required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-
exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by
court order, to cease commercializing the infringing technology or drug. In addition, we could be found liable for monetary
damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of
infringement could hinder current commercialization efforts of our products or prevent us from commercializing our drug
candidates, if approved, or force us to cease some of our business operations. In the event of a successful claim of
infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful
infringement, pay royalties, redesign our infringing product or obtain one or more licenses from third parties, which may be
impossible or require substantial time and monetary expenditure. Claims that we have misappropriated the confidential
information or trade secrets of third parties could have a similar negative impact on our business.
We may be subject to claims by third parties asserting that we, our employees or our licensors have
misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees and our licensors’ employees were previously employed at other biotechnology or
pharmaceutical companies. Although we and our licensors try to ensure that our employees and our licensors’ employees do
not use the proprietary information or know-how of others in their work for us, we or our licensors may be subject to claims
that these employees, our licensors or we have used or disclosed intellectual property, including trade secrets or other
proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these
claims.
In addition, while it is our policy to require our employees and contractors who may be involved in the development
of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing
such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their
assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third
parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual
property.
If we or our licensors fail in prosecuting or defending any such claims, in addition to paying monetary damages, we
may lose valuable intellectual property rights or personnel. Even if we and our licensors are successful in prosecuting or
defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from
their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause
us to incur significant expenses, and could distract our technical and management personnel from their normal
responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim
proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our
operating losses and reduce the resources available for development activities or any future sales, marketing or distribution
activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings
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adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than
we can because of their greater financial resources. Some of our competitors are larger than we are and have substantially
greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could.
Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our
intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm
our business. In addition, the uncertainties associated with litigation could compromise our ability to raise the funds
necessary to continue our clinical trials, continue our internal research programs, or in-license needed technology or other
drug candidates. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could
compromise our ability to compete in the marketplace, including compromising our ability to raise the funds necessary to
continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into
development collaborations that would help us commercialize our drug candidates.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be
harmed.
In addition to seeking and maintaining patents for our products and drug candidates, we also rely on trade secrets,
including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We
seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have
access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers,
consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements
with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our
proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.
Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming,
and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling
to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor,
we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to
compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our
competitive position would be harmed.
The validity, scope and enforceability of any of our patents that cover ESKATA, RHOFADE, A-101 45% Topical
Solution or any of our other drug candidates can be challenged by competitors.
The likelihood that a third party will challenge our patents covering ESKATA or RHOFADE is increased because
these are marketed products. The challenge may come in the form of a patent office proceeding, such as an inter partes
review, challenging the validity of the patents or a district court proceeding, such as a paragraph IV litigation arising out of
the filing of an ANDA.
If a third party files an ANDA or 505(b)(2) application for a generic of ESKATA or RHOFADE, and relies in whole
or in part on studies conducted by or for us, the third party will be required to certify to the FDA that either: (1) there is no
patent information listed in the FDA’s Orange Book with respect to our NDA for the applicable approved drug; (2) the
patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and
approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use
or sale of the third party's generic drug. A certification that the new drug will not infringe the Orange Book-listed patents for
the applicable approved drug, or that such patents are invalid, is called a paragraph IV certification. If the third party submits
a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to us once the third
party's ANDA is accepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the notice.
The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from
approving the third party’s ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is
settled, or the court reaches a decision in the infringement lawsuit in favor of the third party. If we do not file a patent
infringement lawsuit within the required 45-day period, the third party’s ANDA will not be subject to the 30-month stay of
FDA approval. Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in
nature, may be very expensive and time-consuming, may divert our management's attention from our core business, and may
result in unfavorable results that could limit our ability to prevent third parties from competing with ESKATA or RHOFADE.
We are aware that a third party generic pharmaceutical company completed a Phase 3 clinical trial in March 2018 evaluating
the reduction in erythema in adults with moderate to severe facial erythema associated with rosacea with a 1% oxymetazoline
topical cream in comparison to an oxymetazoline reference listed drug. Such a clinical trial could serve as the basis for filing
an ANDA or 505(b)(2)
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application for a generic of RHOFADE that relies in whole or in part on studies conducted by Allergan, triggering the
potential for a paragraph IV certification and subsequent patent infringement lawsuit. Any such lawsuit could result in the
invalidation of, or render unenforceable, some or all of the relevant patent claims or a finding of non-infringement and the
approval of a generic version of RHOFADE sooner than anticipated.
If A-101 45% Topical Solution, our JAK inhibitors, or any of our other drug candidates advance through
development or is approved by the FDA, one or more third parties may challenge the current patents, or patents that may
issue in the future, within our portfolio covering these drug candidates. Any such challenge could result in the invalidation of,
or render unenforceable, some or all of the relevant patent claims or a finding of non-infringement.
If we do not obtain protection under the Hatch-Waxman Act by extending the patent term and obtaining data
exclusivity for our products and drug candidates, our business may be materially harmed.
Our commercial success will largely depend on our ability to obtain and maintain patent and other intellectual
property in the United States and other countries with respect to our proprietary technology, products, drug candidates and
our target indications. Our issued U.S. patent with claims directed to treatment of SK with ESKATA is scheduled to expire in
2022 and our issued U.S. formulation patent with claims directed to high-concentration hydrogen peroxide formulations,
including ESKATA and A-101 45% Topical Solution, and methods of use is scheduled to expire in 2035. Certain issued U.S.
patents relating to our JAK inhibitors, ATI-501 and ATI-502, are scheduled to expire in 2023 and additional U.S. patents,
with claims specifically directed to such JAK inhibitors, are scheduled to expire in 2030. The issued U.S. and Japanese
patents licensed from Columbia University relating to the use of certain third party JAK inhibitor for the treatment of hair
loss disorders, including AA and AGA, and inducing hair growth, expire in 2031. Our issued U.S. patent covering our lead
inhibitors of the MK-2 signaling pathway inhibitor, expires in 2034 and other issued patents covering different MK-2
signaling pathway inhibitors expire in 2031 and 2032. Our issued patents covering our novel inhibitors of ITK expire
between 2035 and 2038. Given the amount of time required for the development, testing and regulatory review of new drug
candidates, patents protecting our drug candidates might expire before or shortly after such candidates begin to be
commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where
we are prosecuting patents.
Depending upon the timing, duration and specifics of FDA marketing approval of our drug candidates, one or more
of our U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act for a drug candidate. The
Hatch-Waxman Act permits a patent extension term of up to five years beyond the normal expiration of the patent as
compensation for patent term lost during development and the FDA regulatory review process, which is limited to the
approved indication (or any additional indications approved during the period of extension). However, the total patent term
including the period of extension cannot exceed 14 years from the product’s approval date. Furthermore, this extension is
limited to only one patent per regulatory review period that covers the approved product. However, the applicable authorities,
including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not
agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may
grant more limited extensions than we request. We may not be granted an extension because of, for example, failing to apply
within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable
requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request.
We believe that ESKATA is eligible for patent term extension and we have filed an application with the USPTO requesting
patent term extension for one patent that covers ESKATA; however, the USPTO and/or the FDA may disagree with our
interpretation.
If we are unable to extend the expiration date of our existing patents or obtain new patents with longer expiry dates,
our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical
and preclinical data to obtain approval of competing products following our patent expiration and launch their product earlier
than might otherwise be the case. For example, even if we obtain new chemical entity, or NCE, exclusivity for ESKATA, we
could be subject to generic competition as early as the end of the applicable exclusivity period, if our patent portfolio does
not have sufficient term or scope to prevent such generic competition.
Any trademarks we have obtained or may obtain may be infringed or successfully challenged, resulting in harm
to our business.
We expect to rely on trademarks as one means to distinguish any of our products that are approved for marketing
from the products of our competitors. Once we select new trademarks and apply to register them, our trademark
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applications may not be approved. Third parties may oppose or attempt to cancel our trademark applications or trademarks,
or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be
forced to rebrand our drugs, which could result in loss of brand recognition and could require us to devote resources to
advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate
resources to enforce our trademarks.
Outside of the United States we cannot be certain that any country’s patent or trademark office will not
implement new rules that could seriously affect how we draft, file, prosecute and maintain patents, trademarks and patent
and trademark applications.
We cannot be certain that the patent or trademark offices of countries outside the United States will not implement
new rules that increase costs for drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark
applications or that any such new rules will not restrict our ability to file for patent protection. For example, we may elect not
to seek patent protection in some jurisdictions or for some products or drug candidates in order to save costs. We may be
forced to abandon or return the rights to specific patents due to a lack of financial resources.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property
rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The
following examples are illustrative:
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others may be able to make formulations or compositions that are the same as or similar to ESKATA, RHOFADE
and A-101 45% Topical Solution but that are not covered by the claims of the patents that we own;
others may be able to make a JAK inhibitor that is similar to the JAK inhibitors we intend to commercialize that is
not covered by the patents that we exclusively license and have the right to enforce;
we, our licensors or any collaborators might not have been the first to make the inventions covered by the issued
patents or pending patent applications that we own;
we, our licensors or any collaborators might not have been the first to file patent applications covering certain of our
inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without
infringing our intellectual property rights;
it is possible that our pending patent applications will not lead to issued patents;
issued patents that we own or exclusively license may not provide us with any competitive advantages, or may be
held invalid or unenforceable as a result of legal challenges;
our competitors might conduct research and development activities in the United States and other countries that
provide a safe harbor from patent infringement claims for certain research and development activities, as well as in
countries where we do not have patent rights, and then use the information learned from such activities to develop
competitive products for sale in our major commercial markets; and
we may not develop additional proprietary technologies that are patentable.
Risks Related to Regulatory Approval of Our Drug Candidates and Other Legal Compliance Matters
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able
to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.
Our drug candidates and the activities associated with their development and commercialization, including their
design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and
distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by
the European Commission and EU Member State Competent Authorities and similar regulatory authorities outside the United
States. Failure to obtain marketing approval for a drug candidate will prevent us from commercializing the drug candidate.
Other than the approval of ESKATA in the United States, Sweden, United Kingdom, Iceland and Belgium, we have not
received approval to market any of our drug candidates from regulatory authorities in any jurisdiction. We have only limited
experience in filing and supporting the applications necessary to gain marketing approvals. Securing marketing approval
requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for
each therapeutic indication to establish the drug candidate’s safety and efficacy. Securing
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marketing approval also requires the submission of information about the drug manufacturing process to, and inspection of
manufacturing facilities by, the regulatory authorities. Our drug candidates may not be effective, may be only moderately
effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our
obtaining marketing approval or prevent or limit commercial use. If any of our drug candidates receive marketing approval,
the accompanying label may limit the approved use of our drug in this way, which could limit sales of the drug.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive and may take
many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a
variety of factors, including the type, complexity and novelty of the drug candidates involved. Changes in marketing
approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes
in regulatory review for each submitted drug application, may cause delays in the approval or rejection of an application.
Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may
decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition,
varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing
approval of a drug candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-
approval commitments that render the approved drug not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of our drug candidates, the commercial
prospects for our drug candidates may be harmed and our ability to generate revenue will be materially impaired.
Failure to obtain marketing approval in international jurisdictions would prevent our drug candidates from
being marketed abroad.
In order to market and sell our drugs in the European Union and any other jurisdictions, we must obtain separate
marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among
countries and can involve additional testing. The time required to obtain approval may differ substantially from that required
to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks
associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the drug
be approved for reimbursement before the drug can be approved for sale in that country. We may not obtain approvals from
regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by
regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States
does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, failure to
obtain approval in one jurisdiction may impact our ability to obtain approval elsewhere. We may not be able to file for
marketing approvals and may not receive necessary approvals to commercialize our drug candidates in any market.
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A variety of risks associated with marketing our drug candidates internationally could harm our business.
We are seeking marketing approval for ESKATA outside of the United States, and we may also seek marketing
approval for RHOFADE or our drug candidates currently in development and, accordingly, we expect that we will be subject
to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:
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differing regulatory requirements in foreign countries;
the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher
local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;
unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
foreign reimbursement, pricing and insurance regimes;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other
obligations incident to doing business in another country;
difficulties staffing and managing foreign operations;
workforce uncertainty in countries where labor unrest is more common than in the United States;
potential liability under the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, or comparable
foreign regulations;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not
respect and protect intellectual property rights to the same extent as the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
logistical challenges resulting from distributing ESKATA, RHOFADE or our drug candidates to foreign countries;
and
business interruptions resulting from geo-political actions, including war and terrorism.
These and other risks associated with our international operations may compromise our ability to achieve or
maintain profitability.
ESKATA, RHOFADE or any drug candidate for which we obtain marketing approval, could be subject to post-
marketing restrictions or recall or withdrawal from the market, and we may be subject to penalties if we fail to comply
with regulatory requirements or if we experience unanticipated problems with our drug candidates, when and if any of
them are approved.
ESKATA, RHOFADE or any drug candidate for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data, labeling, advertising and promotional activities for such drug candidate, will be subject
to continual requirements of and review by the FDA and other regulatory authorities. These requirements include
submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP
requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and
documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval
of a drug candidate is granted, the approval may be subject to limitations on the indicated uses for which the drug candidate
may be marketed or to the conditions of approval, including the requirement to implement a risk evaluation and mitigation
strategy. If any of our drug candidates receives marketing approval, the accompanying label may limit the approved use of
our drug, which could limit sales of the drug.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to
monitor the safety or efficacy of the drug. The FDA closely regulates the post-approval marketing and promotion of drugs to
ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling.
The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market
our drugs for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the
FDCA relating to the promotion of prescription drugs may lead to investigations alleging violations of federal and state
health care fraud and abuse laws, as well as state consumer protection laws.
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In addition, later discovery of previously unknown adverse events or other problems with our drugs, manufacturers
or manufacturing processes, or failure to comply with regulatory requirements, may have negative consequences, including:
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restrictions on such drugs, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a drug;
restrictions on drug distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning letters;
recall or withdrawal of the drugs from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
clinical holds;
fines, restitution or disgorgement of profits or revenue;
suspension or withdrawal of marketing approvals;
refusal to permit the import or export of our drugs;
drug seizure; or
injunctions or the imposition of civil or criminal penalties.
Non-compliance with the European Union’s requirements regarding safety monitoring or pharmacovigilance, and
with requirements related to the development of drugs for the pediatric population, can also result in significant financial
penalties. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal
information can also lead to significant penalties and sanctions.
Our relationships with third-party payors, health care professionals and customers in the United States and
elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician
payment transparency, health information privacy and security and other health care laws and regulations, which could
expose us to significant penalties.
Health care providers, physicians and third-party payors in the United States and elsewhere will play a primary role
in the recommendation and prescription of any of our drugs and drug candidates for which we obtain marketing approval.
Our arrangements with third-party payors, health care professionals and customers may expose us to broadly applicable fraud
and abuse and other health care laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the
federal civil False Claims Act, that may constrain the business or financial arrangements and relationships through which we
sell, market and distribute any drugs for which we obtain marketing approval. In addition, we may be subject to transparency
laws and patient privacy regulation by the federal government and by the U.S. states and foreign jurisdictions in which we
conduct our business. The applicable federal, state and foreign health care laws and regulations that may affect our ability to
operate include the following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and
willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce
or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any
good or service, for which payment may be made under federal and state health care programs such as Medicare and
Medicaid. Further, several courts have interpreted the statute’s intent requirement to mean that if any one purpose of
an arrangement involving remuneration is to induce referrals of federal health care covered business, the Anti-
Kickback Statute has been violated. The intent standard was further amended by the Affordable Care Act, to a
stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation. Moreover, the government may assert that a claim
including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the False Claims Act;
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federal civil and criminal false claims laws, including, without limitation, the federal civil False Claims Act (that
can be enforced through civil whistleblower or qui tam actions), and the civil monetary penalties law, which impose
criminal and civil penalties, against individuals or entities for knowingly presenting, or causing to be presented, to
the federal government, including the Medicare and Medicaid programs, claims for payment that are false or
fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal
government;
HIPAA, which imposes criminal and civil liability for, among other things, executing a scheme to defraud any health
care benefit program or making false statements relating to health care matters. Similar to the federal Anti-Kickback
Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to
have committed a violation;
HIPAA, as amended by HITECH, and their respective implementing regulations, which impose obligations on
covered health care providers, health plans, and health care clearinghouses, as well as their business associates that
create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity,
with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
the federal Open Payments program, created under Section 6002 of the Affordable Care Act (commonly known as
the Physician Payments Sunshine Act) and its implementing regulations, which requires specified manufacturers of
drugs, devices, biologics or medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program, with specific exceptions, to report annually to the CMS information related to
payments or other “transfers of value” made to physicians, which is defined to include doctors, dentists,
optometrists, podiatrists and chiropractors, and teaching hospitals, as well as applicable manufacturers to report
annually to CMS ownership and investment interests held by physicians and their immediate family members. All
such reported information is publicly available; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may
apply to sales or marketing arrangements and claims involving health care items or services reimbursed by non-
governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to
health care providers; state, local and foreign laws that require drug manufacturers to report information related to
payments and other transfers of value to physicians and other health care providers or marketing expenditures; state
laws that require drug manufacturers to report pricing information regarding certain drugs; and/or that require
registration of certain employees engaged in marketing activities in the location; and state and foreign laws
governing the privacy and security of health information in certain circumstances, many of which differ from each
other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable health care laws and
regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business
practices, including our relationships with physicians and other health care providers, some of whom may recommend,
purchase and/or prescribe our products, may not comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other health care laws and regulations. By way of example, some of our consulting
arrangements with physicians may not meet all of the criteria of the personal services safe harbor under the federal Anti-
Kickback Statute. Accordingly, they may not qualify for safe harbor protection from government prosecution. A business
arrangement that does not substantially comply with a safe harbor, however, is not necessarily illegal under the Anti-
Kickback Statute, but may be subject to additional scrutiny by the government.
If our operations are found to be in violation of any of these laws or any other governmental regulations that may
apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation,
damages, fines, disgorgement, individual imprisonment, exclusion from participation in government health care programs,
such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity
agreement or similar agreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring
of our operations, which could have a material adverse effect on our business. If any of the physicians or other health care
providers or entities with whom we expect to do business is found not to be in compliance with applicable
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laws, it may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government
health care programs, which could also materially affect our business.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval
of our drug candidates and commercialize our products and drug candidates, if approved, and affect the prices we may
obtain.
In the United States, and some foreign jurisdictions, there have been a number of legislative and regulatory changes
and proposed changes regarding the health care system that could prevent or delay marketing approval of our drug
candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any products or drug candidates
for which we obtain marketing approval.
Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting
changes in health care systems with the stated goals of containing health care costs, improving quality and/or expanding
access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been
significantly affected by major legislative initiatives. The Affordable Care Act, which was signed into law in March 2010, is
a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of health care spending,
enhance remedies against fraud and abuse, add new transparency requirements for the health care and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms.
Among the provisions of the Affordable Care Act of importance to our products and potential drug candidates are
the following:
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an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and
biologic agents, apportioned among these entities according to their market share in certain government health care
programs;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to
23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;
expansion of health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, which
include, among other things, new government investigative powers and enhanced penalties for non-compliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-
sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap
period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;
extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in
Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid
coverage to additional individuals, thereby potentially increasing manufacturers’ Medicaid rebate liability;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
the new requirements under the federal Open Payments program and its implementing regulations;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative
clinical effectiveness research, along with funding for such research.
Since its enactment there have been judicial and Congressional challenges to, as well efforts by the Trump
Administration to repeal or replace certain aspects of the Affordable Care Act. As a result, there have been delays in the
implementation of, and action taken to repeal or replace, certain aspects of the Affordable Care Act. For example, since
January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen
certain requirements mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would
repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal
legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law.
The Tax Cuts and Jobs Act of 2017 includes a provision that repealed, effective January 1, 2019, the tax-based shared
responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health
coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January
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22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the
implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost
employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market
share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the
BBA, among other things, amended the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most
Medicare drug plans, commonly referred to as the “donut hole”. In July 2018, CMS published a final rule permitting further
collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under
the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the
method CMS uses to determine this risk adjustment. On December 14, 2018, a Texas U.S. District Court Judge ruled that the
Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of
the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as the Trump Administration and
CMS, has stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision,
subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act. We
continue to evaluate the impact of the Affordable Care Act and efforts to repeal or replace the Affordable Care Act on our
business.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted.
These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year that became effective
on April 1, 2013 and, due to subsequent legislative amendments to the statute, including the BBA, will stay in effect through
2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, which was signed into law
in January 2013, among other things, further reduced Medicare payments to several providers, and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years. Any similar new laws
may result in additional reductions in Medicare and other health care funding, which could have a material adverse effect on
customers for ESKATA and RHOFADE and, if approved, our drug candidates, and, accordingly, our financial operations.
We expect that the Affordable Care Act, as well as other health care reform measures that may be adopted in the
future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any
approved drug. Any reduction in reimbursement from Medicare or other government programs may result in a similar
reduction in payments from private payors. The implementation of cost containment measures or other health care reforms
may prevent us from being able to generate revenue, attain profitability, or commercialize our drugs.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and
promotional activities for drugs. In addition, there has been heightened governmental scrutiny in the United States of
pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in
several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs,
and reform government program reimbursement methodologies for drugs. At the federal level, the Trump Administration’s
budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019
budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate
the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to
eliminate cost sharing for generic drugs for low-income patients. Further, the Trump Administration released a “Blueprint”,
or plan, to lower drug prices and reduce out-of-pocket costs of drugs that contains additional proposals to increase drug
manufacturer competition, increase the negotiating power of certain federal health care programs, incentivize manufacturers
to lower the list price of their drugs, and reduce the out of pocket costs of drug products paid by consumers. HHS has already
started the process of soliciting feedback on some of these measures and, at the same time, is immediately implementing
others under its existing authority. For example, in September 2018, CMS announced that it will allow Medicare Advantage
plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new
rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which
payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost,
or list price, of that drug or biological product. On January 31, 2019, the HHS Office of Inspector General proposed
modifications to the federal Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products
to consumers which, among other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans,
Medicaid managed care organizations and pharmacy benefit managers working with these organizations. While some of
these and other proposed measures may require authorization through additional legislation to become effective, Congress
and the Trump Administration have both stated that they will continue to seek new legislative and/or administrative measures
to control drug costs. At the state level,
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legislatures have become increasingly active in passing legislation and implementing regulations designed to control
pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on
certain drug access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage
importation from other countries and bulk purchasing We cannot be sure whether additional legislative changes will be
enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on
the marketing approvals of our drug candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the
FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent drug
labeling and post-marketing testing and other requirements.
If ESKATA is not granted NCE exclusivity from the FDA, our period of marketing exclusivity for ESKATA will
be shorter than previously anticipated, and our business could be harmed.
Under the FDCA, as amended by the Hatch-Waxman Act, a drug that is granted regulatory approval may be eligible
for five years of marketing exclusivity in the United States following regulatory approval if that drug is classified as an
NCE. A drug can be classified as an NCE if the FDA has not previously approved any other drug containing the same active
moiety.
The FDA published a determination on the marketing exclusivity of ESKATA in a cumulative supplement to its
Orange Book and determined that ESKATA is eligible for a three-year period of exclusivity for a new product, which would
continue until December 14, 2020, rather than the five-year exclusivity for an NCE. While we believe we are entitled to an
NCE determination for ESKATA, to date the FDA has not agreed with our position. Although we have appealed the FDA’s
decision, there can be no assurance that ESKATA will be granted NCE exclusivity, or that the FDA will make a
determination on such appeal of their exclusivity decision in a timely manner.
NCE marketing exclusivity, if granted, would preclude approval during the five-year exclusivity period of certain
505(b)(2) applications or ANDAs that rely upon the FDA’s findings of safety and efficacy for ESKATA. However, such an
application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. In this
case, we may be afforded the benefit of a 30-month stay against the launch of such a competitive product that would extend
from the end of the five-year exclusivity period, and may also be afforded other extensions under applicable regulations,
including a judicial extension if applicable requirements are met. If we are not able to gain or exploit the period of marketing
exclusivity, we may face significant competitive threats from other manufacturers, including the manufacturers of generic
alternatives. Further, even if ESKATA is considered to be an NCE and we are able to gain five-year marketing exclusivity,
another company could challenge that decision to seek to overturn the FDA’s determination.
ESKATA has been granted three years of new product exclusivity under the Hatch-Waxman Amendments. A three-
year period of exclusivity is granted under the Hatch-Waxman Amendments for a drug product that contains an active moiety
that has been previously approved when the application contains reports of new clinical investigations (other than
bioavailability studies) conducted by the sponsor that were essential to approval of the application. Our clinical trials of
ESKATA were new clinical investigations that were essential to the approval of our NDA. We are entitled to at least three-
year exclusivity even if the FDA determines that the hydrogen peroxide moiety was previously approved because our clinical
investigations were essential for the approval of our new drug product, ESKATA.
Such three-year exclusivity protection precludes the FDA from approving a marketing application for 505(b)(2)
NDA or ANDA for the same conditions of approval as ESKATA for a period of three years from the date of ESKATA’s FDA
approval, i.e., through December 14, 2020 although the FDA may accept and commence review of such applications during
the exclusivity period. This three-year form of exclusivity may also not prevent the FDA from approving an NDA that relies
only on its own data to support the change or innovation. Any loss of exclusive marketing rights for ESKATA through
introduction of generic or competing products would harm our financial position.
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Governments outside the United States tend to impose strict price controls, which may adversely affect our
revenue, if any.
In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a drug. To obtain coverage and reimbursement or pricing approval in some
countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidate to other
available procedures. If reimbursement of our drugs is unavailable or limited in scope or amount, or if pricing is set at
unsatisfactory levels, our business could be harmed, possibly materially.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines
or penalties or incur costs that could harm our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing
laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our
operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our
operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials
and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or
injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability
could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for
failure to comply with such laws and regulations.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to
injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage
against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted
against us in connection with our storage or disposal of biological, hazardous or radioactive materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and
safety laws and regulations. These current or future laws and regulations may impair our development or production efforts.
Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
The inherent dangers in production and transportation of hydrogen peroxide could cause disruptions and could
expose us to potentially significant losses, costs or liabilities.
Our operations are subject to significant hazards and risks inherent in the use and transport of hydrogen peroxide,
the active ingredient of ESKATA and A-101 45% Topical Solution. Hydrogen peroxide can decompose in the presence of
organic materials and is categorized as an oxidizer and is corrosive. Hydrogen peroxide should be stored in cool, dry, well-
ventilated areas and away from any flammable or combustible substances. The hazards and risks associated with producing
and transporting hydrogen peroxide include fires, explosions, third-party interference (including terrorism) and mechanical
failure of equipment at our facilities or those of our supplier of hydrogen peroxide. The occurrence of any of these events
could result in production and distribution difficulties and disruptions, personal injury or wrongful death claims and other
damage to properties.
We are subject to governmental economic sanctions and export and import controls that could impair our ability
to compete in international markets or subject us to liability if we are not in compliance with applicable laws.
As a U.S. company, we are subject to U.S. import and export controls and economic sanctions laws and regulations,
and we are required to import and export our products and drug candidates, technology and services in compliance with those
laws and regulations, including the U.S. Export Administration Regulations, the International Traffic in Arms Regulations,
and economic embargo and trade sanction programs administered by the Treasury Department’s Office of Foreign Assets
Control.
U.S. economic sanctions and export control laws and regulations prohibit the shipment of certain products and
services to countries, governments and persons targeted by U.S. sanctions. While we are currently taking precautions to
prevent doing any business, directly or indirectly, with countries, governments and persons targeted by U.S. sanctions and
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to ensure that our products and drug candidates, are not exported or used by countries, governments and persons targeted by
U.S. sanctions, such measures may be circumvented.
Furthermore, if we export our products or drug candidates, the exports may require authorizations, including a
license, a license exception or other appropriate government authorization. Complying with export control and sanctions
regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Failure to
comply with export control and sanctions regulations for a particular sale may expose us to government investigations and
penalties.
If we are found to be in violation of U.S. sanctions or import or export control laws, it could result in civil and
criminal, monetary and non-monetary penalties, including possible incarceration for those individuals responsible for the
violations, the loss of export or import privileges and reputational harm.
We are subject to anti-corruption and anti-money laundering laws with respect to our operations and non-
compliance with such laws can subject us to criminal and/or civil liability and harm our business.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the
USA PATRIOT Act and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct
activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees and third-party
intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in
the public or private sector. As we commercialize our drug candidates and eventually commence international sales and
business, we may engage with collaborators and third-party intermediaries to sell our products abroad and to obtain necessary
permits, licenses and other regulatory approvals. We or our third-party intermediaries may have direct or indirect interactions
with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the
corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and
agents, even if we do not explicitly authorize such activities.
Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints,
investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines,
damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain
persons, the loss of export privileges, reputational harm, adverse media coverage and other collateral consequences.
Responding to any action will likely result in a materially significant diversion of management’s attention and resources and
significant defense costs and other professional fees.
Risks Related to Employee Matters and Managing Our Growth
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified
personnel.
We are highly dependent on the management, development, clinical, financial, legal and business development
expertise of Dr. Neal Walker, our Chief Executive Officer, Dr. Stuart Shanler, our Chief Scientific Officer, Dr. David Gordon,
our Chief Medical Officer, Frank Ruffo, our Chief Financial Officer, and Kamil Ali-Jackson, our Chief Legal Officer, as well
as the other members of our scientific and clinical teams. Although we have entered into employment agreements with
certain of our executive officers, each of them may currently terminate their employment with us or resign at any time. We do
not maintain “key person” insurance for any of our key executives other than for Dr. Walker.
Recruiting and retaining qualified scientific and clinical personnel and, if we progress the development of our drug
pipeline toward scaling up for commercialization, manufacturing and sales and marketing personnel, will also be critical to
our success. The loss of the services of our executive officers or other key employees could impede the achievement of our
development and commercialization objectives and seriously harm our ability to successfully implement our business
strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of
time because of the limited number of individuals in our industry with the breadth of skills and experience required to
successfully develop, gain marketing approval of and commercialize drugs. Competition to hire from this limited pool is
intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition
among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the
hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and
advisors, including scientific and clinical advisors, to assist us in formulating our
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development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and
may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we
are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
We expect to expand our development and regulatory capabilities and implement sales, marketing and
distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our
operations.
As of December 31, 2018, we had 169 full-time and part-time employees. As we progress, we expect to experience
growth in the number of our employees and the scope of our operations, particularly in the areas of drug development,
regulatory affairs, sales, marketing and distribution. To manage our anticipated future growth, we must continue to
implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and
train additional qualified personnel. Due to our limited financial resources and the limited experience of our management
team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our
operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs
and may divert our management and business development resources. Any inability to manage growth could delay the
execution of our business plans or disrupt our operations.
Our employees, independent contractors, consultants, commercial collaborators, principal investigators, CROs
and vendors may engage in misconduct or other improper activities, including non-compliance with regulatory standards
and requirements.
We are exposed to the risk that our employees, independent contractors, consultants, commercial collaborators,
principal investigators, CROs and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these
parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates
FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA,
manufacturing standards, federal and state health care laws and regulations, and laws that require the true, complete and
accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the health
care industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other
abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and
promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by these parties
could also involve the improper use of individually identifiable information, including, without limitation, information
obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We
have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or
losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in
compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of
significant civil, criminal and administrative penalties, including, without limitation, damages, fines, disgorgement,
imprisonment, exclusion from participation in government health care programs, such as Medicare and Medicaid, additional
reporting obligations and oversight if we are subject to a corporate integrity agreement or other agreement to resolve
allegations of non-compliance with these laws, and the curtailment or restructuring of our operations.
We may not realize the anticipated benefits of our acquisition of Confluence.
In August 2017, we acquired Confluence, including several preclinical drug candidates and Confluence’s contract
research services business. Acquisitions are inherently risky, and we may not realize the anticipated benefits of the
acquisition of Confluence. Specifically, we are subject to the risks that:
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we receive inadequate or unfavorable data from preclinical studies or clinical trials evaluating the acquired
preclinical drug candidates;
we fail to manage the complexities resulting from the larger combined company with distant business locations; and
we fail to maintain relationships with customers, suppliers and employees.
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If any of these events were to occur, our ability to achieve the anticipated benefits of the merger could be adversely
affected, or could reduce our future earnings or otherwise adversely affect our business and financial results and, as a result,
adversely affect the market price of our common stock.
We may not realize the anticipated benefits from our acquisition of RHOFADE.
The success of our acquisition of RHOFADE will depend, in large part, on our ability to realize operating synergies
from combining RHOFADE with our portfolio of drug candidates and ESKATA.
The failure to successfully integrate and manage the challenges presented by the integration process may result in
our failure to achieve some or all of the anticipated benefits of the acquisition. Potential difficulties that may be encountered
include the following:
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complexities associated with managing an additional commercial-stage drug;
training our sales force to market both ESKATA and RHOFADE;
current and prospective employees may experience uncertainty regarding their future roles with our company, which
might adversely affect our ability to retain, recruit and motivate key personnel;
our due diligence processes in connection with the acquisition may fail to identify significant problems, risks,
liabilities or other shortcomings or challenges associated with the RHOFADE assets, including problems, risks,
liabilities or other shortcomings or challenges with respect to intellectual property, product quality and safety and
other known and unknown liabilities; and
performance shortfalls as a result of the diversion of management’s attention caused by completing the acquisition
and integrating RHOFADE.
If any of these events were to occur, our ability to maintain relationships with customers, suppliers and employees or
our ability to achieve the anticipated benefits of the acquisition could be adversely affected, or could reduce our future
earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect the market price of
our common stock.
Risks Related to Ownership of Our Common Stock
An active trading market for our common stock may not continue to develop or be sustained.
Prior to our initial public offering in October 2015, there was no public market for our common stock. Although our
common stock is listed on The Nasdaq Global Select Market, we cannot assure you that an active trading market for our
shares will continue to develop or be sustained. If an active market for our common stock does not continue to develop or is
not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the
shares or to sell the shares at all.
The trading price of the shares of our common stock has been and is likely to continue to be volatile.
Since our initial public offering, our stock price has been and is likely to continue to be volatile. The stock market in
general and the market for biotechnology companies in particular have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell
their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by
many factors, including:
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the commencement, enrollment or results of any clinical trials we may conduct, or changes in the development
status of our drug candidates;
any delay in our regulatory filings for any of our drug candidates and any adverse development or perceived adverse
development with respect to the applicable regulatory authority’s review of such filings, including without limitation
the FDA’s issuance of a “refusal to file” letter or a request for additional information;
adverse results from, delays in or termination of clinical trials;
adverse regulatory decisions, including failure to receive marketing approval of our drug candidates;
unanticipated serious safety concerns related to the use of ESKATA, RHOFADE or any drug candidate;
changes in financial estimates by us or by any securities analysts who might cover our stock;
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conditions or trends in our industry;
changes in the structure of health care payment systems;
changes in the market valuations of similar companies;
stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the
biotechnology industry;
publication of research reports about us or our industry or positive or negative recommendations or withdrawal of
research coverage by securities analysts;
announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
investors’ general perception of our company and our business;
recruitment or departure of key personnel;
overall performance of the equity markets;
trading volume of our common stock;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to
obtain patent protection for our technologies;
significant lawsuits, including patent or stockholder litigation;
general political and economic conditions; and
other events or factors, many of which are beyond our control.
In addition, in the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology
companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against
us, could cause us to incur substantial costs and divert management’s attention and resources from our business.
If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about
us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that equity research analysts
publish about us or our business, our market and our competitors. Equity research analysts may elect not to initiate or
continue to provide research coverage of our common stock, and such lack of research coverage may adversely affect the
market price of our common stock. Even if we have equity research analyst coverage, we will not have any control over the
analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity
research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research
analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease,
which in turn could cause our stock price or trading volume to decline.
The issuance of additional stock in connection with financings, acquisitions, investments, our equity incentive
plan or otherwise will dilute all other stockholders.
Our certificate of incorporation authorizes us to issue up to 100,000,000 shares of common stock and up to
10,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors.
Subject to compliance with applicable rules and regulations, we may issue our shares of common stock or securities
convertible into our common stock from time to time in connection with a financing, acquisition, investment, our equity
incentive plan or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the
trading price of our common stock to decline.
Sales of a substantial number of shares of our common stock into the market could cause the market price of our
common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our
stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the
public market, the market price of our common stock could decline significantly.
In addition, we have filed registration statements on Form S-8 under the Securities Act registering the issuance of
shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity
incentive plans. Shares registered under these registration statements are available for sale in the public market subject to
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vesting arrangements and exercise of options, and the restrictions of Rule 144 under the Securities Act in the case of our
affiliates.
Additionally, certain holders of shares of our common stock, or their transferees, have rights, subject to some
conditions, to require us to file one or more registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares,
they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in
the public market, the trading price of our common stock could decline.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our
stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of
our common stock may be lower as a result.
There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to
acquire, or attempt to acquire, control of our company, even if a change of control was considered favorable by some or all of
our stockholders. For example, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock.
The board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without any
further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change of control
transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be
adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.
Our charter documents also contain other provisions that could have an anti-takeover effect, including:
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only one of our three classes of directors is elected each year;
stockholders are not entitled to remove directors other than by a 66 % vote and only for cause;
stockholders are not permitted to take actions by written consent;
stockholders cannot call a special meeting of stockholders; and
stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder
meetings.
2/3
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business
combinations with particular stockholders of those companies. These provisions could discourage potential acquisition
proposals and could delay or prevent a change of control transaction. They could also have the effect of discouraging others
from making tender offers for our common stock, including transactions that may be in your best interests. These provisions
may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
Concentration of ownership of our common stock among our existing executive officers, directors and principal
stockholders may prevent new investors from influencing significant corporate decisions.
Our executive officers, directors and current beneficial owners of 5% or more of our common stock and their
respective affiliates beneficially own a substantial portion of our common stock. As a result, these persons, acting together,
would be able to significantly influence all matters requiring stockholder approval, including the election and removal of
directors, any merger, consolidation, sale of all or substantially all of our assets, or other significant corporate transactions.
The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.
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We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements
applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS
Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other
public companies that are not emerging growth companies, including:
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being permitted to provide only two years of audited financial statements, in addition to any required unaudited
interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” disclosure in this report;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over
financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing
additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and
registration statements; and
not being required to hold a nonbinding advisory vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved.
We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common
stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer
an emerging growth company. We will remain an emerging growth company until the earlier of (1) December 31, 2020, (2)
the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the
fiscal year in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is
held by non-affiliates exceeds $700 million as of the prior June 30th and (4) any date on which we have issued more than
$1.0 billion in non-convertible debt during the prior three-year period.
We also qualify as a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act, and so long as we
remain a smaller reporting company, we benefit from some of the same scaled disclosure requirements.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting
standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of
this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements
on a timely basis could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and
regulations of the stock market on which our common stock is listed. The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures and internal control over financial reporting, and perform
system and process evaluation and testing of our internal control over financial reporting to allow management to report on
the effectiveness of our internal control over financial reporting. This requires that we incur substantial additional
professional fees and internal costs to expand our accounting and finance functions and that we expend significant
management efforts.
We may identify weaknesses in our system of internal financial and accounting controls and procedures that could
result in a material misstatement of our consolidated financial statements. Our internal control over financial reporting will
not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud will be detected.
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If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and
accurate financial statements, and we may conclude that our internal control over financial reporting is not effective. If that
were to happen, the market price of our stock could decline, and we could be subject to sanctions or investigations by the
stock exchange on which our common stock is listed, the SEC, or other regulatory authorities.
We might not be able to utilize a significant portion of our net operating loss carryforwards and research and
development tax credit carryforwards.
As of December 31, 2018, we had federal and state net operating loss carryforwards of $199.5 million and $212.4
million, respectively, which will begin to expire in 2032. As of December 31, 2018, we also had federal research and
development tax credit carryforwards of $4.9 million which begin to expire in 2032, and state research and development tax
credit carryforwards of $0.1 million which begin to expire in 2022. These net operating loss and tax credit carryforwards
could expire unused and be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal
Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership
change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period,
the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its
post-change income may be limited. We have completed an analysis under Section 382 for net operating loss carryforwards
generated from July 13, 2012 through December 31, 2016. Although we have experienced Section 382 ownership changes
since 2012, we have concluded that we should have sufficient ability to utilize net operating loss carryforwards accumulated
during the periods tested. We have not yet determined if a Section 382 ownership change has occurred during the year ended
December 31, 2017, or for Confluence prior to the acquisition. In addition, we may experience ownership changes in the
future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If we determine
that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is
materially limited, it would harm our future operating results by effectively increasing our future tax obligations.
The 2017 comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law which significantly revised the
Internal Revenue Code of 1986, as amended. The federal income tax legislation, among other things, contained significant
changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of
21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses),
limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating
loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination
of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and
credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the changes to the federal tax
law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain how various
states will respond to the changes in the federal tax law. The impact of this tax reform on holders of our common stock is
also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this
legislation and the potential tax consequences of investing in or holding our common stock.
We have broad discretion in the use of proceeds from our equity financing transactions and may invest or spend
the proceeds in ways with which you do not agree and in ways that may not increase the value of your investment.
We have broad discretion over the use of proceeds from our equity financing transactions over the last several years.
You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. We expect to
use the net proceeds from those transactions to conduct commercial activities for ESKATA and RHOFADE, and to fund the
continued research and development of our drug candidates, as well as for working capital and general corporate purposes.
Our failure to apply the net proceeds effectively could compromise our ability to pursue our strategy and we might not be
able to yield a significant return, if any, on our investment of these net proceeds. Stockholders will not have the opportunity
to influence our decisions on how to use these net proceeds.
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We do not anticipate paying any cash dividends on our common stock in the foreseeable future and our stock
may not appreciate in value.
We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future
earnings, if any, to fund the development and growth of our business. In addition, the terms of our current loan agreement
with Oxford prohibits us, and future debt agreements may also preclude us, from paying dividends. There is no guarantee that
shares of our common stock will appreciate in value or that the price at which our stockholders have purchased their shares
will be able to be maintained.
We will incur increased costs and demands upon management as a result of being a public company.
As a public company listed in the United States, we have begun, and will continue, particularly after we cease to be
an “emerging growth company,” to incur significant additional legal, accounting and other costs. These additional costs could
negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance
and public disclosure, including regulations implemented by the SEC and The Nasdaq Stock Market, may increase legal and
financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject
to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and
this investment may result in increased general and administrative expenses and a diversion of management’s time and
attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws,
regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business
may be harmed.
Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance,
including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of
directors or as members of senior management.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our
stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware
is the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for
breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action
asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated
certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal
affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it
finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against
us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision
contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may
incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business
and financial condition.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
We currently sublease 33,019 square feet of space for our headquarters in Wayne, Pennsylvania. Subject to the
consent of Chesterbrook Partners, LP, the Landlord, as set forth in the lease by and between them and Auxilium
Pharmaceuticals, LLC, the Sublandlord, the term of our sublease has a term through October 2023. If for any reason the
lease between the Landlord and Sublandlord is terminated or expires prior to October 2023, our sublease will automatically
terminate. We also lease 21,056 square feet of office and laboratory space in St. Louis, Missouri, which has a term of 10
years which we expect to commence by the end of the first half of 2019. Until we move to that space, we continue to occupy
3,689 square feet of office and laboratory space in St. Louis, Missouri under the terms of a short-term lease. We believe that
our facilities are suitable and adequate to meet our current needs.
Item 3. Legal Proceedings
We are not subject to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information for Common Stock
Our common stock is listed on the Nasdaq Global Select Market under the symbol “ACRS.”
Dividend Policy
We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of
our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future.
Stockholders
As of March 15, 2019, we had 41,269,643 shares of common stock outstanding held by 71 holders of record. The
actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial
owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does
not include stockholders whose shares may be held in trust by other entities.
Recent Sales of Unregistered Securities
On November 29, 2018, we issued 253,208 shares of our common stock upon the achievement of a specified
development milestone in accordance with the terms of the Confluence Agreement to former Confluence equity holders who
are “accredited investors,” as that term is defined in the Securities Act, in reliance on the exemption from registration
afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act and
corresponding provisions of state securities or “blue sky” laws. Each of the former Confluence equity holders who received
such shares of our common stock has represented that it was acquiring such shares for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution thereof. Such shares have not been registered under
the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption
from registration under the Securities Act and any applicable state securities laws.
Purchases of Equity Securities by the Issuer and Affiliated Parties
None.
Item 6. Selected Consolidated Financial Data
Not applicable.
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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. 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 “Item 1A.
Risk Factors” and “Special Note Regarding Forward‑Looking Statements.”
Overview
We are a physician-led biopharmaceutical company focused on dermatological and immuno-inflammatory
diseases. We have two commercial products and a diverse pipeline of drug candidates.
Our first commercial product, ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, is a
proprietary formulation of high-concentration hydrogen peroxide topical solution which was approved by the U.S. Food and
Drug Administration, or FDA, in December 2017 as an office-based prescription treatment for raised seborrheic keratosis, or
SK, a common non-malignant skin tumor. We launched ESKATA in the United States in May 2018. We also submitted a
Marketing Authorization Application, or MAA, for ESKATA in select countries in the European Union, Norway and Iceland
in July 2017 using a decentralized procedure. In February 2019, we received approval from the Swedish Medical Products
Agency to market ESKATA (hydrogen peroxide) cutaneous solution, 685 mg for the treatment in adults of SKs that are not
pedunculated and have up to a maximum diameter of 15 millimeters each. We have also received approval to market
ESKATA in the United Kingdom, Iceland and Belgium.
In November 2018, we acquired RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, which
includes an exclusive license to certain intellectual property for RHOFADE, as well as additional intellectual property, from
Allergan Sales, LLC, or Allergan. RHOFADE was approved by the FDA in January 2017 for the topical treatment of
persistent facial erythema (redness) associated with rosacea in adults. Persistent facial redness is the most common sign of
rosacea in most skin types.
We continue to develop our sales, marketing and product distribution capabilities for ESKATA and RHOFADE in
order to support our commercialization efforts in the United States. We plan to continue to deploy sales representatives in
approximately 50 territories in the United States which we believe will allow us to reach the health care providers in the
United States with the highest potential for prescribing ESKATA and RHOFADE to their patients.
We are also developing another high-concentration formulation of hydrogen peroxide, A-101 45% Topical Solution,
as a prescription treatment for common warts, also known as verruca vulgaris. On an annual basis, approximately 2.0 million
people in the United States are diagnosed with common warts.
Additionally, in 2015, we in-licensed exclusive, worldwide rights from Rigel Pharmaceuticals, Inc., or Rigel, to
certain inhibitors of the Janus kinase, or JAK, family of enzymes, for specified dermatological conditions, including alopecia
areata, or AA. AA is an autoimmune dermatologic condition typically characterized by patchy non-scarring hair loss on the
scalp and body. More severe forms of AA include total scalp hair loss, known as alopecia totalis, or AT, and total hair loss on
the scalp and body, known as alopecia universalis, or AU. We are also developing these JAK inhibitors for the treatment of
vitiligo, androgenetic alopecia, or AGA, also known as male or female pattern baldness, and atopic dermatitis.
In 2016, in connection with the acquisition of Vixen Pharmaceuticals, Inc., or Vixen, we acquired additional
intellectual property rights for the development and commercialization of certain JAK inhibitors for specified dermatological
conditions. We intend to continue to in-license or acquire additional drug candidates and technologies to build a fully
integrated biopharmaceutical company.
In 2017, we acquired Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.), or
Confluence. The acquisition of Confluence added small molecule drug discovery and preclinical development capabilities
that allowed us to bring early-stage research and development activities in-house that we previously outsourced to third
parties. We intend to leverage the proprietary KINect drug discovery platform to identify potential drug candidates that we
may
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develop independently or with partners. We also acquired several preclinical drug candidates, including additional topical
JAK inhibitors known as soft-JAK inhibitors, inhibitors of the MK-2 signaling pathway and inhibitors of interleukin-2-
inducible T cell kinase, or ITK. Soft-JAK inhibitors may be topically applied and active in the skin, but will be rapidly
metabolized and inactivated when they enter the bloodstream, which may result in significantly reduced systemic exposure.
We also earn revenue from Confluence’s provision of contract research services to third parties.
Since our inception, we have incurred significant operating losses. Our net loss was $132.7 million for the year
ended December 31, 2018 and $68.5 million for the year ended December 31, 2017. As of December 31, 2018, we had an
accumulated deficit of $292.2 million. We expect to incur significant expenses and operating losses related to product
manufacturing, marketing, sales and distribution over the next several years as we continue to commercialize ESKATA and
RHOFADE. In addition, ESKATA and RHOFADE, and our drug candidates if approved, may not achieve commercial
success. We also expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug
candidates from discovery through preclinical development and clinical trials. In addition, if we obtain marketing approval
for any of our drug candidates, we expect to incur significant commercialization expenses related to product manufacturing,
marketing, sales and distribution. We may also incur expenses in connection with the in-license or acquisition of additional
drug candidates. Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as
a public company, including legal, accounting, investor relations and other expenses. As a result, we will need substantial
additional funding to support our continuing operations and pursue our growth strategy.
We have historically financed our operations primarily with sales of our convertible preferred stock, as well as net
proceeds from our initial public offering, or IPO, in October 2015, subsequent public offerings, and a private placement of
our common stock. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance
our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with
other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other
agreements or arrangements when needed on commercially acceptable terms, or at all. If we fail to raise capital or enter into
such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and
commercialization of one or more of our products or drug candidates or delay our pursuit of potential in-licenses or
acquisitions.
License Agreement with Rigel
In August 2015, we entered into an exclusive, worldwide license and collaboration agreement with Rigel
Pharmaceuticals, Inc., or Rigel, for the development and commercialization of products containing two specified JAK
inhibitors, ATI-501 and ATI-502, or the Rigel License Agreement. Under this agreement, we intend to develop these JAK
inhibitors for the treatment of AA and other dermatological conditions. We paid Rigel an upfront nonrefundable payment of
$8.0 million in September 2015. In addition, we have agreed to make aggregate payments of up to $80.0 million upon the
achievement of specified pre-commercialization milestones, such as clinical trials and regulatory approvals. Further, we have
agreed to pay up to an additional $10.0 million to Rigel upon the achievement of a second set of development milestones.
With respect to any products we commercialize under the Rigel License Agreement, we will pay Rigel quarterly tiered
royalties on our annual net sales of each product at a high single digit percentage of annual net sales, subject to specified
reductions until the date that all of the patent rights for that product have expired, as determined on a country-by-country and
product-by-product basis or, in specified countries under specified circumstances, 10 years from the first commercial sale of
such product.
The Rigel License Agreement terminates on the date of expiration of all royalty obligations unless earlier terminated
by either party for a material breach. We may also terminate the Rigel License Agreement without cause at any time upon
advance written notice to Rigel. Rigel, after consultation with us, will be responsible for maintaining and prosecuting the
patent rights, and we will have final decision-making authority regarding such patent rights for a product in the United States
and the European Union. To the extent that we jointly develop intellectual property, we will confer and decide which party
will be responsible for filing, prosecuting and maintaining those patent rights. The Rigel License Agreement also establishes
a joint steering committee composed of an equal number of representatives for each party, which will monitor progress in the
development of products.
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Stock Purchase Agreement with Vixen Pharmaceuticals, Inc. and License Agreement with Columbia University
In March 2016, we entered into a stock purchase agreement, or the Vixen Agreement, with Vixen, and JAK1, LLC,
JAK2, LLC and JAK3, LLC, or together, the Selling Stockholders, and Shareholder Representative Services LLC as the
representative of the Selling Stockholders. Pursuant to the Vixen Agreement, we acquired all shares of Vixen’s capital stock
from the Selling Stockholders, or the Vixen Acquisition. Following the Vixen Acquisition, Vixen became a wholly-owned
subsidiary of us. Pursuant to the Vixen Agreement, we paid $0.6 million upfront and issued an aggregate of 159,420 shares of
our common stock to the Selling Stockholders. We are obligated to make annual payments of $0.1 million through March
2022, with such amounts being creditable against specified future payments that may be paid under the Vixen Agreement.
Under the Vixen Agreement we are obligated to make aggregate payments of up to $18.0 million to the Selling
Stockholders upon the achievement of specified pre-commercialization milestones for three products in the United States, the
European Union and Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial
milestones. With respect to any commercialized products covered by the Vixen Agreement, we are obligated to pay low
single-digit royalties on net sales, subject to specified reductions, limitations and other adjustments, until the date that all of
the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in
specified circumstances, ten years from the first commercial sale of such product. If we sublicense any of Vixen’s patent
rights and know-how acquired pursuant to the Vixen Agreement, we will be obligated to pay a portion of any consideration
we receive from such sublicenses in specified circumstances.
As a result of the Vixen Acquisition, we became party to the Exclusive License Agreement, by and between Vixen
and the Trustees of Columbia University in the City of New York, or Columbia, dated as of December 31, 2015, or, as
amended, the Columbia License Agreement. Under the Columbia License Agreement, we are obligated to pay Columbia an
annual license fee of $10,000 subject to specified adjustments for patent expenses incurred by Columbia and creditable
against any royalties that may be paid under the Columbia License Agreement. We are also obligated to pay up to an
aggregate of $11.6 million upon the achievement of specified commercial milestones, including specified levels of net sales
of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net
sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments. If we sublicense any
of Columbia’s patent rights and know-how acquired pursuant to the Columbia License Agreement, we will be obligated to
pay Columbia a portion of any consideration received from such sublicenses in specified circumstances. The royalties, as
determined on a country-by-country and product-by-product basis, are payable until the date that all of the patent rights for
that product have expired, the expiration of any market exclusivity period granted by a regulatory body or, in specified
circumstances, ten years from the first commercial sale of such product. The Columbia License Agreement terminates on the
date of expiration of all royalty obligations thereunder unless earlier terminated by either party for a material breach, subject
to a specified cure period. We may also terminate the Columbia License Agreement without cause at any time upon advance
written notice to Columbia.
Agreement and Plan of Merger with Confluence
In August 2017, we entered into an Agreement and Plan of Merger, or the Confluence Agreement, with Confluence,
Aclaris Life Sciences, Inc., our wholly-owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of the
equity holders of Confluence. Pursuant to the terms of the Confluence Agreement, the Merger Sub merged with and into
Confluence, with Confluence surviving as our wholly-owned subsidiary. We paid $10.3 million in cash and issued 349,527
shares of our common stock with a fair value of $9.7 million to the Confluence equity holders.
In November 2018, we achieved a development milestone specified in the Confluence Agreement. The milestone
payment to the former Confluence equity holders was comprised of $2.5 million in cash and 253,208 shares of our common
stock with a fair value of $2.2 million. We also agreed to pay the former Confluence equity holders aggregate additional
contingent consideration of up to $75.0 million, based upon the achievement of certain regulatory and commercial milestones
set forth in the Confluence Agreement. In addition, we have agreed to pay the former Confluence equity holders specified
future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions,
limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a
country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of
such product. In addition, if 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
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Confluence equity holders a portion of any incremental consideration (in excess of the development and milestone payments
described above) that we receive from such sale, license or transfer in specified circumstances.
License, Development and Commercialization Agreement with Cipher Pharmaceuticals Inc.
In April 2018, we entered into an exclusive license agreement with Cipher Pharmaceuticals Inc., or Cipher, for the
rights to obtain regulatory approval of and commercialize A-101 40% Topical Solution, which we market under the brand
name ESKATA in the United States, in Canada for the treatment of SK, or the Cipher License Agreement. Under the Cipher
License Agreement, Cipher is responsible for obtaining marketing approval in Canada for A-101 40% Topical Solution. We
will supply Cipher with finished product, and, if regulatory approval is obtained, Cipher will be responsible for distribution
and commercialization of A-101 40% Topical Solution in Canada. Additionally, Cipher is responsible for all expenses
related to regulatory and commercial activities for A-101 40% Topical Solution in Canada. We received an upfront payment
of $1.0 million upon signing of the Cipher License Agreement and $0.5 million upon the achievement of a specified
regulatory milestone. Pursuant to the Cipher License Agreement, we can earn a remaining payment of $0.5 million upon the
achievement of a specified regulatory milestone, and aggregate payments of $1.75 million upon the achievement of specified
commercial milestones. Cipher will also be required to pay us a low double-digit percentage royalty on net sales of A-101
40% Topical Solution in Canada. The term of the Cipher License Agreement expires on the later of the expiration of
applicable patents in Canada or the 15 anniversary of the first commercial sale of licensed product in Canada. Cipher
submitted a New Drug Submission for A-101 40% Topical Solution for the treatment of raised SKs, which was accepted for
review by Health Canada in December 2018.
th
Asset Purchase Agreement with Allergan
In November 2018, we completed the acquisition of RHOFADE, which includes an exclusive license to certain
intellectual property for RHOFADE, as well as additional intellectual property, from Allergan, pursuant to the Asset Purchase
Agreement dated as of October 15, 2018, or as amended, the Asset Purchase Agreement.
At the closing of the acquisition, we paid total cash consideration of $66.1 million, consisting of $59.6 million paid
to Allergan and $6.5 million placed in escrow. We have also agreed to pay Allergan a one-time payment of $5.0 million upon
the achievement of a specified development milestone related to the potential development of an additional dermatology
product. In addition, we have agreed to pay Allergan specified royalty payments, ranging from a mid-single digit percentage
to a mid-teen percentage of net sales, subject to specified reductions, limitations and other adjustments, on a country-by-
country basis until the date that the patent rights related to a particular product, such as RHOFADE, have expired or, if later,
November 30, 2028. In addition, we have agreed to assume the obligation to pay specified royalties and milestone payments
under agreements with Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc. Members of our management team,
including Neal Walker, Frank Ruffo, Christopher Powala and Stuart Shanler, as well as Stephen Tullman, the chairman of our
board of directors, are former stockholders of Vicept Therapeutics, Inc., and Dr. Shanler is also a current member of Aspect
Pharmaceuticals, LLC. In their capacities as current or former holders of equity interests in these entities, these individuals
may be entitled to receive a portion of the potential future payments payable by us. We incurred an aggregate expense of
approximately $0.2 million and $0 related to royalty payments under these agreements during the years ended December 31,
2018 and 2017, respectively.
RHOFADE was approved by the FDA in January 2017 for the topical treatment of persistent facial erythema
(redness) associated with rosacea in adults, and the product became commercially available in the United States in May
2017.
Other Third-Party Agreements
Under an assignment agreement, pursuant to which we acquired intellectual property, we have agreed to pay
royalties on sales of ESKATA, or other related products, at rates ranging in low single-digit percentages of net sales, as
defined in the agreement. Under this assignment agreement, we paid $0.2 million in connection with a specified
development milestone, and there are no remaining milestone payment obligations.
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In connection with the assignment agreement, we also entered into a finder’s services agreement under which we
have made aggregate milestone payments of $3.0 million upon the achievement of specified pre-commercialization
milestones, such as clinical trials and regulatory approvals, and commercial milestones as described in the agreement. We
have also agreed to make an additional payment of $3.0 million upon the achievement of a specified commercial
milestone. In addition, we have agreed to pay royalties on sales of ESKATA, or other related products, at a low single-digit
percentage of net sales, as defined in the agreement.
Components of Our Results of Operations
Revenue
Product Sales
We promote ESKATA and RHOFADE through our sales force which we believe will allow us to reach the health
care providers in the United States with the highest potential for prescribing ESKATA and RHOFADE to their patients.
We sell ESKATA to one wholesaler, McKesson Specialty Care Distribution, or McKesson, which in turn resells
ESKATA to health care providers. We have also entered into agreements with two group purchasing organizations, or GPOs,
and may enter into additional agreements with other GPOs and corporate accounts that provide for administrative fees and
discounted pricing in the form of volume-based rebates and chargebacks. We have no sales of ESKATA in countries outside
of the United States.
We began commercializing RHOFADE in the United States in December 2018. We currently rely on Allergan to
distribute RHOFADE on our behalf pursuant to the terms of a transition services agreement while we develop our sales,
marketing and distribution capabilities to support the commercialization of RHOFADE in the United States. We sell
RHOFADE to wholesalers in the United States, which, in turn, distribute it to pharmacies that will ultimately fill patient
prescriptions. We may also enter into arrangements with health care providers, pharmacy benefit managers, third-party
payors, and GPOs which provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts,
with respect to the purchase of RHOFADE. We have no sales of RHOFADE in countries outside of the United States.
Contract Research
We earn revenue from the provision of laboratory services to clients through Confluence, our wholly-owned
subsidiary. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-
price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered.
We have also received revenue from grants under the Small Business Innovation Research program of the National
Institutes of Health, or NIH. During the year ended December 31, 2018, we had two active grants from NIH related to early-
stage research. As of December 31, 2018, there were no remaining funds available to us under the grants.
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Cost of Revenue
Cost of revenue consists of the cost of manufacturing the finished product forms of ESKATA and RHOFADE, as
well as costs incurred in connection with the provision of contract research services to our clients through Confluence. Cost
of revenue primarily includes:
Product sales:
·
·
·
·
·
·
·
·
·
·
third-party cost of manufacturing and assembly of finished product forms of ESKATA and RHOFADE;
depreciation of manufacturing equipment;
product release and stability testing;
warehousing and insurance costs;
transition service costs payable to Allergan;
royalty payments;
Prescription Drug User Fee Act, or PDUFA, fees;
non-cash charge to adjust the carrying-value of inventory to net realizable value;
non-cash charge related to the fair value step-up of acquired RHOFADE inventory; and
non-cash amortization of the intangible asset related to RHOFADE intellectual property.
Contract research:
·
·
·
·
·
employee-related expenses, which include salaries, benefits and stock-based compensation;
outsourced professional scientific services;
depreciation of laboratory equipment;
facility-related costs; and
laboratory materials and supplies used to support the services provided.
Research and Development Expenses
Research and development expenses consist of expenses incurred in connection with the discovery and development
of our drug candidates. These expenses primarily include:
·
expenses incurred under agreements with contract research organizations, or CROs, as well as investigative
sites and consultants that conduct our clinical trials and preclinical studies;
· manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial
materials and commercial materials, including manufacturing validation batches;
outsourced professional scientific development services;
·
· medical affairs-related expenses;
·
·
·
employee-related expenses, which include salaries, benefits and stock-based compensation;
depreciation of manufacturing equipment;
payments made under agreements with third parties under which we have acquired or licensed intellectual
property;
expenses relating to regulatory activities, including filing fees paid to regulatory agencies;
laboratory materials and supplies used to support our research activities; and
non-cash charges for changes in the fair value of contingent consideration related to the acquisition of
Confluence.
·
·
·
Research and development activities are central to our business model. Drug candidates in later stages of clinical
development generally have higher development costs than those in earlier stages of clinical development, primarily due to
the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase
significantly over the next several years as we increase personnel costs, including stock-based compensation, continue to
conduct clinical trials of A-101 45% Topical Solution for the treatment of common warts, and conduct clinical trials and
prepare regulatory filings for our other drug candidates. We expense research and development costs as incurred. Our direct
research and development expenses primarily consist of external costs including fees paid to CROs, consultants, investigator
sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials, and are
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tracked on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses, to specific
research and development programs.
The successful development of our drug candidates is highly uncertain. At this time, we cannot reasonably estimate
or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or
when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the
numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life
of a project as a result of many factors, including:
·
·
·
·
·
·
the number of clinical sites included in the trials;
the length of time required to enroll suitable patients;
the number of patients 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 terms and timing of marketing approvals, and
the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may
never succeed in achieving marketing approval for any of our drug candidates. We may obtain unexpected results from our
clinical trials. We may elect to discontinue, delay or modify clinical trials of some drug candidates or focus on others. A
change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant
change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or other
regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we
experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional
financial resources and time on the completion of clinical development.
Sales and Marketing Expenses
Sales and marketing expenses include salaries and related costs for our field sales force, as well as personnel in our
marketing and sales operations functions, including stock-based compensation, travel expenses, expenses related to leasing a
fleet of vehicles for our field-based sales force, and recruiting expenses. Sales and marketing expenses also include costs of
content development, advertising, sponsorships and attendance at dermatology conferences, and costs incurred under the
transition services agreement with Allergan.
Additionally, we anticipate incurring significant sales and marketing expenses as we continue to commercialize
ESKATA and RHOFADE in the United States.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive,
administrative, finance, investor relations and legal functions, including stock-based compensation, travel expenses and
recruiting expenses. General and administrative expenses also include facility-related costs, patent filing and prosecution
costs, professional fees for legal, auditing and tax services, insurance costs, costs incurred under the transition services
agreement with Allergan, as well as payments made under a terminated related party sublease agreement and milestone
payments under our finder’s services agreement. We anticipate that our general and administrative expenses will continue to
increase as a result of increased personnel costs, including stock-based compensation, expanded infrastructure and higher
consulting, legal and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements,
accounting and investor relations costs, and director and officer insurance premiums associated with being a public
company.
Other Income, net
Other income, net consists of interest earned on our cash, cash equivalents and marketable securities, interest
expense, and gains and losses on transactions denominated in foreign currencies.
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Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are 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, 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 assumptions on an ongoing basis.
Our actual results may differ from these estimates under different assumptions and 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 on Form 10-K, 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.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from
Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods
or services in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or
services.
To determine revenue recognition in accordance with ASC Topic 606, we perform the following five steps: (i)
identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the
transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue
when (or as) performance obligations are satisfied. We recognize revenue when collection of the consideration we are
entitled to under a contract with a customer is probable. At contract inception, we assess the goods or services promised
within a contract with a customer to identify the performance obligations, and to determine if they are distinct. We recognize
revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied.
Product Sales, net
We recognize revenue from product sales at the point the customer obtains control, which generally occurs upon
delivery, and also include estimates of variable consideration in the same period revenue is recognized. Components of
variable consideration include trade discounts and allowances, product returns, government rebates, discounts and rebates,
other incentives such as patient co-pay assistance, and other fee for service amounts. Variable consideration is recorded on
the consolidated balance sheet as either a reduction of accounts receivable, if payable to a customer, or as a current liability, if
payable to a third-party other than a customer. We consider all relevant information when estimating variable consideration
such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted
customer buying and payment patterns. The amount of net revenue we can recognize is constrained by estimates of variable
consideration which are included in the transaction price. Payment terms with customers do not exceed one year and,
therefore, we do not account for a financing component in our arrangements. We expense incremental costs of obtaining a
contract with a customer, including sales commissions, when incurred as the period of benefit is less than one year. Shipping
and handling costs for product shipments to customers are recorded as sales and marketing expenses in the consolidated
statement of operations.
Trade Discounts and Allowances - We may provide customers with trade discounts, rebates, allowances or other
incentives. We record an estimate for these items as a reduction of revenue in the same period the revenue is recognized.
Government and Payor Rebates – We may contract with certain third-party payors, primarily health insurance
companies, pharmacy benefit managers and government programs, for the payment of rebates with respect to utilization of
our products. We also have agreements with GPOs that provide for administrative fees and discounted pricing in the form of
volume-based rebates. We are also subject to discount obligations under state Medicaid programs and Medicare. We record
an estimate for these rebates as a reduction of revenue in the same period the revenue is recognized.
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Other Incentives - Other incentives includes our co-pay assistance program which is intended to provide financial
assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. We estimate
and record an accrual for these incentives as a reduction of revenue in the period the revenue is recognized. Our estimated
amounts for co-pay assistance are based upon the number of claims and the cost per claim that we expect to receive
associated with product that has been sold to customers but remains in the distribution channel at the end of each reporting
period.
Product Returns - Consistent with industry practice, we have a product returns policy which may provide customers
a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The
right of return lapses upon shipment of the goods to a patient. We record an estimate for the amount of product which may
be returned as a reduction of revenue in the period the related revenue is recognized. Our estimates for product returns are
based upon available industry data and our own sales information, including visibility into the inventory remaining in the
distribution channel. There is no returns liability associated with sales of ESKATA as we have a no returns policy for
ESKATA.
Contract Research
Revenue related to laboratory services is generally recognized as the laboratory services are performed, based upon
the rates specified in the contracts. Under ASC Topic 606, we elected to apply the “right to invoice” practical expedient
when recognizing contract research revenue. We recognize contract research revenue in the amount to which we have the
right to invoice.
We recognize revenue related to grants as amounts become reimbursable under each grant, which is generally when
research is performed, and the related costs are incurred.
Other Revenue
Licenses of Intellectual Property – We recognize 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, we evaluate whether
the milestones are considered probable of being reached and estimate 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 our
control or the control of the customer, such as regulatory approvals, are not considered probable of being achieved until those
approvals are received.
Inventory
Inventory includes the third-party cost of manufacturing and assembly of the finished product forms of ESKATA
and RHOFADE, quality control and other overhead costs. Inventory is stated at the lower of cost or net realizable
value. Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory
and the estimated value based upon assumptions about future demand and market conditions. Our inventory is comprised
primarily of finished goods.
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Intangible Assets
Our intangible assets include both finite-lived and indefinite-lived assets. Finite-lived intangible assets are
amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise
used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Our finite-lived
intangible assets consist of a research technology platform acquired through the acquisition of Confluence and the intellectual
property rights related to RHOFADE. Our indefinite-lived intangible assets consist of an in-process research and
development, or 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
assets is either amortized over their estimated useful life beginning when the underlying drug candidate is approved and
launched commercially, or expensed immediately if development of the drug candidate is abandoned.
Finite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least
annually, which we perform during the fourth quarter, or when indicators of an impairment are present. We recognize an
impairment loss when and to the extent that the estimated fair value of an indefinite-lived intangible asset is less than its
carrying value.
Goodwill
Goodwill is not amortized, but rather is subject to testing for impairment at least annually, which we perform during
the fourth quarter, or when indicators of an impairment are present. We consider each of our operating segments,
dermatology therapeutics and contract research, to be a reporting unit since this is the lowest level for which discrete
financial information is available. We have attributed the full amount of the goodwill in connection with the acquisition of
Confluence, or $18.5 million, to our dermatology therapeutics segment. We perform an impairment test annually which is a
qualitative assessment based upon current facts and circumstances related to operations of the dermatology therapeutics
segment. If our qualitative assessment indicates an impairment may be present, we would perform the required quantitative
analysis and an impairment charge would be recognized to the extent that the estimated fair value of the reporting unit is less
than its carrying amount. However, any loss recognized would not exceed the total amount of goodwill allocated to that
reporting unit.
Contingent Consideration
We initially recorded the contingent consideration related to future potential payments based upon the achievement
of specified development, regulatory and commercial milestones, resulting from the acquisition of Confluence, at its
estimated fair value on the date of acquisition. Changes in fair value reflect new information about the likelihood of the
payment of the contingent consideration and the passage of time. For example, if the timing of the development of an
acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug, differ from our
assumptions, then the fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value
of the contingent consideration, if any, will be recorded as income or expense in our consolidated statement of operations.
Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our research
and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our
applicable personnel to identify services that have been performed on our behalf and estimating the level of service
performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual
costs. The majority of our preclinical development activities and clinical trials are performed pursuant to quotes and contracts
with multiple vendors, including research institutions and CROs, that conduct and manage such activities on our
behalf. Many of the contracts with our vendors require advance payments; while others invoice us in arrears for services
performed, or on a pre-determined schedule, or upon the successful enrollment of patients, or when contractual milestones
are met. We record expenses for preclinical development activities and clinical trials based upon estimates of the total cost of
the services to be provided by the vendor and the time period over which the vendor is to perform those services. Estimates
of research and development expenses included in our consolidated financial statements are based on facts and circumstances
known to us at that time. The financial terms of our agreements are subject to negotiation, vary from contract to contract, and
may result in uneven payment flows. There may be times when payments made to a vendor exceed the
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level of services provided, resulting in a prepayment for work to be performed. We may confirm the accuracy of our
estimates with the service providers, or make adjustments to our estimates based upon new or updated facts and
circumstances, as necessary. For example, if the timing and/or cost of services to be performed is materially different from
our previous estimates, we would make a prospective adjustment for the change in our estimates in the period in which we
become aware of the new cost and/or timing. Although we do not expect our estimates to be materially different from actual
amounts incurred, our understanding of the status and timing of services performed relative to the actual status and timing of
services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To
date, we have not made any material adjustments to our estimates of research and development expenses.
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, or 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 initially 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. At the end of each financial reporting period prior to the completion of services being rendered, we re-measure
the compensation expense related to these awards using the then current fair value of our common stock for RSUs, or based
upon updated assumptions in the Black-Scholes option-pricing model for stock option awards.
We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. We estimate
expected volatility based on historical volatility of a set of peer companies, which are publicly traded, and we expect to
continue to do so until 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. Prior to our IPO, we valued our common stock using a hybrid method which used market approaches to estimate our
enterprise value. The hybrid method used was a probability-weighted expected return method which was a scenario-based
methodology that estimated the fair value of our common stock based upon an analysis of future values for the company
assuming various outcomes. The hybrid method used calculated equity values using an option pricing model in one or more
of scenarios, and also considered the rights of each class of stock.
The fair value of each RSU is measured using the closing price of our common stock on the date of grant.
Income Taxes
Since our inception in 2012, we have not recorded U.S. federal or state income tax benefits for the net operating
losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of
realizing a benefit from those items.
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Results of Operations
Comparison of Years Ended December 31, 2018 and 2017
Revenues:
Product sales, net
Contract research
Other revenue
Total revenue, net
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Revenue
Year Ended December 31,
2018
2017
(In thousands)
Change
$
3,940 $
4,651
1,500
10,091
6,850
3,241
63,009
47,997
27,649
138,655
(135,414)
2,676
(132,738)
—
$ (132,738) $
— $
1,683
—
1,683
1,207
476
39,790
13,769
19,340
72,899
(72,423)
2,070
(70,353)
(1,830)
(68,523) $
3,940
2,968
1,500
8,408
5,643
2,765
23,219
34,228
8,309
65,756
(62,991)
606
(62,385)
1,830
(64,215)
Revenue was $10.1 million for the year ended December 31, 2018, compared to $1.7 million for the year ended
December 31, 2017. Product sales, net included $2.8 million and $1.1 million of net revenue from sales of ESKATA and
RHOFADE, respectively, during the year ended December 31, 2018. We acquired RHOFADE in November 2018. Contract
research revenue of $4.7 million and $1.7 million for the years ended December 31, 2018 and 2017, respectively, was
comprised primarily of fees earned from the provision of laboratory services to clients through Confluence, which we
acquired in August 2017. Other revenue was related to the Cipher License Agreement and consisted of an upfront payment
of $1.0 million and $0.5 million earned upon the achievement of a specified regulatory milestone.
Cost of Revenue
Cost of revenue was $6.9 million for the year ended December 31, 2018 and was comprised of $1.5 million and $1.0
million of costs related to ESKATA and RHOFADE product sales, net, respectively. Cost of revenue included $0.6 million of
non-cash amortization related to the intangible asset for the RHOFADE intellectual property rights, and a non-cash charge of
$1.1 million related to the write-down of ESKATA finished inventory. We also incurred $4.3 million of costs related to
providing laboratory services to our clients through Confluence. Cost of revenue was $1.2 million for the year ended
December 31, 2017 and was comprised entirely of costs incurred to provide laboratory services to our clients through
Confluence, which we acquired in August 2017.
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Research and Development Expenses
The following table summarizes our research and development expenses:
ESKATA
A-101 45% Topical Solution
JAK inhibitors
Personnel expenses
Change in contingent consideration
Other research and development expenses
Stock-based compensation
Total research and development expenses
$
Year Ended
December 31,
2018
2017
(In thousands)
2,574 $
10,114
22,457
8,332
1,272
11,780
6,480
6,031 $
4,681
11,789
6,131
—
5,687
5,471
$ 63,009 $
39,790 $
Change
(3,457)
5,433
10,668
2,201
1,272
6,093
1,009
23,219
The decrease in expenses associated with the development of ESKATA resulted primarily from the filing of our
NDA in February 2017 following the completion of clinical trials. Expenses related to A-101 45% Topical Solution
increased primarily due to the initiation of our Phase 3 clinical trials for the treatment of common warts during the third
quarter of 2018. Development expenses for our JAK inhibitors increased due to continued growth in both preclinical and
clinical trial expenses as we continue to conduct multiple Phase 2 clinical trials of ATI-501 and ATI-502. The increase in
personnel expenses was primarily the result of increased headcount. The increase in stock-based compensation expense was
primarily the result of new awards granted during 2018. The change in contingent consideration was the result of updates to
our assumptions related to our soft-JAK inhibitors that reflected the achievement of a specified development milestone in
November 2018 under the Confluence Agreement. Other research and development expenses primarily included expenses
for medical affairs activities related to ESKATA, and expenses related to drug discovery performed by Confluence, which we
acquired in August 2017; we did not incur similar drug discovery expenses prior to that acquisition. The increase in other
research and development expenses was also driven by preclinical development of ATI-450, our MK-2 inhibitor, and research
expenses related to our ITK inhibitor.
Sales and Marketing Expenses
The following table summarizes our sales and marketing expenses:
Year Ended
December 31,
2018
2017
(In thousands)
Change
Direct marketing and professional fees
Personnel expenses
Other sales and marketing expenses
Stock-based compensation
Total sales and marketing expenses
$ 20,683 $
14,680
9,142
3,492
7,576 $ 13,107
2,817
1,525
1,851
11,863
7,617
1,641
$ 47,997 $ 13,769 $ 34,228
Direct marketing and professional fees, as well as other sales and marketing expenses, increased as a result of the
commercial launch of ESKATA, which occurred in May 2018. Personnel and stock-based compensation expenses have
increased due to increased headcount, including the hiring of our field sales force during the year ended December 31,
2018. Other sales and marketing expenses included sales operations, travel costs, depreciation and other miscellaneous
expenses. Other sales and marketing expenses included costs related to our national launch meeting, employee training,
samples fulfillment and expenses related to leasing a fleet of vehicles. The increase in other sales and marketing expenses
was primarily related to onboarding our field sales force during the year ended December 31, 2018.
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General and Administrative Expenses
The following table summarizes our general and administrative expenses:
Personnel expenses
Professional and legal fees
Facility and support services
Milestone payment
Other general and administrative expenses
Stock-based compensation
$
Year Ended
December 31,
2018
2017
(In thousands)
7,006 $
5,649
2,349
1,500
1,828
9,317
4,378 $
4,023
1,941
1,000
1,101
6,897
Total general and administrative expenses
$ 27,649 $
19,340 $
Change
2,628
1,626
408
500
727
2,420
8,309
Personnel and stock-based compensation expenses have increased due to increased headcount as we expanded our
operations. Professional and legal fees included accounting, legal and investor relations costs associated with being a public
company, as well as legal fees related to patents. The increase in professional and legal fees was related to legal and
consulting expenses incurred as a result of the commercial launch of ESKATA in May 2018, as well as fees associated with
business development activities. The milestone payment of $1.5 million in the year ended December 31, 2018 was made
upon the achievement of specified commercial milestones under our Finder’s Services Agreement with KPT Consulting,
LLC. The milestone payment of $1.0 million in the year ended December 31, 2017 was made upon the achievement of
specified regulatory milestones pursuant to our Finder’s Services Agreement with KPT Consulting, LLC. Facility and
support services included general office expenses and information technology costs which have risen due to our increased
headcount as well as the relocation of our headquarters during the year ended December 31, 2018. Other general and
administrative expenses included insurance, travel costs, depreciation and other miscellaneous expenses.
Other Income, net
The $0.6 million increase in other income, net was primarily due to higher invested balances of marketable
securities as a result of funds received from our financing transactions in 2017 and 2018, as well as higher yields on those
invested balances.
Provision for (Benefit from) Income Taxes
Provision for income taxes was a net benefit of $1.8 million for the year ended December 31, 2017 and was
comprised primarily of the revaluation of our deferred tax assets, net resulting from the Tax Cuts and Jobs Act of 2017 which
was enacted on December 22, 2017.
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Comparison of Years Ended December 31, 2017 and 2016
Contract research
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Revenue
Year Ended December 31,
2017
2016
(In thousands)
Change
1,683 $
1,207
476
39,790
13,769
19,340
72,899
(72,423)
2,070
(70,353)
(1,830)
(68,523) $
— $
—
—
1,683
1,207
476
33,476
3,295
11,796
48,567
(48,567)
488
(48,079)
—
(48,079) $
6,314
10,474
7,544
24,332
(23,856)
1,582
(22,274)
(1,830)
(20,444)
$
$
Revenue was $1.7 million for the year ended December 31, 2017, and was comprised primarily of fees earned from
the provision of laboratory services to clients through Confluence, which we acquired in August 2017. We did not generate
any revenue in the year ended December 31, 2016.
Cost of Revenue
Cost of revenue was $1.2 million for the year ended December 31, 2017, and was comprised entirely of costs
incurred to provide laboratory services to our clients through Confluence, which we acquired in August 2017. We did not
incur any cost of revenue in the year ended December 31, 2016.
Research and Development Expenses
The following table summarizes our research and development expenses:
ESKATA
A-101 45% Topical Solution
JAK inhibitors
Personnel expenses
Acquisition of Vixen
Other research and development expenses
Stock-based compensation
$
Year Ended
December 31,
2017
2016
(In thousands)
6,031 $
4,681
11,789
6,131
—
5,687
5,471
14,257 $
1,100
7,313
3,728
3,435
1,352
2,291
Total research and development expenses
$ 39,790 $
33,476 $
85
Change
(8,226)
3,581
4,476
2,403
(3,435)
4,335
3,180
6,314
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The increase of $6.3 million in research and development was primarily driven by an increase of $3.6 million of
expenses related to our Phase 2 clinical trials of A-101 45% Topical Solution, an increase of $4.5 million in preclinical and
clinical trial development expenses related to our JAK inhibitor technology, increases of $2.4 million in payroll-related
expenses and $3.2 million in stock-based compensation expense, both of which were due to higher headcount, and a $2.9
million increase in expenses related to medical affairs activities. We also incurred $1.0 million of expenses related to drug
discovery research performed by Confluence in the year ended December 31, 2017. The increases noted above were partially
offset by a $8.2 million decrease in costs associated with the development of ESKATA as a result of the completion of our
Phase 3 clinical trials in November 2016, and $3.4 million in expenses associated with the acquisition of Vixen in the year
ended December 31, 2016, for which there was no similar transaction in 2017.
Sales and Marketing Expenses
The following table summarizes our sales and marketing expenses:
Direct marketing and professional fees
Personnel expenses
Other sales and marketing expenses
Stock-based compensation
Total research and development expenses
Year Ended
December 31,
2017
2016
(In thousands)
Change
$
7,576 $
2,817
1,525
1,851
$ 13,769 $
2,195 $
999
101
—
5,381
1,818
1,424
1,851
3,295 $ 10,474
The increase in direct marketing and professional fees was primarily attributable to $5.2 million in market research
expenses related to pre-commercial launch activities for ESKATA. Personnel and stock-based compensation expenses
increased due to increased headcount, including the hiring of regional sales managers and sales operations employees during
the year ended December 31, 2017. Other sales and marketing expenses included sales operations, travel costs, depreciation
and other miscellaneous expenses and increased primarily as a result of pre-commercial launch activities for ESKATA.
General and Administrative Expenses
The following table summarizes our general and administrative expenses:
Year Ended
December 31,
2017
2016
(In thousands)
Change
Personnel expenses
Professional and legal fees
Facility and support services
Milestone payment
Other general and administrative expenses
Stock-based compensation
$
4,378 $
4,023
1,941
1,000
1,101
6,897
Total general and administrative expenses
$ 19,340 $
3,230 $
2,740
858
300
855
3,813
11,796 $
1,148
1,283
1,083
700
246
3,084
7,544
Personnel and stock-based compensation expenses increased due to increased headcount. Professional and legal
fees included accounting, legal and investor relations costs associated with being a public company, as well as legal fees
related to patents. The increase in professional and legal fees primarily related to legal and consulting expenses incurred in
conjunction with our acquisition of Confluence, for which there were no similar amounts in 2016, and legal fees related to
patents. Facilities and support services included a one-time charge to rent expense of $0.5 million in connection with the
early termination of our sublease with NST Consulting, LLC. In addition, milestone payments pursuant to the Finder’s
Services Agreement related to ESKATA increased by $0.7 million in 2017 compared to 2016.
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Other Income, net
The $1.6 million increase in other income, net was primarily due to higher invested balances of marketable
securities as a result of funds received from our financing transactions in 2016 and 2017.
Provision for (Benefit from) Income Taxes
Provision for income taxes was a net benefit of $1.8 million for the year ended December 31, 2017 and was
comprised primarily of the revaluation of our deferred tax assets, net resulting from the Tax Cuts and Jobs Act of 2017 which
was enacted on December 22, 2017.
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our
acquisition of Confluence in August 2017, we did not generate any revenue. We have financed our operations over the last
several years primarily through sales of our equity securities in public offerings and a private placement transaction. As
described below, in October 2018 we also entered into a loan facility with an institutional lender.
As of December 31, 2018, we had cash, cash equivalents and marketable securities of $168.0 million. Cash in
excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards
liquidity and capital preservation.
We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are
expected to affect our liquidity over the next five years, other than our recent debt financing obligation, sublease obligations,
capital lease obligations and contingent obligations under acquisition and intellectual property licensing agreements, which
are summarized below under “Contractual Obligations and Commitments.”
Private Placement
In June 2016, we closed a private placement in which we sold an aggregate of 1,081,082 shares of common stock at
a price of $18.50 per share, for gross proceeds of $20.0 million. We incurred placement agent fees of $1.3 million, and
expenses of $0.2 million in connection with the private placement. As a result, the net offering proceeds received by us, after
deducting placement agent fees and transaction expenses, were $18.5 million.
November 2016 Public Offering
In November 2016, we closed a public offering in which we sold 4,600,000 shares of common stock at a price to the
public of $22.75 per share, for aggregate gross proceeds of $104.7 million. We paid underwriting discounts and commissions
of $6.3 million, and we also incurred expenses of $0.2 million in connection with the offering. As a result, the net offering
proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $98.2 million.
At-The-Market Facility
In November 2016, we entered into a sales agreement with Cowen and Company, LLC, or Cowen, pursuant to
which Cowen acted as our agent in connection with sales of our common stock from time to time under an “at-the-market”
equity facility. In April 2017, we sold 635,000 shares of our common stock at a weighted average price per share of $31.50,
for aggregate gross proceeds of approximately $20.0 million. We paid underwriting discounts and commissions of $0.6
million, and we also incurred expenses of $0.1 million in connection with this sale. In October 2018, we terminated the at-
the-market sales agreement with Cowen without having sold any additional shares of common stock.
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August 2017 Public Offering
In August 2017, we closed our follow-on public offering in which we sold 3,747,602 shares of common stock at a
price to the public of $23.02 per share, for aggregate gross proceeds of $86.3 million. We paid underwriting discounts and
commissions of $5.2 million, and we also incurred expenses of $0.2 million in connection with the offering. As a result, the
net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $80.9
million.
October 2018 Public Offering
In October 2018, we closed a public offering in which we sold 9,941,750 shares of common stock at a price to the
public of $10.75 per share, for aggregate gross proceeds of $106.9 million. We paid underwriting discounts and commissions
of $6.4 million to the underwriters, and we incurred expenses of $0.3 million in connection with the offering. As a result, the
net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were
$100.2 million.
Loan and Security Agreement with Oxford
In October 2018, we entered into a loan and security agreement, or the Loan and Security Agreement, with Oxford
Finance LLC, or Oxford. The Loan and Security Agreement provides for up to $65.0 million in term loans. Of the $65.0
million, we borrowed $30.0 million in October 2018. The remaining $35.0 million is available for draw ending on the earlier
of March 31, 2019 or an event of default. Should we not draw all or a portion of the $35.0 million during the applicable draw
timeframe, or if we prepay the entirety of the amount drawn during the applicable draw timeframe, we will be required to pay
Oxford a non-utilization fee equal to 1.0% of the undrawn portion.
The Loan and Security Agreement provides for interest only payments through the payment date immediately prior
to November 1, 2021, followed by 24 consecutive equal monthly payments of principal and interest in arrears starting on
November 1, 2021 and continuing through the maturity date of October 1, 2023. All unpaid principal and accrued and unpaid
interest will be due and payable on the maturity date. The Loan and Security Agreement provides for an annual interest rate
equal to the greater of (i) 8.35% and (ii) the 30-day U.S. LIBOR rate reported in The Wall Street Journal on the last business
day of the month that immediately precedes the month in which the interest will accrue plus 6.25%. The Loan and Security
Agreement also provides for a final payment equal to 5.75% of the original principal amount of the term loans drawn, which
final payment is due on October 1, 2023 or upon the prepayment of the facility or the acceleration of amounts due under the
facility as a result of an event of default.
We have the option to prepay the outstanding balance of the term loans in full, subject to a prepayment fee of (i) 3%
of the original principal amount of the aggregate term loans drawn for any prepayment prior to the first anniversary of the
applicable funding date, (ii) 2% of the original principal amount of the aggregate term loans drawn for any prepayment
between the first and second anniversaries of the applicable funding date or (iii) 1% of the original principal amount of the
aggregate term loans drawn for any prepayment after the second anniversary of the applicable funding date but before
October 1, 2023. We also have the option to prepay the term loans in part, once in a three-month period, of an amount of $2.0
million or greater, subject to the same prepayment fees and other specified limitations.
Our obligations under the Loan and Security Agreement are secured by substantially all of our assets, except that the
collateral does not include our intellectual property. However, we have agreed not to encumber any of our intellectual
property. The Loan and Security Agreement contains customary representations, warranties and covenants, including
covenants that limit our ability, subject to specified exceptions, to convey, sell, lease, transfer, assign or otherwise dispose of
assets; engage in any business other than the businesses currently engaged in; liquidate or dissolve; undergo specified change
of control events; create, incur, assume or be liable for indebtedness; create, incur, allow or suffer any liens on property; pay
dividends and make other restricted payments; make investments; or enter into any material transactions with affiliates. The
Loan and Security Agreement also contains specified financial covenants related to minimum consolidated future revenues.
The Loan and Security Agreement also contains customary indemnification obligations and customary events of
default, including, among other things, our failure to fulfill our obligations under the Loan and Security Agreement, the
occurrence of a material adverse change, specified defaults or our failure to keep our common stock listed on the Nasdaq
Stock Market. In the event of default, Oxford would be entitled to exercise its remedies thereunder, including the right to
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accelerate the debt, upon which we may be required to repay all amounts then outstanding under the Loan and Security
Agreement.
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Operating Activities
2018
Year Ended December 31,
2017
(In thousands)
2016
$ (100,811) $
9,367
128,261
36,817 $
$
(54,663) $
(55,692)
100,386
(9,969) $
(34,603)
(61,903)
116,826
20,320
During the year ended December 31, 2018, operating activities used $100.8 million of cash primarily resulting from
our net loss of $132.7 million, partially offset by changes in our operating assets and liabilities of $9.4 million, and non-cash
adjustments of $23.2 million. Net cash provided by changes in our operating assets and liabilities during the year ended
December 31, 2018 consisted of a $13.8 million increase in accounts payable and accrued expenses, which was partially
offset by a $4.4 million increase in accounts receivable. The increase in accounts payable and accrued expenses was
primarily driven by expenses incurred, but not yet paid, as of December 31, 2018, as well as the timing of vendor invoicing
and payments. Expenses incurred, but not yet paid, as of December 31, 2018 primarily included sales and marketing
expenses related to the commercial launch of ESKATA in the United States in May 2018, amounts payable for copay
assistance and commercial rebates related to sales of RHOFADE which we began selling in December 2018, as well as
expenses related to our Phase 3 clinical trials for A-101 45% Topical Solution, and our Phase 2 clinical trials for ATI-501 and
ATI-502. The increase in accounts receivable was the result of the commercial launch of ESKATA in May 2018, and sales of
RHOFADE which we acquired in November 2018. Non-cash expenses of $23.2 million were primarily composed of stock-
based compensation expense.
During the year ended December 31, 2017, operating activities used $54.7 million of cash primarily resulting from
our net loss of $68.5 million, partially offset by changes in our operating assets and liabilities of $0.9 million and non-cash
adjustments of $13.0 million. Net cash used by changes in our operating assets and liabilities during the year ended
December 31, 2017 consisted of a $4.3 million increase in prepaid expenses and other current assets offset by a $5.2 million
increase in accounts payable and accrued expenses. The increase in prepaid expenses and other current assets was primarily
due to a $2.0 million PDUFA fee paid to the FDA in conjunction with the filing of the NDA for ESKATA, as well as deposits
made for clinical supplies and development activities that were incurred during 2018. The increase in accounts payable and
accrued expenses was primarily due to an increase of $1.2 million in accrued bonuses payable due to increased headcount,
$0.6 million payable to NST Consulting LLC in connection with the early termination of our sublease with them, as well as
expenses incurred, but not yet paid, in connection with our Phase 2 clinical trials for A-101 45% Topical Solution, ATI-501
and ATI-502. Non-cash expenses of $13.0 million included stock-based compensation expense of $14.4 million, and $0.4
million of depreciation and amortization, partially offset by an adjustment to our deferred tax liability, net of $1.8 million
which was the result of the Tax Cuts and Jobs Act of 2017 enacted on December 22, 2017.
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During the year ended December 31, 2016, our operating activities used $34.6 million of cash primarily resulting
from our net loss of $48.1 million, partially offset by cash provided by changes in our operating assets and liabilities of $4.5
million and by non-cash expenses of $9.0 million. Net cash provided by changes in our operating assets and liabilities during
the year ended December 31, 2016 consisted primarily of a $4.3 million increase in accounts payable and accrued expenses.
The increase in accounts payable and accrued expenses was primarily due to expenses incurred, but not yet paid, in
connection with preclinical development expenses related to our JAK inhibitor technology and the timing of vendor
invoicing and payments. In addition, we had $1.7 million of employee-related accruals as of December 31, 2016, compared
to $0 as of December 31, 2015. The increase in employee-related accruals resulted from bonuses earned in 2016 which were
paid after December 31, 2016, while all bonuses earned in 2015 were paid before December 31, 2015. Non-cash expenses of
$9.0 million primarily included $6.1 million related to stock-based compensation expense, and $2.8 million resulting from
the Vixen acquisition.
Investing Activities
During the year ended December 31, 2018, investing activities provided $9.4 million of cash, consisting of proceeds
from sales and maturities of marketable securities of $239.4 million, partially offset by purchases of marketable securities of
$161.6 million, $67.1 million for the purchase of RHOFADE, and purchases of equipment of $1.4 million.
During the year ended December 31, 2017, investing activities used $55.7 million of cash, consisting of purchases
of marketable securities of $197.3 million, $9.6 million for the acquisition of Confluence and purchases of property and
equipment of $1.2 million, partially offset by proceeds from sales and maturities of marketable securities of $152.5 million.
During the year ended December 31, 2016, investing activities used $61.9 million of cash, consisting of purchases
of marketable securities of $148.8 million and purchases of equipment of $0.2 million, partially offset by proceeds from sales
and maturities of marketable securities of $87.1 million.
Financing Activities
During the year ended December 31, 2018, financing activities provided $128.3 million of cash and included net
proceeds of $100.2 million received from our public offering of common stock in October 2018, $29.9 million of net
borrowings pursuant to the Loan and Security Agreement with Oxford, and $0.6 million of cash received from the exercise of
employee stock options, partially offset by $1.8 million paid to the former Confluence equity holders as a result of the
achievement of a development milestone and $0.6 million of capital lease payments.
During the year ended December 31, 2017, financing activities provided $100.4 million of cash and included $19.3
million of net proceeds received from the sale of common stock under our sales agreement with Cowen in April 2017, $80.9
million of net proceeds received from our public offering of common stock in August 2017, and $0.2 million of cash received
from the exercise of employee stock options, partially offset by $0.1 million of capital lease payments for laboratory
equipment.
During the year ended December 31, 2016, financing activities provided $116.8 million of cash and included $18.5
million of net proceeds received from the private placement of our common stock in June 2016, net proceeds of $98.2 million
received from our public offering of common stock in November 2016, as well as $0.1 million of cash received from the
exercise of employee stock options.
Funding Requirements
We plan to focus in the near term on the commercialization of ESKATA for the treatment of raised SKs, and
RHOFADE for the treatment of persistent facial erythema associated with rosacea in adults, as well as the clinical
development of our drug candidates. We anticipate we will incur net losses for the next several years as we continue to
commercialize ESKATA and RHOFADE, continue the clinical development of A-101 45% Topical Solution for the treatment
of common warts and continue research and development of ATI-501 and ATI-502 for the treatment of AA and other
dermatological conditions, as well as the identification, research and development of other compounds. We plan to continue
to invest in discovery efforts to explore additional drug candidates, build commercial capabilities and expand our
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corporate infrastructure. We may not be able to complete the development and initiate commercialization of these programs
if, among other things, our clinical trials are not successful or if the FDA does not approve our drug candidates currently in
clinical trials when we expect, or at all.
Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical
costs, external research and development services, laboratory and related supplies, sales, marketing and advertising costs,
legal and other regulatory expenses, and administrative and overhead costs. In addition, in 2019 we plan to invest in a new
research facility for our drug discovery operations. Our future funding requirements will be heavily determined by the
resources needed to support the commercialization of ESKATA and RHOFADE, as well as the development of our drug
candidates.
As a publicly traded company, we have incurred and will continue to incur significant legal, accounting and other
expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as
rules adopted by the SEC and the Nasdaq Stock Market LLC, requires public companies to implement specified corporate
governance practices that were not applicable to us prior to our IPO. We expect ongoing compliance with these rules and
regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and
costly.
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 on Form 10-K based on our current operating assumptions including
the commercialization of ESKATA and RHOFADE, conducting Phase 3 clinical trials for A-101 45% Topical Solution for
the treatment of common warts, the continued development of ATI-501 and ATI-502 as potential treatments for AA and other
dermatological indications, and the development of ATI-450 as a potential treatment for psoriasis and other dermatological
conditions. These assumptions may prove to be wrong, and we could utilize our available capital resources sooner than we
expect. We expect that we will require additional capital to commercialize A-101 45% Topical Solution for the treatment of
common warts, if approved, to complete the clinical development of ATI-501 and ATI-502, to develop our preclinical
compounds, to support our discovery efforts, and to pursue in-licenses or acquisitions of other drug candidates. We also
expect to incur significant expenses related to the commercialization of ESKATA and RHOFADE, including product
manufacturing, sales, marketing, advertising and distribution costs. 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. If we are unable to raise sufficient additional capital, we may need to
substantially curtail our planned operations and the pursuit of our growth strategy.
We may raise additional capital through the sale of equity or convertible debt securities. In such an event, your
ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect
the rights of a holder of our common stock.
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Because of the numerous risks and uncertainties associated with research, development and commercialization of
pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding
requirements will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
the extent to which we in-license or acquire additional drug candidates and technologies;
the number and development requirements of the drug candidates that we may pursue;
the costs, timing and outcome of regulatory review of our drug candidates;
the scope, progress, results and costs of preclinical development, laboratory testing and conducting pre-clinical and
clinical trials for our drug candidates;
the cost of commercializing ESKATA and RHOFADE and the costs and timing of future commercialization
activities, including drug manufacturing, marketing, sales and distribution, for any of our drug candidates for which
we receive marketing approval;
the revenue received from commercial sales of ESKATA and RHOFADE and any of our drug candidates for which
we receive marketing approval;
the progress of obtaining marketing approval for ESKATA in select countries in the European Union and Norway;
our ability to establish collaborations to commercialize ESKATA and RHOFADE outside the United States;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our
intellectual property rights and defending any intellectual property-related claims; and
the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future
products or drug candidates, if any, as a result of licenses to, or partnership or collaborations with, third parties.
See “Risk Factors” for additional risks associated with our substantial capital requirements.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2018 and the effect such obligations
are expected to have on our liquidity and cash flows in future periods:
Total
Less Than
1 Year
Payments Due by Period
1 ‑ 3
Years
(In thousands)
4 ‑ 5
Years
More than
5 Years
Operating lease commitments
Capital lease commitments
Long-term debt commitments
Vixen annual commitment
Total
$ 3,000 $ 652 $ 1,816 $ 532 $
1,775
30,000
400
591
—
100
1,184
2,500
300
—
27,500
—
$ 35,175 $ 1,343 $ 5,800 $ 28,032 $
—
—
—
—
—
We occupy space for our headquarters in Wayne, Pennsylvania under a sublease agreement which has a term
through October 2023. We lease office space in Malvern, Pennsylvania under an operating lease agreement which has a term
through November 2019. We occupy office and laboratory space in St. Louis, Missouri under an operating lease agreement
which has a term through May 2019.
We lease laboratory equipment used in our laboratory space in St. Louis, Missouri under two capital lease financing
arrangements which have terms through October 2020 and December 2020.
We lease a fleet of automobiles for our sales force and other field-based employees under the terms of a master lease
agreement. The lease term for each automobile begins on the date we take delivery and continues for a period of four years.
In October 2018, we borrowed $30.0 million under the Loan and Security Agreement with Oxford. We have the
ability to borrow up to an additional $35.0 million ending on the earlier of March 31, 2019 or an event of default. Any
amounts borrowed under the Loan and Security Agreement will be subject to interest only through October 2021, after which
we will be required to make principal and interest payments through the maturity date of October 2023.
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Under various agreements, we may be required to make milestone payments and pay royalties and other amounts to
third parties. We have not included any contingent payment obligations, such as milestones or royalties, in the table above as
the amount, timing and likelihood of such payments are not known.
Under the assignment agreement pursuant to which we acquired intellectual property, we have agreed to pay
royalties on sales of ESKATA or other related products at rates ranging in low single-digit percentages of net sales, as defined
in the agreement. Under the related finder’s services agreement, we have also agreed to make a remaining payment of $3.0
million upon the achievement of a specified commercial milestone. In addition, we have agreed to pay royalties on sales of
ESKATA or other related products at a low single-digit percentage of net sales, as defined in the agreement.
Under the Rigel License Agreement, we have agreed to make aggregate payments of up to $80.0 million upon the
achievement of specified pre-commercialization milestones, such as clinical trials and regulatory approvals. Further, we have
agreed to pay up to an additional $10.0 million to Rigel upon the achievement of a second set of development milestones.
With respect to any products we commercialize under the Rigel License Agreement, we will pay Rigel quarterly tiered
royalties on our annual net sales of each product developed using the licensed JAK inhibitors at a high single digit percentage
of annual net sales, subject to specified reductions.
Under the Vixen Agreement, we are obligated to make aggregate payments of up to $18.0 million upon the
achievement of specified pre-commercialization milestones for three products covered by the Vixen patent rights in the
United States, the European Union and Japan, and aggregate payments of up to $22.5 million upon the achievement of
specified commercial milestones for products covered by the Vixen patent rights. We are also obligated to make an annual
payment of $0.1 million through March 2022, which amounts are creditable against any specified future payments that may
be paid under the Vixen Agreement. With respect to any products we commercialize under the Vixen Agreement, we are
obligated to pay low single-digit percentage of annual net sales, subject to specified reductions, limitations and other
adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country
and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. If we
sublicense any of the patent rights and know-how acquired pursuant to the Vixen Agreement, we will be obligated to pay a
portion of any consideration we receive from such sublicenses in specified circumstances.
Under the Columbia License Agreement, we are obligated to pay an annual license fee of $10,000, subject to
specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under
the license agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified
commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-
how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or
know-how, subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired
pursuant to the Columbia License Agreement, we will be obligated to pay Columbia a portion of any consideration Vixen
receives from such sublicenses in specified circumstances.
Under the Confluence Agreement with the former Confluence equity holders, we are obligated to make remaining
aggregate payments of up to $75.0 million upon the achievement of specified regulatory and commercialization
milestones. With respect to any covered products we commercialize, we are obligated to pay a low single-digit percentage of
annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights
for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified
circumstances, ten years from the first commercial sale of such product. If we sublicense any of the patent rights and know-
how acquired pursuant to the Confluence Agreement, we will be obligated to pay a portion of any consideration we receive
from such sublicenses in specified circumstances.
Under the Asset Purchase Agreement with Allergan pursuant to which we acquired intellectual property, we have
agreed to pay Allergan royalties on net sales of RHOFADE ranging from a mid-single digit percentage to a mid-teen
percentage of net sales, subject to specified reductions, limitations and other adjustments, on a country-by-country basis until
the date that the patent rights related to a particular product, such as RHOFADE, have expired or, if later, November 30,
2028. In addition, we have agreed to assume the obligation to pay specified royalties and milestone payments under
agreements with Aspect Pharmaceuticals, LLC and Vicept Therapeutics, Inc. We have also agreed to pay Allergan a one-
time payment of $5.0 million upon the achievement of a specified development milestone related to the potential
development of an additional dermatology product.
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We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies
and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for
termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not
material.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as
defined in the rules and regulations of the SEC.
Recently Issued and Adopted Accounting Pronouncements
In November 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or
ASU, 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606,
which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions
should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact of
ASU 2018-18 on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow
the internal-use software guidance in Accounting Standards Codification, or ASC, 350-40 to determine which
implementation costs to capitalize as assets or expense as incurred. The standard will be effective for fiscal years beginning
after December 15, 2019, including interim periods within such fiscal years, with early adoption permitted. We are
evaluating the impact of ASU 2018-15 on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The FASB developed the
amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of
disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important
information to users of the financial statements. This update eliminates certain disclosure requirements for fair value
measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing
disclosure requirements. The standard will be effective for fiscal years beginning after December 15, 2019, including interim
periods within such fiscal years, with early adoption permitted. We are evaluating the impact of ASU 2018-13 on our
consolidated financial statements.
In June 2018, the FASB, issued ASU 2018-07, Compensation—Stock Compensation (Topic 718). The amendments
in this ASU expand the scope of Topic 718 to include stock-based compensation arrangements with non-employees except
for specific guidance on option pricing model inputs and cost attribution. ASU 2018-07 is effective for annual reporting
periods beginning after December 31, 2018, including interim periods within that year, and early adoption is permitted. We
adopted this standard as of January 1, 2019, the impact of which on our consolidated financial statements was not significant.
In January 2017, the FASB issued ASU, 2017-01, Business Combinations—Clarifying the Definition of a Business
(Topic 805). The amendments in this ASU provide a screen to determine when a set of acquired assets and/or activities is
not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is
concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments
in this ASU will reduce the number of transactions that meet the definition of a business. ASU 2017-01 is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within those years, and early adoption
was permitted. We adopted this standard as of January 1, 2018, the impact of which on our consolidated financial statements
was not significant.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU
introduces a new model for recognizing credit losses on financial instruments based upon estimated expected credit
losses. ASU 2016-13 will apply to loans, accounts receivable, financial assets measured at amortized cost and at fair value
through other comprehensive income, loan commitments and certain off-balance sheet credit exposures. ASU 2016-13 is
effective
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for annual reporting periods beginning after December 15, 2019, including interim periods within those years, and early
adoption is permitted. We are assessing the potential impact of ASU 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU 2018-
10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Targeted Improvements, both of which included a
number of technical corrections and improvements, including additional options for transition. The new standard establishes
a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all
leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting
the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after
December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The amendments
in ASU 2016-02 must be applied to all leases existing at the date a company initially applies the standard. A company may
choose to use either the effective date of ASU 2016-02, or the beginning of the earliest comparative period presented in the
financial statements, as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective
date as the date of initial application. Our financial statements will not be updated, and the disclosures under the new
standard will not be provided, for periods before January 1, 2019.
ASU 2016-02 provides optional practical expedients companies can elect to use in transition. We expect to elect
practical expedients which allow us not to reassess prior conclusions about lease identification, lease classification and initial
direct costs made under previous accounting standards. We are continuing to evaluate the effect of adoption of ASU 2016-
02, and we estimate that both assets and liabilities will increase by $2.0 million to $2.5 million upon adoption, before
considering deferred taxes. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated
statement of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this
ASU, entities should recognize revenue in an amount that reflects the consideration to which they expect to be entitled to in
exchange for goods and services provided. ASU 2014-09 was effective for annual reporting periods beginning after
December 15, 2017. We adopted the provisions of this standard on January 1, 2018, using the modified retrospective
transition method. We did not recognize any transition adjustments as a result of adopting ASU 2014-09 and, accordingly,
comparative information has not been restated for the periods reported.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as
us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public
companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this
provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by
public companies that are not emerging growth companies.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in interest rates. Our cash equivalents and marketable securities
consist of money market funds, asset-backed securities, commercial paper, corporate debt securities and government agency
debt. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S.
interest rates. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase.
However, due to the short-term nature and low-risk profile of our investment portfolio, we do not expect that an immediate
10% change in market interest rates would have a material effect on the fair market value of our investment portfolio. We
have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.
The Loan and Security Agreement with Oxford provides for an annual interest rate equal to the greater of (i) 8.35%
and (ii) the 30-day U.S. LIBOR rate plus 6.25%. To the extent that any present or future credit facilities that we enter into
are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of
rising interest rates when we have such debt outstanding, our interest expense would increase. Based upon our debt
outstanding under the Loan and Security Agreement of $30.0 million as of December 31, 2018, a 100 basis-point increase in
the interest rate on our loan with Oxford would result in approximately $304,000 of additional interest expense on an
annualized basis.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018, 2017 and
2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
98
99
100
101
102
103
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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, 2018 and 2017, and the related consolidated statements of operations and
comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31,
2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2018 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 audit 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.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 18, 2019
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)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses and other current assets
Total current assets
Marketable securities
Property and equipment, net
Intangible assets
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Other liabilities
Long-term debt
Contingent consideration
Deferred tax liability
Total liabilities
Stockholders’ Equity:
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued
or outstanding at December 31, 2018 and December 31, 2017
Common stock, $0.00001 par value; 100,000,000 shares authorized at
December 31, 2018 and December 31, 2017; 41,210,725 and 30,856,505 shares issued
and outstanding at December 31, 2018 and December 31, 2017, respectively
Additional paid‑in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
December 31,
2018
2017
57,019 $
110,953
4,861
791
5,875
179,499
—
4,280
72,951
18,504
332
20,202
173,655
481
—
5,883
200,221
14,997
2,159
7,349
18,504
279
275,566 $ 243,509
14,755 $
12,587
27,342
1,703
29,914
934
549
60,442
7,822
4,940
12,762
558
—
4,378
549
18,247
—
—
—
—
507,366
384,943
(69)
(246)
(292,173)
(159,435)
225,262
215,124
275,566 $ 243,509
$
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,
2017
2016
2018
Revenues:
Product sales, net
Contract research
Other revenue
Total revenue, net
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax of $0
Foreign currency translation adjustments
Total other comprehensive income (loss)
Comprehensive loss
$
3,940
4,651
1,500
10,091
6,850
3,241
63,009
47,997
27,649
138,655
(135,414)
2,676
(132,738)
—
$
— $
1,683
—
1,683
1,207
476
—
—
—
—
—
—
39,790
13,769
19,340
72,899
(72,423)
2,070
(70,353)
(1,830)
(68,523) $
33,476
3,295
11,796
48,567
(48,567)
488
(48,079)
—
(48,079)
$
(132,738) $
$
(4.03) $
32,909,762
28,102,386
(2.44) $
(2.25)
21,415,733
$
$
145 $
32
177
(132,561) $
(121) $
144
23
(68,500) $
105
(225)
(120)
(48,199)
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)
Common Stock
Additional
Accumulated
Other
Total
Shares
20,157,503 $
Par
Value Capital
Paid‑in Comprehensive Accumulated Stockholders’
Loss
Deficit
Equity
— $
135,503 $
(149) $
(42,833) $
92,521
Balance at December 31, 2015
Issuance of common stock in connection with Vixen
acquisition
Issuance of common stock in connection with private
placement, net of offering costs of $1,453
Issuance of common stock in connection with follow-on
public offering, net of offering costs of $6,492
Exercise of stock options and vesting of RSUs
Unrealized gain on marketable securities
Foreign currency translation adjustment
Stock-based compensation expense
Net loss
Balance at December 31, 2016
Issuance of common stock under the at-the-market sales
agreement, net of offering costs of $691
Issuance of common stock in connection with public
offering, net of offering costs of $5,352
Issuance of common stock in connection with the
acquisition of Confluence
Exercise of stock options and vesting of RSUs
Unrealized loss on marketable securities
Foreign currency translation adjustment
Stock-based compensation expense
Net loss
Balance at December 31, 2017
Issuance of common stock in connection with public
offering, net of offering costs of $6,669
Issuance of common stock in connection with the
Confluence development milestone
Exercise of stock options and vesting of RSUs
Unrealized gain on marketable securities
Foreign currency translation adjustment
Stock-based compensation expense
Net loss
159,420
—
2,355
1,081,082
—
18,547
4,600,000
61,176
—
—
—
—
26,059,181
—
—
—
—
—
—
—
98,158
4
—
—
6,104
—
260,671
635,000
—
19,311
3,747,602
—
80,918
349,527
65,195
—
—
—
—
30,856,505
—
—
—
—
—
—
9,675
(62)
—
—
14,430
—
384,943
9,941,750
—
100,205
253,181
159,289
—
—
—
—
—
—
—
—
—
—
2,215
(52)
—
—
20,055
—
Balance at December 31, 2018
41,210,725 $ — $ 507,366 $
—
—
—
—
105
(225)
—
—
(269)
—
—
—
—
(121)
144
—
—
(246)
—
—
—
—
—
—
—
—
(48,079)
(90,912)
—
—
—
—
—
—
—
(68,523)
(159,435)
2,355
18,547
98,158
4
105
(225)
6,104
(48,079)
169,490
19,311
80,918
9,675
(62)
(121)
144
14,430
(68,523)
225,262
—
100,205
—
—
145
32
—
—
(69) $
—
—
—
—
—
(132,738)
(292,173) $
2,215
(52)
145
32
20,055
(132,738)
215,124
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)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Year Ended
December 31,
2017
2016
2018
$ (132,738) $ (68,523) $ (48,079)
Depreciation and amortization
Stock-based compensation expense
Change in fair value of contingent consideration
Payment of Confluence development milestone
Deferred taxes
Write-down of equipment held for sale
Non-cash charge related to Vixen acquisition
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of RHOFADE
Acquisition of Confluence, net of cash acquired
Purchases of marketable securities
Proceeds from sales and maturities of marketable securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
1,879
20,055
1,272
(717)
—
—
—
(4,380)
102
(40)
6,964
6,792
(100,811)
(1,356)
(67,122)
—
(161,598)
239,443
9,367
402
14,430
—
—
(1,837)
—
—
120
6,104
—
—
—
216
2,784
—
—
(4,306)
4,564
607
(54,663)
—
—
(8)
1,810
2,450
(34,603)
(1,235)
—
(9,647)
(232)
—
—
(197,337) (148,764)
87,093
(61,903)
152,527
(55,692)
Proceeds from issuance of common stock under the at-the-market sales
agreement, net of issuance costs
Proceeds from issuance of common stock in connection with public offering, net
of issuance costs
Proceeds from issuance of common stock in connection with private placement,
net of issuance costs
Proceeds from debt financing, net of issuance costs
Capital lease payments
Proceeds from the exercise of employee stock options
Payment of Confluence development milestone
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of non-cash investing and financing activities:
Additions to property and equipment included in accounts payable
Fair value of stock issued in connection with Confluence acquisition
Fair value of stock issued in settlement of Confluence development milestone
Property and equipment obtained pursuant to capital lease financing
arrangements
Offering costs included in accounts payable
$
$
$
$
$
$
—
19,311
—
100,205
80,918
98,158
—
29,910
(648)
577
(1,783)
128,261
36,817
20,202
57,019 $
—
—
(78)
235
—
100,386
(9,969)
30,171
20,202 $
18,547
—
—
121
—
116,826
20,320
9,851
30,171
161 $
— $
2,215 $
2,131 $
210 $
274 $
9,675 $
— $
11
—
—
— $
20 $
2,355
250
The accompanying notes are an integral part of these consolidated financial statements.
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ACLARIS THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. Organization and Nature of Business
Overview
Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012. In July 2015, Aclaris
Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned
subsidiary of Aclaris Therapeutics, Inc. In March 2016, Vixen Pharmaceuticals, Inc. (“Vixen”) became a wholly-owned
subsidiary of Aclaris Therapeutics, Inc., and in September 2018, Vixen was dissolved. 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 (see Note 3). Aclaris Therapeutics, Inc., ATIL, Vixen and Confluence are
referred to collectively as the “Company”. The Company is a physician-led biopharmaceutical company focused on
dermatological and immuno-inflammatory diseases. The Company has two commercial products and a diverse pipeline of
drug candidates. The Company’s first commercial product, ESKATA (hydrogen peroxide) Topical Solution, 40% (w/w)
(“ESKATA”), is a proprietary high‑concentration formulation of hydrogen peroxide that the Company is commercializing as
an office-based prescription treatment for raised seborrheic keratosis (“SK”), a common non‑malignant skin tumor. The
Company submitted a New Drug Application (“NDA”) for ESKATA to the U.S. Food and Drug Administration (“FDA”) in
February 2017, and it was approved in December 2017. The Company launched ESKATA in the United States in May
2018. In November 2018, the Company acquired the worldwide rights to a second commercial product, RHOFADE
(oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) (see Note 3).
Liquidity
The Company’s consolidated financial statements have been prepared on the basis of continuity of operations,
realization of assets and the satisfaction of liabilities in the ordinary course of business. At December 31, 2018, the Company
had cash, cash equivalents and marketable securities of $167,972 and an accumulated deficit of $292,173. 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 any 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, clinical and
preclinical testing of the Company’s drug candidates, and commercialization of ESKATA and RHOFADE will require
significant additional financing. The future viability of the Company is dependent on its ability to generate cash from
operating activities or to raise additional capital to finance its 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States (“GAAP”). The consolidated financial statements of the Company include the
accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, Confluence, ATIL
and Vixen. All significant intercompany transactions have been eliminated.
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. Actual results could differ from the Company’s estimates.
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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 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. The Company expenses incremental costs of contracts with direct and indirect
customers, which generally include sales commissions, in the period they are incurred.
Product Sales, net
The Company sells ESKATA and RHOFADE to a limited number of wholesalers in the United States (collectively,
its “Customers”). These Customers subsequently resell the Company’s products to pharmacies and health care providers. In
addition to distribution agreements with Customers, the Company may enter into arrangements with health care providers,
third-party payors, pharmacy benefit managers, and group purchasing organizations (“GPOs”) which provide for government
mandated and/or privately negotiated rebates, chargebacks, and discounts, with respect to the purchase of the Company’s
products.
The Company recognizes revenue from product sales at the point the Customer obtains control of the product, which
generally occurs upon delivery, and includes estimates of variable consideration in the same period revenue is
recognized. Components of variable consideration include trade discounts and allowances, product returns, government
rebates, discounts and rebates, other incentives such as patient co-pay assistance, and other fee for service amounts. Variable
consideration is recorded on the consolidated balance sheet as either a reduction of accounts receivable, if payable to a
customer, or as a current liability, if payable to a third-party other than a customer. The Company considers all relevant
information when estimating variable consideration such as current contractual and statutory requirements, specific known
market events and trends, industry data and forecasted customer buying and payment patterns. The amount of net revenue
the Company can recognize is constrained by estimates of variable consideration which are included in the transaction
price. Payment terms with Customers do not exceed one year and, therefore, the Company does not account for a financing
component in its arrangements. The Company expenses incremental costs of obtaining a contract with a Customer, including
sales commissions, when incurred as the period of benefit is less than one year. Shipping and handling costs for product
shipments to Customers are recorded as sales and marketing expenses in the consolidated statement of operations.
Trade Discounts and Allowances - The Company may provide Customers with trade discounts, rebates, allowances
or other incentives. The Company records an estimate for these items as a reduction of revenue in the same period the
revenue is recognized.
Government and Payor Rebates - The Company may contract with certain third-party payors, primarily health
insurance companies, pharmacy benefit managers and government programs, for the payment of rebates with respect to
utilization of its products. The Company also has agreements with GPOs that provide for administrative fees and discounted
pricing in the form of volume-based rebates. The Company is also subject to discount obligations under state Medicaid
programs and Medicare. The Company records an estimate for these rebates as a reduction of revenue in the same period the
revenue is recognized.
Other Incentives - Other incentives includes the Company’s co-pay assistance program which is intended to provide
financial assistance to qualified commercially-insured patients with prescription drug co-payments required by
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payors. The Company estimates and records an accrual for these incentives as a reduction of revenue in the period the
revenue is recognized. The Company estimates amounts for co-pay assistance based upon the number of claims and the cost
per claim that the Company expects to receive associated with product that has been sold to Customers but remains in the
distribution channel at the end of each reporting period.
Product Returns - Consistent with industry practice, the Company has a product returns policy that provides
Customers a right of return for product purchased within a specified period prior to and subsequent to the product’s
expiration date. The right of return lapses upon shipment of the goods to a patient. The Company records an estimate for the
amount of its products which may be returned as a reduction of revenue in the period the related revenue is recognized. The
Company’s estimates for product returns are based upon available industry data and its own sales information, including its
visibility into the inventory remaining in the distribution channel. There is no returns liability associated with sales of
ESKATA as the Company has a no returns policy for this product.
Product sales, net included the following for the years ended December 31, 2018, 2017 and 2016:
ESKATA
RHOFADE
Total product revenue, net
Contract Research
Year Ended
December 31,
2017
2018
$
$
2,804 $
1,136
3,940 $
— $
—
— $
2016
—
—
—
The Company earns contract research revenue from the provision of laboratory services to clients through
Confluence, its wholly-owned subsidiary. Contract research revenue is generally evidenced by contracts with clients which
are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services
rendered. Revenue related to these contracts is generally recognized as the laboratory services are performed, based upon the
rates specified in the contracts. Under ASC Topic 606, the Company elected to apply the “right to invoice” practical
expedient when recognizing contract research revenue. The Company recognizes contract research revenue in the amount to
which it has the right to invoice.
The Company has also received revenue from grants under the Small Business Innovation Research program of the
National Institutes of Health (“NIH”). During the year ended December 31, 2018, the Company had two active grants from
NIH which were related to early-stage research. As of December 31, 2018, there were no remaining funds available to the
Company under the grants. The Company recognizes revenue related to grants as amounts become reimbursable under each
grant, which is generally when research is performed, and the related costs are incurred.
Other Revenue
Licenses of Intellectual Property – The Company recognizes revenue received from non-refundable, upfront fees
related to the licensing of intellectual property when the intellectual property is determined to be distinct from the other
performance obligations identified in the arrangement, the license has been transferred to the customer, and the customer is
able to use and benefit from the license.
Milestone Payments - At the inception of each arrangement that includes milestone payments, the Company
evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the
transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur,
the associated milestone value is included in the amount allocated to the license of intellectual property. Milestone payments
that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of
being achieved until those approvals are received.
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Cash Equivalents
The Company considers all short term, highly liquid investments with original maturities of 90 days or less at
acquisition date to be cash equivalents. Cash equivalents, which have consisted of money market accounts, commercial paper
and corporate debt securities with original maturities of less than three months, are stated at fair value.
Marketable Securities
Marketable securities with original maturities of greater than three months and remaining maturities of less than one
year from the balance sheet date are classified as short term. Marketable securities with remaining maturities of greater than
one year from the balance sheet date are classified as long term.
The Company classifies all of its marketable securities as available-for-sale securities. The Company’s marketable
securities are measured and reported at fair value using quoted prices in markets that are not active for identical or similar
securities. Unrealized gains and losses are reported as a separate component of stockholders’ equity. The cost of securities
sold is determined on a specific identification basis, and realized gains and losses, if any, are included in other income, net
within the consolidated statement of operations and comprehensive loss. If any adjustment to fair value reflects a decline in
the value of the investment, the Company considers available evidence to evaluate the extent to which the decline is “other
than temporary” and reduces the investment to fair value through a charge to the statement of operations and comprehensive
loss.
Other Assets
In February 2017, the Company paid a $2,000 PDUFA fee to the FDA in conjunction with the filing of its NDA for
ESKATA. The Company requested a waiver and refund of this PDUFA fee, which was approved by the FDA in December
2017, and was refunded to the Company in January 2018.
Inventory
Inventory includes the third-party cost of manufacturing and assembly of finished product, quality control and other
overhead costs. Inventory is stated at the lower of cost or net realizable value. Inventory is adjusted for short-dated,
unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon
assumptions about future demand and market conditions. The Company had $791 and $0 of inventory as of December 31,
2018 and 2017, respectively, which was comprised primarily of finished goods.
Deferred Offering Costs
The Company recorded legal, accounting and other third-party fees associated directly with the filing of its
registration statement on Form S-3 in November 2016, in other assets on its consolidated balance sheet. These deferred
offering costs are recorded in stockholders’ equity as a reduction of the proceeds generated from offerings consummated
under the Form S-3 on a pro rata basis. The Company may also record legal, accounting and other third-party fees directly
associated with in-process equity financings as deferred offering costs (non-current) until such financings are
completed. The deferred costs related to an in-process equity financing are recorded in stockholders’ equity as a reduction of
the proceeds generated from the related offering when it is completed. Deferred offering costs were $0 and $62 as of
December 31, 2018 and 2017, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using
the straight-line method over the useful life of the asset. Computer equipment is depreciated over three years. Manufacturing
and laboratory equipment is depreciated over five years. Furniture and fixtures are depreciated over five years. Leasehold
improvements are depreciated over the shorter of the lease term or their useful life. Expenditures for repairs and maintenance
of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets
disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.
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Assets Held for Sale
In order for an asset to be classified as held for sale, several criteria must be achieved. These criteria include, among
others, an active program to market an asset and locate a buyer, as well as the probable disposition of the asset within one
year. Upon being classified as held for sale, the recoverability of the carrying value of an asset must be assessed and
evaluated. After the valuation process is completed, the held for sale asset is reported at the lower of its carrying value or fair
value less cost to sell, and no additional depreciation expense is recognized related to the asset. Once an asset is classified as
held for sale, all of its historical balance sheet information is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets. The Company recorded an impairment charge of $216 in the year ended
December 31, 2016 for equipment that was previously classified as held for sale. The impairment charge was included in
research and development expense on the Company’s consolidated statement of operations. The Company had no assets
classified as held for sale as of December 31, 2018 and 2017.
Impairment of Long Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for
recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include
significant underperformance of the business in relation to expectations, significant negative industry or economic trends and
significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long lived
asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and
eventual disposition of the long lived asset to its carrying value. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment
loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on
discounted cash flows.
Intangible Assets
Intangible assets include both finite-lived and indefinite-lived assets. Finite-lived intangible assets are amortized
over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If
that pattern cannot be reliably determined, the straight-line method of amortization is used. Finite-lived intangible assets
consist of a research technology platform the Company acquired through the acquisition of Confluence and the intellectual
property rights related to RHOFADE. 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 assets is either
amortized over their estimated useful life beginning when the underlying drug candidate is approved and launched
commercially, or expensed immediately if development of the drug candidate is abandoned.
Finite-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 indefinite-lived intangible
asset is less than its carrying value.
Goodwill
Goodwill is not amortized, but rather is subject to testing for impairment at least annually, which the Company
performs during the fourth quarter, or when indicators of an impairment are present. The Company considers each of its
operating segments, dermatology therapeutics and contract research, to be a reporting unit since this is the lowest level for
which discrete financial information is available. The Company has attributed the full amount of the goodwill acquired with
Confluence, or $18,504, to the dermatology therapeutics segment. The annual impairment test performed by the Company is
a qualitative assessment based upon current facts and circumstances related to operations of the dermatology therapeutics
segment. If the qualitative assessment indicates an impairment may be present, the Company would perform the required
quantitative analysis and an impairment charge would be recognized to the extent that the estimated fair value of the
reporting unit is less than its carrying amount. However, any loss recognized would not exceed the total amount of goodwill
allocated to that reporting unit. The Company concluded goodwill was not impaired as of December 31, 2018 and 2017.
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Contingent Consideration
The Company initially recorded the contingent consideration related to future potential payments based upon the
achievement of certain development, regulatory and commercial milestones, resulting from the acquisition of Confluence, at
its estimated fair value on the date of acquisition. Changes in fair value reflect new information about the likelihood of the
payment of the contingent consideration and the passage of time. Future changes in the fair value of the contingent
consideration, if any, will be recorded as income or expense in the Company’s consolidated statement of operations.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses include salaries,
stock-based compensation and benefits of employees, fees paid under licensing agreements, fees paid under a third party
assignment agreement and other operational costs related to the Company’s research and development activities, including
depreciation expenses and the cost of research and development contracts which the Company has entered into with outside
vendors to conduct both preclinical studies and clinical trials. Significant judgment and estimates are made in determining
the amount of research and development costs recognized in each reporting period. The Company analyzes the progress of
its preclinical studies and clinical trials, completion of milestone events, invoices received and contracted costs when
estimating research and development costs. Actual results could differ from the Company’s estimates. The Company’s
historical estimates for research and development costs have not been materially different from the actual costs.
Stock-Based Compensation
The Company measures the compensation expense of stock-based awards granted to employees and directors using
the grant date fair value of the award. The Company has issued stock options and restricted stock unit (“RSU”) awards with
service-based vesting conditions, as well as with performance-based vesting conditions. The Company has not issued awards
that include market-based conditions. For service-based awards the Company recognizes stock-based compensation expense
on a straight-line basis over the requisite service period. For performance-based awards the Company recognizes 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, the Company evaluates 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.
The Company initially measures the compensation expense of stock-based awards granted to consultants using the
grant date fair value of the award. Compensation expense is recognized over the period during which services are rendered
by such consultants. At the end of each financial reporting period prior to completion of services being rendered, the
compensation expense related to these awards is remeasured using the then current fair value of the Company’s common
stock for RSUs, or based upon updated assumptions in the Black-Scholes option pricing model for stock option awards.
The Company classifies stock-based compensation expense in its statement of operations and comprehensive loss in
the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service
payments are classified.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing
model. The Company estimates its expected stock volatility based on the historical volatility of a set of peer companies,
which are publicly traded, and expects to continue to do so until it has adequate historical data regarding the volatility of its
own publicly-traded stock price. The expected term of the Company’s stock options has been determined using the
“simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options 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. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid
cash dividends and does not expect to pay cash dividends in the future. Prior to the Company’s initial public offering in
October 2015 (“IPO”), the Company valued its common stock using a hybrid method to estimate its enterprise value. The
hybrid method used was a probability-weighted expected return method which was a scenario-based methodology
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that estimated the fair value of the Company’s common stock based upon an analysis of future values for the Company
assuming various outcomes. The hybrid method used calculated equity values using an option pricing model in one or more
of scenarios, and also considered the rights of each class of stock.
The fair value of each RSU is measured using the closing price of the Company’s common stock on the date of
grant.
Patent Costs
All patent related costs incurred in connection with filing and prosecuting patent applications are expensed as
incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and
administrative expenses.
Foreign Currency Translation
The reporting currency of the Company is the U.S. Dollar. The functional currency of ATIL, the Company’s wholly-
owned subsidiary, is the British Pound. Assets and liabilities of ATIL are translated into U.S. Dollars based on exchange
rates at the end of each reporting period. Revenues and expenses are translated at average exchange rates during the reporting
period. Gains and losses arising from the translation of assets and liabilities are included as a component of accumulated
other comprehensive loss within the Company’s consolidated balance sheet. Gains and losses resulting from foreign
currency transactions are reflected within the Company’s consolidated statement of operations. The Company has not
utilized foreign currency hedging strategies to mitigate the effect of its foreign currency exposure.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the
financial statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences
are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The
Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it
believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax
assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for
recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and
feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by
applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated
to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is
deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize
in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a
greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of
any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and
penalties.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from
transactions and economic events other than those with stockholders. Comprehensive loss is comprised of net loss, foreign
currency translation adjustments and unrealized gains (losses) on marketable securities.
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Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding
during the period, plus the weighted average number of potential shares of common stock from the assumed exercise of stock
options, and the assumed vesting of RSUs and restricted stock granted by the Company upon its formation, if dilutive. Since
the Company was in a net loss position basic and diluted net loss per share was the same for each of the periods presented.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets
and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value
hierarchy, of which the first two are considered observable and the last is considered unobservable:
·
·
·
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for
similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or
liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to
determining the fair value of the assets or liabilities, including pricing models, discounted cash flow
methodologies and similar techniques.
The Company’s cash equivalents, marketable securities and contingent consideration are carried at fair value,
determined according to the fair value hierarchy described above. The carrying value of the Company’s accounts payable
and accrued expenses approximate fair value due to the short-term nature of these liabilities. The carrying value of the
Company’s debt approximates fair value because interest is a floating rate based on the 30-day U.S. LIBOR rate, and is
therefore reflective of market rates.
Concentration of Credit Risk and of Significant Customers and 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’s top five customers represented 83% of aggregate gross revenue from product sales and contract
research revenue for the year ended December 31, 2018. The Company’s top five customers represented 70% of total
contract research revenue earned from August 3, 2017, the date of acquisition of Confluence, through December 31,
2017. The Company did not have product sales during the year ended December 31, 2017.
The Company is dependent on third party manufacturers to supply products for commercial distribution, as well as
for 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 and other components.
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Segment Reporting
Operating segments are components of a company for which separate financial information is available and
evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate
resources. The Company reports two segments, dermatology therapeutics and contract research, which are primarily based
on its operating segments and operating results used to assess performance. The dermatology therapeutics segment is
focused on dermatological and immuno-inflammatory diseases. The contract research segment is focused on providing
laboratory services to pharmaceutical and biotech companies looking to supplement their research and development efforts
with difficult-to-execute specialty skills and programs. The Company does not allocate assets by segment.
Recently Issued and Adopted Accounting Pronouncements
In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606,
which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions
should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the
impact of ASU 2018-18 on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow
the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense
as incurred. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods
within such fiscal years, with early adoption permitted. The Company is evaluating the impact of ASU 2018-15 on its
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The FASB developed the
amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of
disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important
information to users of the financial statements. This update eliminates certain disclosure requirements for fair value
measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing
disclosure requirements. The standard will be effective for fiscal years beginning after December 15, 2019, including interim
periods within such fiscal years, with early adoption permitted. The Company is evaluating the impact of ASU 2018-13 on
its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718). The amendments
in this ASU expand the scope of Topic 718 to include stock-based compensation arrangements with nonemployees except for
specific guidance on option pricing model inputs and cost attribution. ASU 2018-07 is effective for annual reporting periods
beginning after December 31, 2018, including interim periods within that year, and early adoption is permitted. The
Company adopted the provisions of this standard on January 1, 2019, the impact of which on its consolidated financial
statements was not significant.
In January 2017, the FASB issued ASU 2017-01, Business Combinations—Clarifying the Definition of a Business
(Topic 805). The amendments in this ASU provide a screen to determine when a set of acquired assets and/or activities is
not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is
concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments
in this ASU will reduce the number of transactions that meet the definition of a business. ASU 2017-01 is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within those years, and early adoption
is permitted. The Company adopted the provisions of this standard on January 1, 2018, the impact of which on its
consolidated financial statements was not significant.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU
introduces a new model for recognizing credit losses on financial instruments based upon estimated expected credit
losses. ASU 2016-13 will apply to loans, accounts receivable, financial assets measured at amortized cost and at fair value
through other comprehensive income, loan commitments and certain off-balance sheet credit exposures. ASU 2016-13 is
effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, and
early adoption is permitted. The Company is assessing the potential impact of ASU 2016-13 on its consolidated financial
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statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU 2018-
10, Codification Improvements to Topic 842, Leases, and 2018-11, Targeted Improvements, which included a number of
technical corrections and improvements, including additional options for transition. The new standard establishes a right-of-
use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with early adoption permitted. The amendments in ASU 2016-
02 must be applied to all leases existing at the date a company initially applies the standard. A company may choose to use
either the effective date of ASU 2016-02, or the beginning of the earliest comparative period presented in the financial
statements, as its date of initial application. The Company adopted the new standard on January 1, 2019 and used the
effective date as its date of initial application. The Company’s financial statements will not be updated, and the disclosures
under the new standard will not be provided, for periods before January 1, 2019.
ASU 2016-02 provides optional practical expedients companies can elect to use in transition. The Company expects
to elect practical expedients which allow it not to reassess prior conclusions about lease identification, lease classification and
initial direct costs made under previous accounting standards. The Company continues to evaluate the effect of adoption of
ASU 2016-02, and estimates both assets and liabilities will increase by $2,000 to $2,500 upon adoption, before considering
deferred taxes. The Company does not expect the adoption of ASU 2016-02 will have a material impact on its consolidated
statement of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this
ASU, entities should recognize revenue in an amount that reflects the consideration to which they expect to be entitled to in
exchange for goods and services provided. ASU 2014-09 was effective for annual reporting periods beginning after
December 15, 2017. The Company did not recognize any transition adjustments as a result of adopting ASU 2014-09 and,
accordingly, comparative information has not been restated for the periods reported.
3. Acquisitions
RHOFADE
In November 2018, the Company completed the acquisition of RHOFADE from Allergan Sales, LLC (“Allergan”)
pursuant to the Asset Purchase Agreement dated as of October 15, 2018 (the “APA”). Pursuant to the APA, the Company
acquired the worldwide rights to RHOFADE, which includes an exclusive license to certain intellectual property for
RHOFADE, as well as additional intellectual property.
The following table summarizes the aggregate amount paid for the assets acquired by the Company in connection
with the acquisition of RHOFADE:
Cash paid to Allergan at closing
Cash deposited in escrow at closing
Transaction costs
Total purchase price of assets acquired
$
$
59,574
6,500
1,048
67,122
The Company has also agreed to pay Allergan a one-time payment of $5,000 upon the achievement of a specified
development milestone related to the potential development of an additional dermatology product. In addition, the Company
has agreed to pay Allergan specified royalties, ranging from a mid-single digit percentage to a mid-teen percentage of net
sales, subject to specified reductions, limitations and other adjustments, on a country-by-country basis until the date that the
patent rights related RHOFADE have expired or, if later, November 30, 2028. In addition, the Company has agreed to
assume the obligation to pay specified royalties and milestone payments under agreements with Aspect Pharmaceuticals,
LLC and Vicept Therapeutics, Inc. Members of the Company’s management team, including Neal Walker, Frank Ruffo,
Christopher Powala and Stuart Shanler, as well as Stephen Tullman, the chairman of the Company’s board of directors, are
former stockholders of Vicept Therapeutics, Inc., and Dr. Shanler is also a current member of Aspect Pharmaceuticals,
LLC. In their capacities as current or former holders of equity interests in these
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entities, these individuals may be entitled to receive a portion of the potential future payments payable by the Company. The
Company incurred an aggregate expense of $165 and $0 related to royalty payments under these agreements during the years
ended December 31, 2018 and 2017, respectively.
The acquisition of RHOFADE has been accounted for as an asset acquisition in accordance with FASB ASC 805-50,
rather than as a business combination. As an asset acquisition, the cost to acquire the group of assets is allocated to the
individual assets acquired or liabilities assumed based on their relative fair values. The relative fair values of identifiable
tangible and intangible assets assumed from the acquisition of RHOFADE are based on estimates of fair value using
assumptions that the Company believes is reasonable. The Company accounted for the acquisition of RHOFADE as an asset
acquisition because substantially all of the fair value of the assets acquired is concentrated in a single asset, the RHOFADE
product rights. ASC 805-10-55-5A, which sets forth a screen test, provides that if substantially all of the fair value of the
assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the assets acquired are not
considered to be a business.
The following table summarizes the fair value of assets acquired in the acquisition of RHOFADE:
Inventory
Intangible assets, net
Total assets acquired
$
$
893
66,229
67,122
The fair value of finished goods inventory acquired was estimated using net selling price less the costs of disposal
and a reasonable profit for the disposal efforts. Raw material was valued at current replacement cost, which approximated
the seller’s carrying value. The intangible asset for the RHOFADE product rights will be amortized on a straight-line basis
over a period of 10 years. The Company believes this pattern of amortization reflects the expected benefits to be realized
from commercializing RHOFADE. In addition, the 10-year useful life is based upon expiration dates of key patents
underlying the RHOFADE intellectual property.
Confluence
In August 2017, the Company acquired Confluence, at which time, Confluence became a wholly-owned subsidiary
of the Company. The Company gave aggregate consideration with a fair value of $24,322 to the equity holders of
Confluence. The following table summarizes the fair value of total consideration given to the Confluence equity holders in
connection with the acquisition:
Cash consideration paid
Aclaris common stock issued
Contingent consideration
Total fair value of consideration to Confluence equity holders
$
$
10,269
9,675
4,378
24,322
The Company accounted for the acquisition of Confluence as a business combination using the acquisition method
of accounting. Under the acquisition method of accounting, the assets acquired and liabilities assumed in this transaction
were recorded at their respective fair values. The following table summarizes the fair value of assets acquired and liabilities
assumed in the acquisition of Confluence:
Cash and cash equivalents
Accounts receivable, net
Other current assets
Property and equipment
Other intangible assets
IPR&D
Goodwill
Total assets acquired
Accounts payable and accrued expenses
Deferred tax liability
113
$
622
574
89
268
751
6,629
18,504
27,437
656
2,386
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Other liabilities
Total liabilities assumed
Total net assets acquired
73
3,115
$
24,322
The fair value of the IPR&D and the other intangible assets acquired was determined using a replacement cost
method, which estimated the cost that would be required to rebuild the intangible assets identified in the acquisition of
Confluence. The acquisition of Confluence resulted in the recognition of goodwill in the amount of $18,504 which
represents the value of new products and technologies to be developed in the future as well as the value of the employee
workforce acquired.
In November 2018, the Company achieved a development milestone specified in the merger agreement with
Confluence equity holders. The milestone payment to the Confluence equity holders was comprised of $2,500 in cash and
253,208 shares of the Company’s common stock with a fair value of $2,216. The Company also agreed to pay the
Confluence equity holders aggregate additional milestone payments of up to $75,000, based upon the achievement of
specified regulatory and commercial milestones. In addition, the Company has agreed to pay the Confluence equity holders
royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations
and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-
country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such
product. In addition, if the Company sells, licenses or transfers any of the intellectual property acquired from Confluence,
the Company will be obligated to pay the Confluence equity holders a portion of any incremental consideration (in excess of
the development and milestone payments described above) that the Company receives from such sales, licenses or transfers
in specified circumstances.
The following supplemental unaudited pro forma information presents the Company’s financial results, for the
periods presented, as if the acquisition of Confluence had occurred on January 1, 2016. This supplemental unaudited pro
forma financial information has been prepared for comparative purposes only, and is not necessarily indicative of what actual
results would have been had the acquisition of Confluence occurred on January 1, 2016, nor is this information indicative of
future results.
Revenue
Gross profit
Total operating expenses
Net loss
$
Year Ended
December 31,
2017
2018
10,091 $
3,241
138,655
(132,738)
4,365 $
1,347
73,810
(70,391)
2016
3,693
1,652
51,277
(49,148)
The supplemental unaudited pro forma financial results for the year ended December 31, 2017 includes adjustments
to exclude $1,351 of acquisition-related expenses, and $888 to exclude revenue billed to the Company by Confluence. The
supplemental unaudited pro forma financial results for the year ended December 31, 2017 also includes an adjustment for
amortization expense related to the other intangible asset acquired.
There were no acquisition-related expenses incurred, or revenue billed to the Company by Confluence for the year
ended December 31, 2016, and accordingly, no adjustment is necessary for these items in the supplemental pro forma
financial results for that year. The supplemental unaudited pro forma financial results for the year ended December 31, 2016
includes an adjustment for amortization expense related to the other intangible assets acquired.
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4. Fair Value of Financial Assets and Liabilities
The following tables present information about the fair value measurements of the Company’s financial assets and
liabilities which are measured at fair value on a recurring basis, and indicate the level of the fair value hierarchy utilized to
determine such fair values:
Assets:
Cash equivalents
Marketable securities
Total Assets
Liabilities:
Level 1
Level 2
Level 3
Total
December 31, 2018
$ 49,766 $
4,992 $
—
110,953
$ 49,766 $ 115,945 $
— $ 54,758
—
110,953
— $ 165,711
Acquisition-related contingent consideration
Total liabilities
$
$
— $
— $
— $
— $
934
$
934 $
934
934
Assets:
Cash equivalents
Marketable securities
Total Assets
Level 1
Level 2
Level 3
Total
December 31, 2017
$ 19,339 $
— $
—
188,652
$ 19,339 $ 188,652 $
— $ 19,339
—
188,652
— $ 207,991
Liabilities:
Acquisition-related contingent consideration
Total liabilities
$
$
— $
— $
— $ 4,378 $
— $ 4,378 $
4,378
4,378
As of December 31, 2018 and 2017, the Company’s cash equivalents consisted of investments with maturities of
less than three months and included a money market fund and commercial paper which were valued based upon Level 1
inputs, and commercial paper, government obligations and corporate debt securities which were valued based upon Level 2
inputs. In determining the fair value of its Level 2 investments the Company relied on quoted prices for identical securities
in markets that are not active. These quoted prices were obtained by the Company with the assistance of a third‑party pricing
service based on available trade, bid and other observable market data for identical securities. Quarterly, the Company
compares the quoted prices obtained from the third‑party pricing service to other available independent pricing information
to validate the reasonableness of the quoted prices provided. The Company evaluates whether adjustments to third-party
pricing is necessary and, historically, the Company has not made adjustments to quoted prices obtained from the third-party
pricing service. During the years ended December 31, 2018 and 2017, there were no transfers between Level 1, Level 2 and
Level 3. The reduction in acquisition-related contingent consideration of $3,444 during the year ended December 31, 2018
was primarily due to the achievement of a specified development milestone in November 2018 which resulted in the
Company paying cash of $2,500 and issuing common stock with a fair value of $2,216 to the former Confluence equity
holders. This reduction was partially offset by an adjustment of $1,272 to increase the value of the liability related to the
achievement of the specified development milestone.
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As of December 31, 2018 and 2017, the fair value of the Company’s available-for-sale marketable securities by type
of security was as follows:
December 31, 2018
Gross
Gross
Amortized Unrealized Unrealized
Gain
Loss
Cost
Fair
Value
Marketable securities:
Corporate debt securities
Commercial paper
Asset-backed securities
U.S. government agency debt securities
Total marketable securities
Marketable securities:
Corporate debt securities
Commercial paper
Asset-backed securities
U.S. government agency debt securities
Total marketable securities
$
5,030 $
67,159
21,745
17,044
$ 110,978 $
— $
—
—
—
— $
(14) $
5,016
—
67,159
(8)
21,737
(3)
17,041
(25) $ 110,953
December 31, 2017
Gross
Gross
Amortized Unrealized Unrealized
Gain
Loss
Cost
Fair
Value
$ 37,401 $
85,202
16,708
49,511
$ 188,822 $
— $
—
—
—
— $
37,333
(68) $
85,202
—
16,695
(13)
(89)
49,422
(170) $ 188,652
5. Property and Equipment, Net
Property and equipment, net consisted of the following:
December 31,
Computer equipment
Fleet vehicles
Manufacturing equipment
Lab equipment
Furniture and fixtures
Leasehold improvements
Property and equipment, gross
Accumulated depreciation
Property and equipment, net
2017
2018
650
1,292 $
—
2,131
511
604
721
1,068
327
524
430
332
2,639
5,951
(1,671)
(480)
4,280 $ 2,159
$
$
Depreciation expense was $1,248, $370 and $120 for the years ended December 31, 2018, 2017 and 2016,
respectively.
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6. Intangible Assets
Intangible assets consisted of the following:
Gross Cost
Remaining December 31,
Accumulated Amortization
December 31,
RHOFADE product rights
Other intangible assets
Total definite-lived intangible assets
IPR&D
Total intangible assets, net
Life
9.9
8.6
na
2017
2018
$ 66,229 $
751
66,980
— $
751
751
6,629 6,629
$ 73,609 $ 7,380 $
2018
2017
552 $
106
658
—
658 $
—
31
31
—
31
Amortization expense was $627, $31 and $0 for the years ended December 31, 2018, 2017 and 2016, respectively
As of December 31, 2018, estimated future amortization expenses is as follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
7. Accrued Expenses
Accrued expenses consisted of the following:
Employee compensation expenses
Sales incentives and rebates
Marketing expenses
Research and development expenses
Capital leases, current portion
Professional fees
Payable to NST
Other
Total accrued expenses
117
$ 6,698
6,698
6,698
6,698
6,698
32,832
$ 66,322
December 31,
2017
$
2018
5,293 $ 3,010
—
2,650
39
453
627
1,437
142
601
108
1,123
590
—
424
1,030
$ 12,587 $ 4,940
Table of Contents
8. Debt
Loan and Security Agreement – Oxford Finance LLC
In October 2018, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Oxford
Finance LLC, a Delaware limited liability company (“Oxford”). The Loan Agreement provides for up to $65,000 in term
loans (the “Term Loan Facility”). Of the $65,000, the Company borrowed $30,000 in October 2018. The remaining $35,000
is available to be borrowed until the earlier of March 31, 2019 or an event of default. Should the Company not draw all of
the Term Loan Facility, or repay the entirety of the amount drawn during the applicable draw timeframe, the Company will
be required to pay a non-utilization fee equal to 1.0% of the undrawn portion of the Term Loan Facility.
The Loan Agreement provides for interest only payments through November 2021, followed by 24 consecutive
equal monthly payments of principal and interest in arrears starting on November 2021 and continuing through the maturity
date of October 2023. All unpaid principal and accrued and unpaid interest will be due and payable on the maturity
date. The Loan Agreement provides for an annual interest rate equal to the greater of (i) 8.35% and (ii) the 30-day U.S.
LIBOR rate plus 6.25%. The Loan Agreement also provides for a final payment fee equal to 5.75% of the original principal
amount of the term loans drawn under the Term Loan Facility, which final payment is due on October 1, 2023 or upon the
prepayment of the facility or the acceleration of amounts due under the facility as a result of an event of default.
The Company has the option to prepay the outstanding balance of the term loans in full, subject to a prepayment fee
of (i) 3% of the original principal amount of the aggregate term loans drawn for any prepayment prior to the first anniversary
of the date such term loan was funded, (ii) 2% of the original principal amount of the aggregate term loans drawn for any
prepayment between the first and second anniversaries of the date such term loan was funded or (iii) 1% of the original
principal amount of the aggregate term loans drawn for any prepayment after the second anniversary of the funding date but
before October 1, 2023. The Company also has the option to prepay the term loans in part, once in a three-month period, of
an amount of $2,000 or greater, subject to the same prepayment fees and other specified limitations.
The Term Loan Facility is secured by substantially all of the Company’s assets, except that the collateral does not
include the Company’s intellectual property, and the Company has agreed not to encumber any of its intellectual
property. The Loan Agreement contains customary representations, warranties and covenants by the Company. The Loan
Agreement also contains specified financial covenants related to minimum consolidated future revenues of the Company.
9. Stockholders’ Equity
Preferred Stock
As of December 31, 2018 and 2017, the Company’s amended and restated certificate of incorporation authorized the
Company to issue 10,000,000 shares of undesignated preferred stock. There were no shares of preferred stock outstanding as
of December 31, 2018 and 2017.
Common Stock
As of December 31, 2018 and 2017, the Company’s amended and restated certificate of incorporation authorized the
Company to issue 100,000,000 shares of $0.00001 par value common stock.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s
stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any,
subject to any preferential dividend rights of any series of preferred stock that may be outstanding. No dividends have been
declared through December 31, 2018.
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Private Placement
In June 2016, pursuant to a securities purchase agreement with certain accredited investors dated May 27, 2016, the
Company closed a private placement in which it sold an aggregate of 1,081,082 shares of common stock at a price of $18.50
per share, for gross proceeds of $20,000. The Company incurred placement agent fees of $1,300 and expenses of $153 in
connection with the private placement. The net offering proceeds received by the Company, after deducting placement agent
fees and transaction expenses, were $18,547.
November 2016 Public Offering
In November 2016, the Company’s registration statement on Form S-3 was declared effective by the Securities and
Exchange Commission. On November 23, 2016, the Company closed a follow-on public offering in which 4,000,000 shares
of common stock were sold to the public at a price of $22.75 per share, for gross proceeds of $91,000. On November 17,
2016, the underwriters exercised in full their option to purchase 600,000 additional shares of common stock at a price to the
public of $22.75 per share, for gross proceeds of $13,650.
The Company paid underwriting discounts and commissions of $6,279 to the underwriters in connection with the
offering, including the underwriters’ exercise of their option to purchase additional shares. In addition, the Company
incurred expenses of $188 in connection with the offering. The net offering proceeds received by the Company, after
deducting underwriting discounts, commissions and offering expenses, were $98,158.
At-The-Market Equity Offering
In November 2016, the Company entered into an at-the-market sales agreement with Cowen and Company, LLC
(“Cowen”) to sell the Company’s securities under the Company’s registration statement on Form S-3. In October 2018, the
Company terminated the at-the-market sales agreement with Cowen. During the year ended December 31, 2018, the
Company did not issue any shares of common stock under the at-the-market sales agreement. As of December 31, 2018, the
Company had issued and sold an aggregate of 635,000 shares of common stock under the at-the-market sales agreement at a
weighted average price per share of $31.50, for aggregate gross proceeds of $20,003. The Company incurred expenses of
$691 in connection with the shares issued under the at-the-market sales agreement.
August 2017 Public Offering
In August 2017, the Company entered into an underwriting agreement pursuant to which the Company issued and
sold 3,747,602 shares of common stock under the Company’s registration statement on Form S-3, including the underwriters’
partial exercise of their option to purchase additional shares. The shares of common stock were sold to the public at a price
of $23.02 per share, for gross proceeds of $86,270.
The Company paid underwriting discounts and commissions of $5,176 to the underwriters in connection with the
offering. In addition, the Company incurred expenses of $176 in connection with the offering. The net offering proceeds
received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $80,918.
October 2018 Public Offering
In October 2018, the Company entered into an underwriting agreement pursuant to which the Company issued and
sold 9,941,750 shares of common stock under registration statements on Form S-3, including the underwriters’ full exercise
of their option to purchase additional shares. The shares of common stock were sold to the public at a price of $10.75 per
share, for gross proceeds of $106,874. The Company paid underwriting discounts and commissions of $6,412 to the
underwriters in connection with the offering. In addition, the Company incurred expenses of $257 in connection with the
offering. The net offering proceeds received by the Company, after deducting underwriting discounts and commissions and
offering expenses, were $100,205.
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10. Stock‑Based Awards
2017 Inducement Plan
In July 2017, the Company’s board of directors adopted the 2017 Inducement Plan (the “2017 Inducement
Plan”). The 2017 Inducement Plan is a non-shareholder approved stock plan adopted pursuant to the “inducement exception”
provided under Nasdaq listing rules. The only employees eligible to receive grants of awards under the 2017 Inducement
Plan are individuals who satisfy the standards for inducement grants under Nasdaq rules, generally including individuals who
were not previously an employee or director of the Company. Under the terms of the 2017 Inducement Plan the Company
may grant up to 1,000,000 shares of common stock pursuant to nonqualified stock options, stock appreciation rights,
restricted stock awards, RSUs, and other stock awards. All shares of common stock that were eligible for issuance under the
2017 Inducement Plan after October 1, 2018, including any shares underlying any awards that expire or are otherwise
terminated, reacquired to satisfy tax withholding obligations, settled in cash or repurchased by the Company in the future that
would have been eligible for re-issuance under the 2017 Inducement Plan, were retired.
2015 Equity Incentive Plan
In September 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”),
and the Company’s stockholders approved the 2015 Plan. The 2015 Plan became effective in connection with the Company’s
IPO. Beginning at the time the 2015 Plan became effective, no further grants may be made under the Company’s 2012
Equity Compensation Plan, as amended and restated (the “2012 Plan”). The 2015 Plan provides for the grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock
awards, cash-based awards and other stock-based awards. The number of shares initially reserved for issuance under the 2015
Plan was 1,643,872 shares of common stock. The number of shares of common stock that may be issued under the 2015 Plan
will automatically increase on January 1 of each year ending on January 1, 2025, in an amount equal to the lesser of (i) 4.0%
of the shares of the Company’s common stock outstanding on December 31 of the preceding calendar year or (ii) an amount
determined by the Company’s board of directors. The shares of common stock underlying any awards that expire, are
otherwise terminated, settled in cash or repurchased by the Company under the 2015 Plan and the 2012 Plan will be added
back to the shares of common stock available for issuance under the 2015 Plan. As of December 31, 2018, 1,616,362 shares
remained available for grant under the 2015 Plan. As of January 1, 2019, the number of shares of common stock that may be
issued under the 2015 Plan was automatically increased by 1,648,429 shares.
2012 Equity Compensation Plan
Upon the 2015 Plan becoming effective, no further grants can be made under the 2012 Plan. The Company granted
a total of 1,140,524 stock options under the 2012 Plan, of which 948,761 and 984,720 were outstanding as of December 31,
2018 and 2017, respectively. Stock options granted under the 2012 Plan vest over four years and expire after ten years. As
required, the exercise price for the stock options granted under the 2012 Plan was not less than the fair value of common
shares as determined by the Company as of the date of grant.
Stock Option Valuation
The weighted average assumptions the Company used to estimate the fair value of stock options granted during the
years ended December 31, 2018, 2017 and 2016 were as follows:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
Year Ended
December 31,
2017
1.93 %
6.2
94.19 %
0 %
2018
2.66 %
6.3
96.78 %
0 %
2016
2.06 %
6.5
94.86 %
0 %
The Company recognizes compensation expense for awards over their vesting period. Compensation expense for
awards includes the impact of forfeiture in the period when they occur.
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Stock Options
The following table summarizes stock option activity for the years ended December 31, 2018, 2017 and 2016:
Weighted
Number
of Shares
Price
Weighted Average
Average
Exercise
Remaining Aggregate
Contractual
Term
(in years)
Intrinsic
Value
Outstanding as of December 31, 2015
Granted
Exercised
Forfeited and cancelled
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited and cancelled
Outstanding as of December 31, 2017
Granted
Exercised
Forfeited and cancelled
Outstanding as of December 31, 2018
Options vested and expected to vest as of December 31, 2018
Options exercisable as of December 31, 2018
1,738,524 $
1,083,919
(51,980)
(68,113)
2,702,350 $
790,100
(36,738)
(126,955)
3,328,757 $
1,459,800
(59,450)
(447,026)
4,282,081 $
4,282,081 $
1,908,561
$
(1)
13.23
27.12
—
—
18.94
26.21
6.40
22.05
20.69
20.97
9.70
24.62
20.53
20.53
17.53
9.51 $ 24,722
9.05
24,434
8.28 $ 19,812
7.91 $
7.91 $
7.02 $
2,404
2,404
2,404
(1) All options granted under the 2012 Plan are exercisable immediately, subject to a repurchase right in the Company’s
favor that lapses as the option vests. This amount reflects the number of shares under options that were vested, as
opposed to exercisable, as of December 31, 2018.
The weighted average grant date fair value of stock options granted during the years ended December 31, 2018,
2017 and 2016 was $16.55, $20.28 and $21.16 per share, respectively.
The intrinsic value of a stock option is calculated as the difference between the exercise price of the stock option and
the fair value of the underlying common stock, and cannot be less than zero.
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Restricted Stock Units
The following table summarizes RSU activity for the years ended December 31, 2018, 2017 and 2016.
Weighted
Average
Grant Date
Fair Value
Per Share
Number
of Shares
Outstanding as of December 31, 2015
Granted
Vested
Forfeited and cancelled
Outstanding as of December 31, 2016
Granted
Vested
Forfeited and cancelled
Outstanding as of December 31, 2017
Granted
Vested
Forfeited and cancelled
Outstanding as of December 31, 2018
Stock‑Based Compensation
53,800 $
180,764
(12,950)
(2,000)
219,614 $
117,883
(40,705)
(13,239)
283,553 $
552,060
(140,497)
(68,709)
626,407 $
28.68
27.16
28.68
28.68
27.43
26.27
26.89
27.53
27.02
19.03
27.22
23.65
20.30
The following table summarizes stock-based compensation expense recorded by the Company for the years ended
December 31, 2018, 2017 and 2016:
Year Ended
December 31,
2018
2017
2016
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total stock-based compensation expense
$
211 $
766 $
—
5,471 2,291
1,851
—
6,897 3,813
$ 20,055 $ 14,430 $ 6,104
6,480
3,492
9,317
As of December 31, 2018, the Company had unrecognized stock‑based compensation expense for stock options and
RSUs of $35,909 and $9,409, respectively, which is expected to be recognized over weighted average periods of 2.54 years
and 2.90 years, respectively.
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11. Net Loss per Share
Basic and diluted net loss per share is summarized in the following table:
Numerator:
Net loss
Denominator:
Weighted average shares of common stock outstanding
Net loss per share, basic and diluted
2018
Year Ended
December 31,
2017
2016
$
(132,738) $
(68,523) $
(48,079)
32,909,762
$
(4.03) $
28,102,386
21,415,733
(2.25)
(2.44) $
The Company’s potentially dilutive securities, which included stock options and RSUs, have been excluded from the
computation of diluted net loss per share since the effect would be to reduce the net loss per share. Therefore, the weighted
average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to
common stockholders is the same. The following table presents potential shares of common stock excluded from the
calculation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2018, 2017
and 2016. All share amounts presented in the table below represent the total number outstanding as of December 31.
Options to purchase common stock
Restricted stock unit awards
Total potential shares of common stock
12. Commitments and Contingencies
Agreements for Office Space
2018
December 31,
2017
4,282,081 3,328,757 1,738,524
53,800
1,792,324
283,553
4,908,488 3,612,310
626,407
2016
In November 2017, the Company entered into a sublease agreement with Auxilium Pharmaceuticals, LLC (the
“Sublandlord”) pursuant to which it subleases 33,019 square feet of office space for its headquarters in Wayne,
Pennsylvania. Subject to the consent of Chesterbrook Partners, LP (“Landlord”) as set forth in the lease by and between
them and Sublandlord, the sublease has a term that runs through October 2023. If for any reason the lease between the
Landlord and Sublandlord is terminated or expires prior to October 2023, the Company’s sublease will automatically
terminate.
In November 2016, the Company entered into a lease agreement with a third party for additional office space in
Malvern, Pennsylvania with a term beginning in February 2017, and ending in November 2019. The Company also occupies
office and laboratory space in St. Louis, Missouri under the terms of an agreement which expires in May 2019.
Rent expense was $886, $946 and $254 for the years ended December 31, 2018, 2017 and 2016, respectively. The
Company recognizes rent expense on a straight-line basis over the term of the agreement and has accrued for rent expense
incurred but not yet paid.
Capital Leases
Laboratory Equipment
The Company leases laboratory equipment which is used in its laboratory space in St. Louis, Missouri under two
capital lease financing arrangements which the Company entered into in August 2017 and October 2017. The capital leases
have terms which end in October 2020 and December 2020, respectively.
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Fleet Vehicles
The Company leases automobiles for its sales force and other field-based employees under the terms of a master
lease agreement with a third party. The lease term for each automobile begins on the date the Company takes delivery and
continues for a period of four years. The Company has accounted for the automobile leases as capital leases in its
consolidated financial statements.
As of December 31, 2018, future minimum lease payments under operating and capital lease agreements were as
follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Total
$
$
1,242
1,156
1,054
791
531
4,774
Stock Purchase Agreement with Vixen Pharmaceuticals, Inc
Pursuant to the stock purchase agreement with Vixen the Company is obligated to make annual payments of $100
through March 2022, with such amounts being creditable against specified future payments.
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to
vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising
out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the
Company has entered into indemnification agreements with members of its board of directors that will require the Company,
among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors
or officers. The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result
of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements
will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities
related to such obligations in its consolidated financial statements as of December 31, 2018 or 2017.
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13. Income Taxes
The Tax Cuts and Jobs Act of 2017 (the "TCJA") was enacted on December 22, 2017 and became effective January
1, 2018. The TCJA made significant changes to U.S. tax law, including lowering U.S. corporate income tax rates,
implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign
subsidiaries and modifying the taxation of other income and expense items.
The TCJA reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to
21% under the TCJA, the Company revalued its deferred tax liabilities, net as of December 31, 2017. The impact of
revaluation of the deferred tax liabilities, net was $18,507 of income tax expense, which was more than offset by a reduction
in the valuation allowance of $20,344 resulting in a net impact of a $1,837 tax benefit. The net tax benefit recorded was
primarily the result of tax law changes which impacted the deferred tax liability the Company recorded for IPR&D related to
the acquisition of Confluence. Under GAAP, IPR&D is an indefinite lived intangible that is capitalized on the balance sheet,
but which does not have a cost basis under U.S. tax law.
The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign
subsidiary earnings and profits. The Company did not have consolidated accumulated earnings and profits attributable to its
foreign subsidiary; accordingly, the Company did not record any income tax expense related to the transition tax.
Due to the timing of the enactment of the TCJA, the Staff of the SEC issued SAB 118 which provided a
measurement period to report the impact of the TCJA. During the measurement period, provisional amounts for the effects
of the law were able to be recorded to the extent a reasonable estimate can be made. To the extent that all information
necessary is not available, prepared or analyzed, companies were able to recognize provisional estimated amounts for a
period of up to one year following enactment of the TCJA. The Company completed its analysis during the year ended
December 31, 2018, and made no adjustments as a result of TCJA under SAB 118.
During the years ended December 31, 2018, 2017 and 2016, the Company did not record an income tax benefit for
net operating losses incurred in each year due to the uncertainty of realizing a benefit from those items.
Loss before income taxes is allocated as follows:
Year Ended December 31,
2018
2017
2016
U.S. operations
Foreign operations
Loss before income taxes
$ (132,473) $ (63,665) $ (40,597)
(7,482)
$ (132,738) $ (70,353) $ (48,079)
(6,688)
(265)
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as
follows:
Federal statutory income tax rate
State taxes, net of federal benefit
Research and development tax credits
Permanent differences
Foreign rate differential
Change in deferred tax asset valuation allowance
Impact of U.S. tax reform
Effective income tax rate
125
Year Ended December 31,
2017
(34.0)%
(9.7)
(1.1)
0.4
1.7
17.4
22.7
(2.6)%
2018
(21.0)%
(3.5)
(2.1)
0.8
—
25.7
—
(0.1)%
2016
(34.0)%
(5.2)
(2.0)
1.8
3.2
36.2
—
— %
Table of Contents
Deferred tax liabilities, net as of December 31, 2018 and 2017 consisted of the following:
Deferred tax assets:
Net operating loss carryforwards
Capitalized start-up costs
Research and development tax credit carryforwards
Capitalized research and development expenses
Stock‑based compensation expenses
Accrued compensation
Inventory
Property and equipment
Other
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible asset
Section 481(a) adjustment
Other
Total deferred tax liabilities
Valuation allowance
Deferred tax liabilities, net
$
$
December 31,
2018
2017
57,426 $ 26,566
9,940
6,954
2,296
5,038
3,595
2,843
6,220
9,037
—
923
—
271
86
—
280
683
48,983
83,175
(674)
(1,735)
—
(330)
(2,739)
(80,985)
(549) $
—
(1,843)
(498)
(313)
(2,654)
(46,878)
(549)
As of December 31, 2018, the Company had federal and state net operating loss (“NOL”) carryforwards of
$199,507 and $212,430, respectively, which begin to expire in 2032. As of December 31, 2018, the Company also had
federal research and development tax credit carryforwards of $4,944 which begin to expire in 2032, and state research and
development tax credit carryforwards of $118 which begin to expire in 2022. The Company also has $1,513 of loss carry
forwards in the United Kingdom which can be carried forward indefinitely. Utilization of the net operating loss carryforwards
and research and development tax credit carryforwards in the United States may be subject to a substantial annual limitation
under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that may have occurred previously or that
could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to
offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing
the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year
period. The Company has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through
December 31, 2016. Although the Company has experienced Section 382 ownership changes since 2012, the Company has
concluded that it should have sufficient ability to utilize NOLs accumulated during the periods tested. The Company has not
yet determined if a Section 382 ownership change has occurred during the years ended December 31, 2017 or 2018, or for
Confluence prior to the acquisition. In addition, the Company may experience ownership changes in the future as a result of
subsequent shifts in its stock ownership, some of which may be outside of the Company’s control.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax
assets. The Company considered its history of cumulative net losses incurred since inception, its lack of substantial revenue
generated to date, and its forecasted future operating losses and concluded that it is more likely than not that the Company
will not realize the benefits of its deferred tax assets. Accordingly, a full valuation allowance has been established against the
deferred tax assets as of December 31, 2018 and 2017. The Company evaluates positive and negative evidence of its’ ability
to realize deferred tax assets at each reporting period.
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Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2018, 2017, and
2016 related primarily to the increases in net operating loss carryforwards, capitalized start-up costs, and research and
development tax credit carryforwards and were as follows:
Valuation allowance at beginning of year
Decreases recorded as benefit to income tax provision
Increases resulting from the acquisition of Confluence
Increases recorded to income tax provision
Valuation allowance as of end of year
$
$
2016
2018
Year Ended December 31,
2017
(46,878) $ (30,726) $ (13,286)
—
—
—
—
(4,176)
—
(34,107)
(17,440)
(11,976)
(80,985) $ (46,878) $ (30,726)
During the year ended December 31, 2015, the Company recorded unrecognized tax benefits in the amount of
$4,400 related to start-up costs that were previously deducted beginning in the initial return filing period ended December 31,
2012. During the year ended December 31, 2016, the Company filed a method of accounting change with the IRS related to
the start-up costs, and reversed the related unrecognized tax position. During the year ended December 31, 2017, the
Company recorded uncertain tax benefits related to tax positions from the acquired Confluence business, which were settled
during the year ended December 31, 2018. The following table summarizes the changes in the Company’s unrecognized tax
benefits:
Unrecognized tax benefits at beginning of year
Increases related to prior year tax provisions
Decreases related to prior year tax provisions
Increases related to current year tax provisions
Unrecognized tax benefits as of end of year
Year ended December 31,
2018
2017
$
$
43 $
—
(43)
—
— $
— $
43
—
—
43 $
2016
(4,400)
—
4,400
—
—
The total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate
were $0 and $36 as of December 31, 2018 and 2017, respectively. The Company accrues interest and penalties related to
unrecognized tax benefits in income tax expense (benefit) in the consolidated statement of operations and comprehensive
loss. During each of the years ended December 31, 2018, 2017 and 2016, the Company recognized expense (benefit) of $0,
$3 and $0, respectively, related to interest and penalties.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal
course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are
currently no pending income tax examinations. The Company’s tax years are still open under statute from 2012 to the
present. All open years may be examined to the extent that tax credit or net operating loss carryforwards are used in future
periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.
14. Related Party Transactions
In August 2013, the Company entered into a sublease agreement with NeXeption, Inc. ("NeXeption"), which was
subsequently assigned to NST Consulting, LLC, a wholly-owned subsidiary of NST, LLC. In November 2017, the Company
terminated the sublease with NST Consulting, LLC effective March 31, 2018. The Company paid $590 to NST Consulting,
LLC, which amount represented accelerated rent payments. The Company recorded a one-time charge of $506 in the year
ended December 31, 2017 which is included in general and administrative expenses in the consolidated statement of
operations. Total payments made under the sublease during the years ended December 31, 2018, 2017 and 2016, were $570,
$318 and $253, respectively.
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Table of Contents
In February 2014, the Company entered into a services agreement with NST, LLC (the “NST Services Agreement”),
pursuant to which NST, LLC provided certain pharmaceutical development, management and other administrative services to
the Company. The NST Services agreement was subsequently assigned by NST, LLC to NST Consulting, LLC. Under the
same agreement the Company also provided services to another company under common control with the Company and NST
Consulting, LLC and was reimbursed by NST, LLC for those services. In November 2017, the Company terminated the NST
Services Agreement effective December 31, 2017.
Mr. Stephen Tullman, the chairman of the Company’s board of directors, was an executive officer of NeXeption and
is also the manager of NST Consulting, LLC and NST, LLC, and three of the Company’s executive officers are and have
been members of entities affiliated with NST, LLC.
During the years ended December 31, 2018, 2017 and 2016 amounts included in the consolidated statement of
operations for the NST Services Agreement are summarized in the following table:
Services provided by NST Consulting, LLC
Services provided to NST Consulting, LLC
General and administrative expense, net
Services provided by NST Consulting, LLC
Services provided to NST Consulting, LLC
Research and development expense, net
Services provided by NST Consulting, LLC
Services provided to NST Consulting, LLC
Total, net
Year Ended
December 31,
2018
2017
2016
— $
—
— $
— $
—
— $
— $
—
— $
225
(17)
208
$
$
— $
—
— $
323
(56)
267
246
(97)
149
225
(17)
208
$
$
569
(153)
416
$
$
$
$
$
$
Net payments made to NST Consulting, LLC
$
— $
300 $
325
The Company had a net amount payable of $0 and $570 due to NST Consulting, LLC under the NST Services
Agreement as of December 31, 2018, and December 31, 2017, respectively.
15. Agreements Related to Intellectual Property
License, Development and Commercialization Agreement with Cipher Pharmaceuticals Inc.
In April 2018, the Company entered into an exclusive license agreement with Cipher Pharmaceuticals Inc.
(“Cipher”) for the rights to obtain regulatory approval of and commercialize A-101 40% Topical Solution, which the
Company markets under the brand name ESKATA in the United States, in Canada for the treatment of SK. Under the
agreement, Cipher is responsible for obtaining marketing approval in Canada for A-101 40% Topical Solution. The
Company will supply Cipher with finished product, and, if regulatory approval is obtained, Cipher will be responsible for
distribution and commercialization of A-101 40% Topical Solution in Canada. Additionally, Cipher is responsible for all
expenses related to regulatory and commercial activities for A-101 40% Topical Solution in Canada. The Company received
an upfront payment of $1,000 upon signing of the agreement with Cipher and $500 upon the achievement of a specified
regulatory milestone, both of which are included in other revenue in the Company’s consolidated statement of operations for
the year ended December 31, 2018. The Company can earn a remaining payment of $500 upon the achievement of a
specified regulatory milestone, and aggregate payments of $1,750 upon the achievement of specified commercial milestones
under the terms of the agreement with Cipher. Cipher will also be required to pay the Company a low double-digit
percentage royalty on net sales of A-101 40% Topical Solution in Canada. The term of the agreement expires on the later of
the expiration of applicable patents in Canada or the 15 anniversary of the first commercial sale of
th
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Table of Contents
licensed product in Canada. Cipher submitted a New Drug Submission for A-101 40% Topical Solution for the treatment of
raised SKs, which was accepted for review by Health Canada in December 2018.
Assignment Agreement with Estate of Mickey Miller and Finder’s Services Agreement with KPT Consulting,
LLC
In August 2012, the Company entered into an assignment agreement with the Estate of Mickey Miller (the “Miller
Estate”) under which the Company acquired some of the intellectual property rights covering ESKATA and A-101 45%
Topical Solution. In connection with obtaining the assignment of the intellectual property from the Miller Estate, the
Company also entered into a separate finder’s services agreement with KPT Consulting, LLC. Under the terms of the
finder’s services agreement, the Company made one-time milestone payments of $300 in the year ended December 31, 2016
upon the dosing of the first human subject with ESKATA in the Company’s Phase 3 clinical trial, $1,000 in the year ended
December 31, 2017 upon the achievement of a specified regulatory milestone and $1,500 in the year ended December 31,
2018 upon the achievement of a specified commercial milestone. The payments were recorded as general and administrative
expenses in the Company’s consolidated statement of operations.
Under the finder’s services agreement the Company is obligated to make an additional milestone payment of $3,000
upon the achievement of a specified commercial milestone. Under each of the assignment agreement and the finder’s
services agreement, the Company is obligated to pay royalties on sales of ESKATA and any related products, at low single-
digit percentages of net sales, subject to reduction in specified circumstances. The Company incurred an aggregate expense
of $112 and $0 related to royalty payments under these agreements during the years ended December 31, 2018 and 2017,
respectively. Both agreements will terminate upon the expiration of the last pending, viable patent claim of the patents
acquired under the assignment agreement, but no sooner than 15 years from the effective date of the agreements.
License Agreement with Rigel Pharmaceuticals, Inc.
In August 2015, the Company entered into an exclusive, worldwide license and collaboration agreement with Rigel
Pharmaceuticals, Inc. (“Rigel”) for the development and commercialization of products containing specified JAK inhibitors
developed by Rigel. Under this agreement, the Company intends to develop these JAK inhibitors for the treatment of
alopecia areata and other dermatological conditions. During the year ended December 31, 2015, the Company made an
upfront non-refundable payment of $8,000 to Rigel. In addition, the Company has agreed to make aggregate payments of up
to $80,000 upon the achievement of specified pre‑commercialization milestones, such as clinical trials and regulatory
approvals. Further, the Company has agreed to pay up to an additional $10,000 to Rigel upon the achievement of a second set
of development milestones. With respect to any products the Company commercializes under the agreement, the Company
will pay Rigel quarterly tiered royalties on its annual net sales of each product at a high single‑digit percentage of annual net
sales, subject to specified reductions, until the date that all of the patent rights for that product have expired, as determined on
a country‑by‑country and product‑by‑product basis or, in specified countries under specified circumstances, ten years from
the first commercial sale of such product.
The agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by either party
for a material breach. The Company may also terminate the agreement without cause at any time upon advance written notice
to Rigel. Rigel, after consultation with the Company, will be responsible for maintaining and prosecuting the patent rights,
and the Company will have final decision making authority regarding such patent rights for a product in the United States
and the European Union. To the extent that the Company and Rigel jointly develop intellectual property, the parties will
confer and decide which party will be responsible for filing, prosecuting and maintaining those patent rights. The agreement
also establishes a joint steering committee composed of an equal number of representatives for each party which will monitor
progress in the development of products.
The Company accounted for the transaction as an asset acquisition as the licensing arrangement did not meet the
definition of a business pursuant to the guidance prescribed in ASC Topic 805, Business Combinations. Accordingly, the
Company recorded the $8,000 upfront payment as research and development expense in the year ended December 31,
2015. The Company will record as expense any contingent milestone payments or royalties in the period in which such
liabilities are incurred. The Company concluded that licensing arrangement with Rigel did not meet the definition of a
business because the transaction principally resulted in its acquisition of intellectual property. As part of the transaction, the
Company did not acquire any employees or tangible assets, or any processes, protocols or operating systems. In addition, at
the time of the acquisition, there were no activities being conducted related to the licensed patents. The
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Table of Contents
Company expensed the cost of the acquired intellectual property as of the acquisition date on the basis that the cost of
intellectual property that is purchased for use in research and development activities, and that has no alternative future uses,
is expensed when acquired.
Stock Purchase Agreement with Vixen Pharmaceuticals, Inc. and License Agreement with Columbia
University
In March 2016, the Company entered into a stock purchase agreement (the “Vixen Agreement”) with Vixen, JAK1,
LLC, JAK2, LLC and JAK3, LLC (together, the “Selling Stockholders”) and Shareholder Representative Services LLC,
solely in its capacity as the representative of the Selling Stockholders. Pursuant to the Vixen Agreement, the Company
acquired all shares of Vixen’s capital stock from the Selling Stockholders. Following the acquisition of Vixen, Vixen became
a wholly-owned subsidiary of the Company. Pursuant to the Vixen Agreement, the Company paid $600 upfront and issued an
aggregate of 159,420 shares of the Company’s common stock to the Selling Stockholders. The Company is obligated to make
annual payments of $100 each year through March 2022, with such amounts being creditable against specified future
payments that may be paid under the Vixen Agreement.
The Company is obligated to make aggregate payments of up to $18,000 to the Selling Stockholders upon the
achievement of specified pre-commercialization milestones for three products in the United States, the European Union and
Japan, and aggregate payments of up to $22,500 upon the achievement of specified commercial milestones. With respect to
any commercialized products covered by the Vixen Agreement, the Company is obligated to pay low single-digit royalties on
net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that
product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten
years from the first commercial sale of such product. If the Company sublicenses any of Vixen’s patent rights and know-how
acquired pursuant to the Vixen Agreement, the Company will be obligated to pay a portion of any consideration the
Company receives from such sublicenses in specified circumstances.
As a result of the transaction with Vixen, the Company became party to the Exclusive License Agreement, by and
between Vixen and the Trustees of Columbia University in the City of New York (“Columbia”), dated as of December 31,
2015 (as amended, the “License Agreement”). Under the License Agreement, the Company is obligated to pay Columbia an
annual license fee of $10, subject to specified adjustments for patent expenses incurred by Columbia and creditable against
any royalties that may be paid under the License Agreement. The Company is also obligated to pay up to an aggregate of
$11,600 upon the achievement of specified commercial milestones, including specified levels of net sales of products covered
by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products
covered by Columbia patent rights and/or know-how, subject to specified adjustments. If the Company sublicenses any of
Columbia’s patent rights and know-how acquired pursuant to the License Agreement, it will be obligated to pay Columbia a
portion of any consideration received from such sublicenses in specified circumstances. The royalties, as determined on a
country-by-country and product-by-product basis, are payable until the date that all of the patent rights for that product have
expired, the expiration of any market exclusivity period granted by a regulatory body or, in specified circumstances, ten years
from the first commercial sale of such product. The License Agreement terminates on the date of expiration of all royalty
obligations thereunder unless earlier terminated by either party for a material breach, subject to a specified cure period. The
Company may also terminate the License Agreement without cause at any time upon advance written notice to Columbia.
The Company accounted for the transaction with Vixen as an asset acquisition as the arrangement did not meet the
definition of a business pursuant to the guidance prescribed in ASC Topic 805, Business Combinations. The Company
concluded the transaction with Vixen did not meet the definition of a business because the transaction principally resulted in
the acquisition of the License Agreement. The Company did not acquire tangible assets, processes, protocols or operating
systems. In addition, at the time of the transaction, there were no activities being conducted related to the licensed patents.
The Company expensed the acquired intellectual property as of the acquisition date on the basis that the cost of intellectual
property purchased for use in research and development activities, and that has no alternative future uses, is expensed when
acquired. Accordingly, the Company recorded the $600 upfront payment, the fair value of the shares of common stock issued
of $2,355, and the present value of the six non-contingent annual payments as research and development expense in the year
ended December 31, 2016. Additionally, the Company will record as expense any contingent milestone payments or royalties
in the period in which such liabilities are incurred.
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16. Retirement Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan
covers substantially all employees who meet minimum age and service requirements and allows participants to defer a
portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of
the Company’s board of directors. The Company has elected to match 100% of employee contributions to the 401(k) Plan up
to 4% of the employee’s earnings, subject to certain limitations. Company contributions under the 401(k) Plan were $662,
$270, and $176 for the years ended December 31, 2018, 2017 and 2016, respectively.
17. Segment Information
The Company has two reportable segments, dermatology therapeutics and contract research. The dermatology
therapeutics segment is focused on identifying, developing and commercializing innovative therapies to address significant
unmet needs for dermatological and immuno-inflammatory diseases. The Company currently markets and sells two drugs,
ESKATA and RHOFADE. ESKATA is a proprietary formulation of high-concentration hydrogen peroxide topical solution
that the Company is commercializing as an office-based prescription treatment for raised SKs, a common non-malignant skin
tumor. RHOFADE is approved for the topical treatment of persistent facial erythema, or redness, associated with rosacea in
adults. The Company sells ESKATA and RHOFADE to a limited number of wholesalers in the U.S. These wholesalers
subsequently resell the Company’s products to pharmacies and health care providers. The contract research segment earns
revenue from the provision of laboratory services to clients through Confluence, the Company’s wholly-owned
subsidiary. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-
price, fee-for-service basis. Corporate and other includes general and administrative expenses as well as eliminations of
intercompany transactions. The Company does not report balance sheet information by segment since it is not reviewed by
the chief operating decision maker, and all of the Company’s tangible assets are held in the United States.
The Company’s results of operations by segment for the years ended December 31, 2018, 2017 and 2016 are
summarized in the tables below:
Year Ended December 31, 2018
Revenue, net
Cost of revenue
Research and development
Sales and marketing
General and administrative
Loss from operations
Year Ended December 31, 2017
Revenue, net
Cost of revenue
Research and development
Sales and marketing
General and administrative
Loss from operations
Total
Dermatology Contract Corporate
Therapeutics Research and Other Company
$
10,091
5,441 $ 13,134 $ (8,484) $
6,850
(7,070)
2,522 11,398
63,009
(1,414)
—
64,423
47,997
40
47,957
—
2,141
27,649
25,478
30
$ (109,491) $
(445) $ (25,478) $ (135,414)
Total
Dermatology Contract Corporate
Therapeutics Research and Other Company
$
1,683
— $ 3,202 $ (1,519) $
(1,519)
—
1,207
2,726
39,790
—
39,790
—
13,769
13,769
—
—
19,340
18,445
222
673
$ (53,781) $
(72,423)
(197) $ (18,445) $
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Table of Contents
Year Ended December 31, 2016
Revenue, net
Cost of revenue
Research and development
Sales and marketing
General and administrative
Loss from operations
Intersegment Revenue
Total
Dermatology Contract Corporate
Therapeutics Research and Other Company
$
— $
—
— $
—
—
—
—
33,476
—
—
—
3,295
11,796
—
11,641
(48,567)
— $ (11,641) $
— $
—
33,476
3,295
155
$ (36,926) $
Revenue for the contract research segment included $8,484 and $1,519 for services performed on behalf of the
dermatology therapeutics segment for the years ended December 31, 2018 and 2017, respectively. All intersegment revenue
has been eliminated in the Company’s consolidated statement of operations.
18. Quarterly Financial Information (unaudited)
The following table summarizes the unaudited consolidated financial results of operations for the quarters indicated:
2018 Quarter Ended
Revenue, net
Gross profit
Operating expenses
Other income, net
Net loss
Net loss per share, basic and diluted
Revenue, net
Gross profit
Operating expenses
Other income, net
Net loss
Net loss per share, basic and diluted
March 31, June 30,
$
1,118 $
151
3,676 $
2,495
31,099 34,473
760
(30,229) (31,218)
$
(1.01) $
September 30, December 31,
3,669
160
39,198
487
(38,551)
(0.99)
1,628 $
435
33,885
710
(32,740)
(1.06) $
(0.98) $
719
2017 Quarter Ended
March 31, June 30,
$
— $
—
— $
—
12,930 15,295
457
(12,559) (14,838)
$
(0.56) $
September 30, December 31,
999
684 $
231
245
25,687
18,987
678
564
(22,934)
(18,192)
(0.74)
(0.63) $
(0.48) $
371
Net loss per share is computed independently for each quarter and, therefore, the sum of the quarterly per share
amounts may not equal the year-to-date per share amount.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our chief executive officer, who is
our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2018, the end of the period
covered by this Annual Report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a
company that are designed to provide reasonable assurance that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including
its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as
of December 31, 2018, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation
required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2018
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public
Accounting Firm
Our management is responsible for establishing and maintaining an adequate system of internal control over
financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Management conducted an assessment of our internal
control over financial reporting based on the framework established in 2013 by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control—Integrated Framework. Based on the assessment, management concluded
that, as of December 31, 2018, our internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act of 2002. Because we qualify as an
emerging growth company under the JOBS Act, management's report was not subject to attestation by our independent
registered public accounting firm.
Item 9B. Other Information
Not applicable.
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PART III
We will file a definitive Proxy Statement for our 2019 Annual Meeting of Stockholders, or the 2019 Proxy
Statement, with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly,
certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections
of the 2019 Proxy Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference to the sections of the 2019 Proxy
Statement under the captions “Information Regarding the Board of Directors and Corporate Governance,” “Election of
Directors,” “Executive Officers Who Are Not Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference to the sections of the 2019 Proxy Statement
under the captions “Executive Compensation” and “Non-Employee Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference to the sections of the 2019 Proxy
Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities
Authorized for Issuance under Equity Compensation Plans.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference to the sections of the 2019 Proxy
Statement under the captions “Transactions with Related Persons” and “Independence of the Board of Directors.”
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference to the sections of the 2019 Proxy
Statement under the caption “Ratification of Selection of Independent Registered Public Accounting Firm.”
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)The following documents are filed as part of this report:
(1) Financial Statements
Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements”
under Part II. Item 8 of this Annual Report on Form 10‑K.
(2) Financial Statement Schedules
Financial statement schedules have been omitted in this report because they are not applicable, not
required under the instructions, or the information required is set forth in the consolidated financial statements
or related notes thereto.
(3) Exhibits
See exhibits listed under part (b) below.
(b)Exhibits
Exhibit
Number
Description of Document
2.1# Stock Purchase Agreement, by and among the Registrant, Vixen Pharmaceuticals, Inc., JAK1, LLC, JAK2,
LLC, JAK3, LLC and Shareholder Representative Services LLC, dated as of March 24, 2016 (incorporated by
reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the
SEC on May 11, 2016).
2.2# Agreement and Plan of Merger, dated as of August 3, 2017, by and among the Registrant, Aclaris Life
Sciences, Inc., Confluence Life Sciences, Inc. and Fortis Advisors LLC (incorporated by reference to Exhibit
2.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on November
7, 2017).
2.3# Asset Purchase Agreement, by and between the Registrant and Allergan Sales, LLC, dated as of October 15,
2018, as amended on November 30, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K (File No. 001-37581), filed with the SEC on December 3, 2018).
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1
to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on October 13,
2015).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-37581), filed with the SEC on October 13, 2015).
4.1 Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with
the SEC on September 25, 2015).
10.1# Clinical and Commercial Supply Agreement, by and between the Registrant and PeroxyChem LLC, dated as of
August 6, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-206437), filed with the SEC on August 17, 2015).
10.2# Assignment Agreement, by and between the Registrant and Mickey J. Miller, II, as personal representative of
the estate of Mickey J. Miller, dated as of August 20, 2012 (incorporated by reference to Exhibit 10.3 to
Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with
the SEC on September 25, 2015).
10.3 Amendment to Assignment Agreement, by and between the Registrant and Mickey J. Miller, II, as personal
representative of the estate of Mickey J. Miller, dated as of June 15, 2016 (incorporated herein by reference to
Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212095), filed with the
SEC on June 2, 2016).
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10.4# Finder's Services Agreement, by and between the Registrant and KPT Consulting, LLC, dated as of August 25,
2012 (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-206437), filed with the SEC on August 17, 2015).
10.5 Second Amended and Restated Investors' Rights Agreement, dated as of August 28, 2015, by and among the
Registrant and certain of its stockholders (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on September 4,
2015).
10.6+ Amended and Restated 2012 Equity Compensation Plan (incorporated by reference to Exhibit 10.7 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with
the SEC on September 4, 2015).
10.7+ Form of Stock Option Grant under Amended and Restated 2012 Equity Compensation Plan (incorporated by
reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed
with the SEC on August 17, 2015).
2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement
on Form S-8 (File No. 333-207434), filed with the SEC on October 15, 2015).
10.8+
10.9+ Form of Stock Option Grant Notice and Stock Option Agreement under 2015 Equity Incentive Plan
(incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-206437), filed with the SEC on September 25, 2015).
10.10+ Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under 2015 Equity
Incentive Plan (incorporated by reference to Exhibit 10.11 to Amendment No. 2 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on September 25, 2015).
10.11+* Form of Performance Stock Option Grant Notice and Stock Option Agreement used in connection with the
2015 Equity Incentive Plan.
10.12+* Form of Performance Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement used in
connection with the 2015 Equity Incentive Plan.
10.13 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.12 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on August 17, 2015).
10.14+ Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.13 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on
September 25, 2015).
10.15*+ Amended & Restated Non-Employee Director Compensation Policy.
10.16# License and Collaboration Agreement, by and between Aclaris Therapeutics International Limited and Rigel
Pharmaceuticals, Inc., dated as of August 27, 2015 (incorporated by reference to Exhibit 10.14 to Amendment
No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on
October 1, 2015).
10.17+ Amended and Restated Employment Agreement, by and between the Registrant and Neal Walker, dated as of
October 5, 2015 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
(File No. 001-37581), filed with the SEC on November 18, 2015).
10.18+ Employment Agreement, by and between the Registrant and Stuart Shanler, dated as of October 4, 2015
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-
37581), filed with the SEC on November 18, 2015).
10.19+ Employment Agreement, by and between the Registrant and Christopher Powala, dated as of September 17,
2015 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 001-37581), filed with the SEC on November 18, 2015).
10.20+ Employment Agreement with Kamil Ali-Jackson, dated as of September 17, 2015 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on
May 9, 2017).
10.21# Exclusive License Agreement, by and between The Trustees of Columbia University in the City of New York
and Vixen Pharmaceuticals, Inc., dated as of December 31, 2015 (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on May 11, 2016).
10.22# First Amendment to License Agreement, by and between The Trustees of Columbia University in the City of
New York and the Registrant, dated as of June 27, 2018 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on August 3, 2018).
10.23+ Aclaris Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
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10.24+ Form of Stock Option Grant Notice and Stock Option Agreement used in connection with the Aclaris
Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
10.25+ Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement used in connection
with the Aclaris Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
10.26 Sublease, dated November 2, 2017, by and between the Registrant and Auxilium Pharmaceuticals, LLC
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-
37581), filed with the SEC on November 2, 2017).
10.27* First Amendment to Sublease, dated as of December 13, 2017, by and between the Registrant and Auxilium
Pharmaceuticals, LLC.
10.28# Commercial Supply Manufacturing Services Agreement, by and between the Registrant and James Alexander
Corporation, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on May 8, 2018).
10.29# Distribution Agreement, by and between the Registrant and McKesson Specialty Care Distribution
Corporation, dated as of October 13, 2017, as amended by Amendment No. 1, dated as of March 6, 2018
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-
37581), filed with the SEC on August 3, 2018).
10.30# Exclusive Patent License Agreement, by and between the Registrant and Allergan, Inc., dated as of November
30, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
001-37581), filed with the SEC on December 3, 2018).
10.31^* Loan and Security Agreement, dated as of October 15, 2018, by and among Oxford Finance LLC, the lenders
party thereto, the Registrant, Confluence Discovery Technologies, Inc. and Aclaris Life Sciences, Inc., as
amended by First Amendment to Loan and Security Agreement, dated as of January 28, 2019.
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
24.1* Power of Attorney (contained on signature page hereto).
31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *† Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) and
15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
*
† This certification is being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and are
not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
Indicates management contract or compensatory plan.
+
# Confidential treatment has been granted with respect to portions of this exhibit (indicated by asterisks) and those portions
have been separately filed with the SEC.
^ Confidential treatment has been requested with respect to portions of this exhibit (indicated by asterisks) and those
portions have been separately filed with the SEC.
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Item 16. Form 10-K Summary.
Not applicable.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ACLARIS THERAPEUTICS, INC.
By:
/s/ Neal Walker
Neal Walker
President and Chief Executive Officer
Date: March 18, 2019
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Neal Walker, Kamil Ali-Jackson and Frank Ruffo, jointly and severally, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities,
to sign this Annual Report on Form 10-K of Aclaris Therapeutics, Inc., and any or all amendments thereto, and to file the
same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Neal Walker
Neal Walker
/s/ Frank Ruffo
Frank Ruffo
Title
Date
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
March 18, 2019
March 18, 2019
/s/ Stephen A. Tullman
Stephen A. Tullman
Chairman of the Board of Directors
March 18, 2019
/s/ Christopher Molineaux
Christopher Molineaux
Director
/s/ Anand Mehra, M.D.
Anand Mehra, M.D.
Director
/s/ William Humphries
William Humphries
Director
/s/ Andrew Powell
Andrew Powell
/s/ Andrew Schiff
Andrew Schiff
/s/ Bryan Reasons
Bryan Reasons
Director
Director
Director
139
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
ACLARIS THERAPEUTICS, INC.
2015 EQUITY INCENTIVE PLAN
STOCK OPTION GRANT NOTICE
Exhibits 10.11
Aclaris Therapeutics, Inc. (the “Company”), pursuant to its 2015 Equity Incentive Plan (the “Plan”), hereby grants to
Optionholder an option to purchase the number of shares of the Company’s Common Stock set forth below. This option is
subject to all of the terms and conditions as set forth in this notice, in the Option Agreement, the Plan and the Notice of
Exercise, all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined
herein but defined in the Plan or the Option Agreement will have the same definitions as in the Plan or the Option Agreement.
If there is any conflict between the terms in this notice and the Plan, the terms of the Plan will control.
Optionholder:
Date of Grant:
Vesting Commencement Date:
Number of Shares Subject to Option:
Exercise Price (Per Share):
Total Exercise Price:
Expiration Date:
Type of Grant: ☐ Incentive Stock Option
1
☐ Nonstatutory Stock Option
Exercise Schedule: Same as Vesting Schedule
Vesting Schedule: [________________________], subject to Optionholder’s Continuous Service through each such date.
Termination: Notwithstanding anything to the contrary in this Stock Option Grant Notice or the Option Agreement, if
the [PERFORMANCE CONDITION] is not achieved by [DATE], then the shares of Common Stock
subject to this option shall not vest, this option shall terminate on [DATE] and Optionholder shall have no
further right, title or interest in this option or the shares of Common Stock subject to this option.
Payment: By one or a combination of the following items (described in the Option Agreement):
☐ By cash, check, bank draft or money order payable to the Company
☐ Pursuant to a Regulation T Program if the shares are publicly traded
☐ By delivery of already-owned shares if the shares are publicly traded
☐ If and only to the extent this option is a Nonstatutory Stock Option, and subject to the Company’s
consent at the time of exercise, by a “net exercise” arrangement
Additional Terms/Acknowledgements: Optionholder acknowledges receipt of, and understands and agrees to, this Stock
Option Grant Notice, the Option Agreement and the Plan. Optionholder acknowledges and agrees that this Stock Option
Grant Notice and the Option Agreement may not be modified, amended
1
If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value
(measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.
1.
or revised except as provided in the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option
Grant Notice, the Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company
regarding this option award and supersede all prior oral and written agreements, promises and/or representations on that
subject with the exception of (i) options previously granted and delivered to Optionholder, (ii) any compensation recovery
policy that is adopted by the Company or is otherwise required by applicable law and (iii) any written employment or
severance arrangement that would provide for vesting acceleration of this option upon the terms and conditions set forth
therein.
By accepting this option, Optionholder consents to receive such documents by electronic delivery and to participate in the Plan
through an online or electronic system established and maintained by the Company or another third party designated by the
Company.
ACLARIS THERAPEUTICS, INC.
OPTIONHOLDER:
By:
Title:
Date:
Signature
Signature
Date:
ATTACHMENTS: Option Agreement, 2015 Equity Incentive Plan and Notice of Exercise
2.
ATTACHMENT I
OPTION AGREEMENT
ACLARIS THERAPEUTICS, INC.
2015 EQUITY INCENTIVE PLAN
OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Option Agreement, Aclaris Therapeutics, Inc.
(the “Company”) has granted you an option under its 2015 Equity Incentive Plan (the “Plan”) to purchase the number of
shares of the Company’s Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant
Notice. The option is granted to you effective as of the date of grant set forth in the Grant Notice (the “Date of Grant”). If
there is any conflict between the terms in this Option Agreement and the Plan, the terms of the Plan will control. Capitalized
terms not explicitly defined in this Option Agreement or in the Grant Notice but defined in the Plan will have the same
definitions as in the Plan.
The details of your option, in addition to those set forth in the Grant Notice and the Plan, are as follows:
1. VESTING. Subject to the provisions contained herein, your option will vest as provided in your Grant
Notice. Vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to
your option and your exercise price per share in your Grant Notice will be adjusted for Capitalization Adjustments.
3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. If you are an Employee eligible for
overtime compensation under the Fair Labor Standards Act of 1938, as amended (that is, a “Non-Exempt Employee”), and
except as otherwise provided in the Plan, you may not exercise your option until you have completed at least six (6) months of
Continuous Service measured from the Date of Grant, even if you have already been an employee for more than six (6)
months. Consistent with the provisions of the Worker Economic Opportunity Act, you may exercise your option as to any
vested portion prior to such six (6) month anniversary in the case of (i) your death or disability, (ii) a Corporate Transaction in
which your option is not assumed, continued or substituted, (iii) a Change in Control or (iv) your termination of Continuous
Service on your “retirement” (as defined in the Company’s benefit plans).
4. METHOD OF PAYMENT. You must pay the full amount of the exercise price for the shares you wish to
exercise. You may pay the exercise price in cash or by check, bank draft or money order payable to the Company or in any
other manner permitted by your Grant Notice, which may include one or more of the following:
(a) Pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board
that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. This manner of payment
is also known as a “broker-assisted exercise”, “same day sale”, or “sell to cover”.
(b) By delivery to the Company (either by actual delivery or attestation) of already-owned shares of
Common Stock that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at
Fair Market Value on the date of exercise. “Delivery” for these purposes, in the sole discretion of the Company at the time
you exercise your option, will include delivery to the
1
Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. You may
not exercise your option by delivery to the Company of Common Stock if doing so would violate the provisions of any law,
regulation or agreement restricting the redemption of the Company’s stock.
(c) If this option is a Nonstatutory Stock Option, subject to the consent of the Company at the time of
exercise, by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock
issued upon exercise of your option by the largest whole number of shares with a Fair Market Value that does not exceed the
aggregate exercise price. You must pay any remaining balance of the aggregate exercise price not satisfied by the “net
exercise” in cash or other permitted form of payment. Shares of Common Stock will no longer be outstanding under your
option and will not be exercisable thereafter if those shares (i) are used to pay the exercise price pursuant to the “net exercise,”
(ii) are delivered to you as a result of such exercise, and (iii) are withheld to satisfy your tax withholding obligations.
5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
6. SECURITIES LAW COMPLIANCE. In no event may you exercise your option unless the shares of Common
Stock issuable upon exercise are then registered under the Securities Act or, if not registered, the Company has determined that
your exercise and the issuance of the shares would be exempt from the registration requirements of the Securities Act. The
exercise of your option also must comply with all other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not be in material compliance with such laws
and regulations (including any restrictions on exercise required for compliance with Treas. Reg. 1.401(k)-1(d)(3), if
applicable).
7. TERM. You may not exercise your option before the Date of Grant or after the expiration of the option’s
term. The term of your option expires, subject to the provisions of Section 5(h) of the Plan and the Grant Notice, upon the
earliest of the following:
(a) immediately upon the date on which the event giving rise to your termination of Continuous Service
for Cause occurs (or, if required by law, the date of termination of Continuous Service for Cause);
(b) three (3) months after the termination of your Continuous Service for any reason other than Cause,
your Disability or your death (except as otherwise provided in Section 7(d) below); provided, however, that if during any part
of such three (3) month period your option is not exercisable solely because of the condition set forth in the section above
relating to “Securities Law Compliance,” your option will not expire until the earlier of the Expiration Date or until it has been
exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; provided further, if
during any part of such three (3) month period, the sale of any Common Stock received upon exercise of your option would
violate the Company’s insider trading policy, then your option will not expire until the earlier of the Expiration Date or until it
has been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service during
which the sale of the Common Stock received upon exercise of your option would not be in violation of the Company’s insider
trading policy. Notwithstanding the foregoing, if (i) you are a Non-Exempt Employee, (ii) your Continuous Service terminates
within six (6) months after the Date of Grant, and (iii) you have vested in a portion of your option at the time of your
termination of Continuous Service, your option will not expire until the earlier of (x) the later of (A) the date that is seven (7)
months after the Date of Grant, and (B) the date that is three (3) months after the termination of your Continuous Service, and
(y) the Expiration Date;
2
(c) twelve (12) months after the termination of your Continuous Service due to your Disability (except as
otherwise provided in Section 7(d)) below;
(d) eighteen (18) months after your death if you die either during your Continuous Service or within three
(3) months after your Continuous Service terminates for any reason other than Cause;
(e) in certain circumstances upon the effective date of a Transaction as set forth in the Plan;
(f) the Expiration Date indicated in your Grant Notice; or
(g) the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an
Incentive Stock Option, the Code requires that at all times beginning on the Date of Grant and ending on the day three (3)
months before the date of your option’s exercise, you must be an employee of the Company or an Affiliate, except in the event
of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances
for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue
to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you
otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate
terminates.
8. EXERCISE.
(a) You may exercise the vested portion of your option during its term by (i) delivering a Notice of
Exercise (in a form designated by the Company) or completing such other documents and/or procedures designated by the
Company for exercise and (ii) paying the exercise price and any applicable withholding taxes to the Company’s Secretary,
stock plan administrator, or such other person as the Company may designate, together with such additional documents as the
Company may then require.
(b) By exercising your option you agree that, as a condition to any exercise of your option, the Company
may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (i) the exercise of your option, (ii) the lapse of any substantial risk of forfeiture
to which the shares of Common Stock are subject at the time of exercise, or (iii) the disposition of shares of Common Stock
acquired upon such exercise.
(c) If your option is an Incentive Stock Option, by exercising your option you agree that you will notify
the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the Date of Grant or within one (1) year after such
shares of Common Stock are transferred upon exercise of your option.
9. TRANSFERABILITY. Except as otherwise provided in this Section 9, your option is not transferable, except by
will or by the laws of descent and distribution, and is exercisable during your life only by you.
(a) Certain Trusts. Upon receiving written permission from the Board or its duly authorized designee,
you may transfer your option to a trust if you are considered to be the sole beneficial
3
owner (determined under Section 671 of the Code and applicable state law) while the option is held in the trust. You and the
trustee must enter into transfer and other agreements required by the Company.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly
authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by
the Company, you may transfer your option pursuant to the terms of a domestic relations order, official marital settlement
agreement or other divorce or separation instrument as permitted by Treasury Regulation 1.421-1(b)(2) that contains the
information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms of any
division of this option with the Company prior to finalizing the domestic relations order or marital settlement agreement to
help ensure the required information is contained within the domestic relations order or marital settlement agreement. If this
option is an Incentive Stock Option, this option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
(c) Beneficiary Designation. Upon receiving written permission from the Board or its duly authorized
designee, you may, by delivering written notice to the Company, in a form approved by the Company and any broker
designated by the Company to handle option exercises, designate a third party who, on your death, will thereafter be entitled to
exercise this option and receive the Common Stock or other consideration resulting from such exercise. In the absence of such
a designation, your executor or administrator of your estate will be entitled to exercise this option and receive, on behalf of
your estate, the Common Stock or other consideration resulting from such exercise.
10. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in
your option will be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option
will obligate the Company or an Affiliate, their respective stockholders, boards of directors, officers or employees to continue
any relationship that you might have as a Director or Consultant for the Company or an Affiliate.
11. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part, and at any time thereafter as requested by
the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to
make adequate provision for (including by means of a “same day sale” pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the
exercise of your option.
(b) If this option is a Nonstatutory Stock Option, then upon your request and subject to approval by the
Company, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested
shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common
Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum
amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of your option
as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferred to a
date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of
Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the
determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such
election,
4
shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of
exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in
connection with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax withholding obligations of the Company and/or any
Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is
vested, and the Company will have no obligation to issue a certificate for such shares of Common Stock or release such shares
of Common Stock from any escrow provided for herein, if applicable, unless such obligations are satisfied.
12. TAX CONSEQUENCES. You hereby agree that the Company does not have a duty to design or administer the
Plan or its other compensation programs in a manner that minimizes your tax liabilities. You will not make any claim against
the Company, or any of its Officers, Directors, Employees or Affiliates related to tax liabilities arising from your option or
your other compensation. In particular, you acknowledge that this option is exempt from Section 409A of the Code only if the
exercise price per share specified in the Grant Notice is at least equal to the “fair market value” per share of the Common
Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with the option.
13. NOTICES. Any notices provided for in your option or the Plan will be given in writing (including
electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company
to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided
to the Company. The Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan
and this option by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this
option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or
electronic system established and maintained by the Company or another third party designated by the Company.
14. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of
which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations,
which may from time to time be promulgated and adopted pursuant to the Plan. If there is any conflict between the provisions
of your option and those of the Plan, the provisions of the Plan will control. In addition, your option (and any compensation
paid or shares issued under your option) is subject to recoupment in accordance with The Dodd–Frank Wall Street Reform and
Consumer Protection Act and any implementing regulations thereunder, any clawback policy adopted by the Company and
any compensation recovery policy otherwise required by applicable law.
15. OTHER DOCUMENTS. You hereby acknowledge receipt of and the right to receive a document providing the
information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In
addition, you acknowledge receipt of the Company’s policy permitting certain individuals to sell shares only during certain
“window” periods and the Company’s insider trading policy, in effect from time to time.
16. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of this option will not be included as
compensation, earnings, salaries, or other similar terms used when calculating your benefits under any employee benefit plan
sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly
reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.
5
17. VOTING RIGHTS. You will not have voting or any other rights as a stockholder of the Company with respect
to the shares to be issued pursuant to this option until such shares are issued to you. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this option, and no action taken pursuant to its
provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or
any other person.
18. SEVERABILITY. If all or any part of this Option Agreement or the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Option
Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Option Agreement (or part of such a
Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of
such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
19. MISCELLANEOUS.
(a) The rights and obligations of the Company under your option will be transferable to any one or more
persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the
Company’s successors and assigns.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the
sole determination of the Company to carry out the purposes or intent of your option.
(c) You acknowledge and agree that you have reviewed your option in its entirety, have had an
opportunity to obtain the advice of counsel prior to executing and accepting your option, and fully understand all provisions of
your option.
(d) This Option Agreement will be subject to all applicable laws, rules, and regulations, and to such
approvals by any governmental agencies or national securities exchanges as may be required.
(e) All obligations of the Company under the Plan and this Option Agreement will be binding on any
successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
This Option Agreement will be deemed to be signed by you upon the signing by you of the Grant Notice to which it is
attached.
* * *
6
ATTACHMENT II
2015 EQUITY INCENTIVE PLAN
ATTACHMENT III
NOTICE OF EXERCISE
Aclaris Therapeutics, Inc.
Attention: Stock Plan Administrator
640 Lee Road, Suite 200
Wayne, PA 19087
NOTICE OF EXERCISE
This constitutes notice to Aclaris Therapeutics, Inc. (the “Company”) under my stock option that I elect to purchase
the below number of shares of Common Stock of the Company (the “Shares”) for the price set forth below.
Type of option (check one):
Incentive ☐
Nonstatutory ☐
Date of Exercise: _______________
Stock option dated:
Number of Shares as to which option is exercised:
Certificates to be issued in name of:
Total exercise price:
Cash payment delivered herewith:
Value of ________ Shares delivered herewith:
Regulation T Program (cashless exercise):
$
$
$
$
$
$
$
$
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the
Aclaris Therapeutics, Inc. 2015 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated
by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an
Incentive Stock Option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the Shares
issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year
after such Shares are issued upon exercise of this option.
Very truly yours,
Signature
Print Name
ACLARIS THERAPEUTICS, INC.
RESTRICTED STOCK UNIT GRANT NOTICE
(2015 EQUITY INCENTIVE PLAN)
Exhibit 10.12
Aclaris Therapeutics, Inc. (the “Company”), pursuant to Section 6(b) of the Company’s 2015 Equity Incentive Plan (the
“Plan”), hereby awards to Participant a Restricted Stock Unit Award for the number of shares of the Company’s Common
Stock (“Restricted Stock Units”) set forth below (the “Award”). The Award is subject to all of the terms and conditions as set
forth in this notice of grant (this “Restricted Stock Unit Grant Notice”) and in the Plan and the Restricted Stock Unit Award
Agreement (the “Award Agreement”), both of which are attached hereto and incorporated herein in their entirety. Capitalized
terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event of any
conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Number of Restricted Stock Units/Shares:
Vesting Schedule: The shares subject to the Award shall vest as follows: [________________________], subject to
Participant’s Continuous Service through each such date.
Termination: Notwithstanding anything to the contrary in this Restricted Stock Unit Grant Notice or the Award
Agreement, if the [INSERT PERFORMANCE CONDITION] is not achieved by [DATE], then the
unvested Restricted Stock Units subject to this Award shall not vest, the Award will terminate on
[DATE] and Participant shall have no further right, title or interest in this Award or the shares of
Common Stock subject to this Award.
Issuance Schedule: Subject to any change on a Capitalization Adjustment, one share of Common Stock will be issued for
each Restricted Stock Unit that vests at the time set forth in Section 6 of the Award Agreement.
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Restricted
Stock Unit Grant Notice, the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant,
this Restricted Stock Unit Grant Notice, the Award Agreement and the Plan set forth the entire understanding between
Participant and the Company regarding the acquisition of the Common Stock pursuant to the Award specified above and
supersede all prior oral and written agreements on the terms of this Award with the exception, if applicable, of (i) any
compensation recovery policy that is adopted by the Company or is otherwise required by applicable law, and (ii) any written
employment or severance arrangement that would provide for vesting acceleration of this Award upon the terms and
conditions set forth therein.
By accepting this Award, Participant acknowledges having received and read this Restricted Stock Unit Grant Notice, the
Award Agreement and the Plan and agrees to all of the terms and conditions set forth in
these documents. Participant consents to receive Plan documents by electronic delivery and to participate in the Plan through
an on-line or electronic system established and maintained by the Company or another third party designated by the Company.
ACLARIS THERAPEUTICS, INC.
PARTICIPANT
By:
Title:
Date:
Signature
Signature
Date:
ATTACHMENTS: Restricted Stock Unit Award Agreement and 2015 Equity Incentive Plan
ATTACHMENT I
RESTRICTED STOCK UNIT AWARD AGREEMENT
ACLARIS THERAPEUTICS, INC.
RESTRICTED STOCK UNIT AWARD AGREEMENT
(2015 EQUITY INCENTIVE PLAN)
Pursuant to the Restricted Stock Unit Grant Notice (the “Grant Notice”) and this Restricted Stock Unit
Award Agreement (the “Agreement”), Aclaris Therapeutics, Inc. (the
“Company”) has awarded you
(“Participant”) a Restricted Stock Unit Award (the “Award”) pursuant to Section 6(b) of the Company’s 2015
Equity Incentive Plan (the “Plan”) for the number of Restricted Stock Units/shares indicated in the Grant Notice.
Capitalized terms not explicitly defined in this Agreement or the Grant Notice shall have the same meanings given
to them in the Plan. The terms of your Award, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE AWARD. This Award represents the right to be issued on a future date one (1)
share of Common Stock for each Restricted Stock Unit that vests on the applicable vesting date(s) (subject to any
adjustment under Section 3 below) as indicated in the Grant Notice. As of the Date of Grant, the Company will
credit to a bookkeeping account maintained by the Company for your benefit (the “Account”) the number of
Restricted Stock Units/shares of Common Stock subject to the Award. This Award was granted in consideration of
your services to the Company.
2. VESTING. Subject to the limitations contained herein and in the Grant Notice, your Award will
vest, if at all, in accordance with the vesting schedule provided in the Grant Notice, provided that vesting will cease
upon the termination of your Continuous Service. Upon such termination of your Continuous Service, the Restricted
Stock Units/shares of Common Stock credited to the Account that were not vested on the date of such termination
will be forfeited at no cost to the Company and you will have no further right, title or interest in or to such
underlying shares of Common Stock.
3. NUMBER OF SHARES. The number of Restricted Stock Units/shares subject to your Award may
be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. Any additional Restricted
Stock Units, shares, cash or other property that becomes subject to the Award pursuant to this Section 3, if any, shall
be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability,
and time and manner of delivery as applicable to the other Restricted Stock Units and shares covered by your
Award. Notwithstanding the provisions of this Section 3, no fractional shares or rights for fractional shares of
Common Stock shall be created pursuant to this Section 3. Any fraction of a share will be rounded down to the
nearest whole share.
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your
Award unless the shares of Common Stock underlying the Restricted Stock Units are either (i) then registered under
the Securities Act, or (ii) the Company has determined that such issuance would be exempt from the registration
requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations
governing the Award, and you shall not receive such Common Stock if the Company determines that such receipt
would not be in material compliance with such laws and regulations.
1.
5. TRANSFER RESTRICTIONS. Prior to the time that shares of Common Stock have been delivered
to you, you may not transfer, pledge, sell or otherwise dispose of this Award or the shares issuable in respect of your
Award, except as expressly provided in this Section 5. For example, you may not use shares that may be issued in
respect of your Restricted Stock Units as security for a loan. The restrictions on transfer set forth herein will lapse
upon delivery to you of shares in respect of your vested Restricted Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At
your death, vesting of your Award will cease and your executor or administrator of your estate shall be entitled to
receive, on behalf of your estate, any Common Stock or other consideration that vested but was not issued before
your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly
authorized designee, and provided that you and the designated transferee enter into transfer and other agreements
required by the Company, you may transfer your right to receive the distribution of Common Stock or other
consideration hereunder, pursuant to a domestic relations order or marital settlement agreement that contains the
information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms
of any division of this Award with the Company’s Chief Legal Officer prior to finalizing the domestic relations
order or marital settlement agreement to verify that you may make such transfer, and if so, to help ensure the
required information is contained within the domestic relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Restricted Stock Units is intended to comply with
Treasury Regulations Section 1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to
the satisfaction of the withholding obligations set forth in this Agreement, in the event one or more Restricted Stock
Units vests, the Company shall issue to you one (1) share of Common Stock for each Restricted Stock Unit that
vests on the applicable vesting date(s) (subject to any adjustment under Section 3 above). The issuance date
determined by this paragraph is referred to as the “Original Issuance Date”.
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead
occur on the next following business day. In addition, if:
(i) the Original Issuance Date does not occur (1) during an “open window period”
applicable to you, as determined by the Company in accordance with the Company’s then-effective policy on
trading in Company securities, or (2) on a date when you are otherwise permitted to sell shares of Common Stock
on an established stock exchange or stock market, and
(ii) either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the
Original Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the
shares otherwise due, on the Original Issuance Date, to you under this Award, and (B) not to permit you to pay your
Withholding Taxes in cash,
2.
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on
such Original Issuance Date and will instead be delivered on the first business day when you are not prohibited
from selling shares of the Company’s Common Stock in the open public market, but in no event later than
December 31 of the calendar year in which the Original Issuance Date occurs (that is, the last day of your taxable
year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that complies with
Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month
of the applicable year following the year in which the shares of Common Stock under this Award are no longer
subject to a “substantial risk of forfeiture” within the meaning of Treasury Regulations Section 1.409A-1(d).
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares)
shall be determined by the Company.
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash
dividend, stock dividend or other distribution that does not result from a Capitalization Adjustment.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be
endorsed with appropriate legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by
the Company by which you indicate your consent to your Grant Notice is also deemed to be your execution of your
Grant Notice and of this Agreement. You further agree that such manner of indicating consent may be relied upon
as your signature for establishing your execution of any documents to be executed in the future in connection with
your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Award or the
issuance of the shares subject to your Award), the Plan or any covenant of good faith and fair dealing that may be
found implicit in this Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or
affiliation with, the Company or an Affiliate; (ii) constitute any promise or commitment by the Company or an
Affiliate regarding the fact or nature of future positions, future work assignments, future compensation or any other
term or condition of employment or affiliation; (iii) confer any right or benefit under this Agreement or the Plan
unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may
have.
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more
of its businesses or Affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a
reorganization could result in the termination of your Continuous Service, or the termination of Affiliate status of
your employer and the loss of benefits available to you under this Agreement, including but not limited to, the
termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions contemplated
hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing
3.
that may be found implicit in any of them do not constitute an express or implied promise of continued
engagement as an employee or consultant for the term of this Agreement, for any period, or at all, and shall not
interfere in any way with the Company’s right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares
underlying your Restricted Stock Units, and at any other time as reasonably requested by the Company in
accordance with applicable tax laws, you hereby authorize any required withholding from the Common Stock
issuable to you and/or otherwise agree to make adequate provision in cash for any sums required to satisfy the
federal, state, local and foreign tax withholding obligations of the Company or any Affiliate that arise in connection
with your Award (the “Withholding Taxes”). Additionally, the Company or any Affiliate may, in its sole discretion,
satisfy all or any portion of the Withholding Taxes obligation relating to your Award by any of the following means
or by a combination of such means: (i) withholding from any compensation otherwise payable to you by the
Company; (ii) causing you to tender a cash payment; (iii) permitting or requiring you to enter into a “same day sale”
commitment, if applicable, with a broker-dealer that is a member of the Financial Industry Regulatory Authority (a
“FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered in connection with
your Restricted Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits
to forward the proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its Affiliates; or
(iv) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to you in
connection with the Award with a Fair Market Value (measured as of the date shares of Common Stock are issued to
pursuant to Section 6) equal to the amount of such Withholding Taxes; provided, however, that the number of such
shares of Common Stock so withheld will not exceed the amount necessary to satisfy the Company’s required tax
withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to
the extent necessary to qualify for an exemption from application of Section 16(b) of the Exchange Act, if
applicable, such share withholding procedure will be subject to the express prior approval of the Company’s
Compensation Committee.
(b) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the
Company shall have no obligation to deliver to you any Common Stock.
(c) In the event the Company’s obligation to withhold arises prior to the delivery to you of
Common Stock or it is determined after the delivery of Common Stock to you that the amount of the Company’s
withholding obligation was greater than the amount withheld by the Company, you agree to indemnify and hold the
Company harmless from any failure by the Company to withhold the proper amount.
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax
consequences to you of this Award and shall not be liable to you for any adverse tax consequences to you arising in
connection with this Award. You are hereby advised to consult with your own personal tax, financial and/or legal
advisors regarding the tax consequences of this Award and by
4.
signing the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so.
You understand that you (and not the Company) shall be responsible for your own tax liability that may arise as a
result of this investment or the transactions contemplated by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of a vested Award, you
shall be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue
shares or other property pursuant to this Agreement. You shall not have voting or any other rights as a stockholder
of the Company with respect to the shares to be issued pursuant to this Agreement until such shares are issued to
you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a
stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its provisions,
shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or
any other person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each
of the other parties hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery,
including delivery by express courier, or delivery via electronic means, or (ii) the date that is five (5) days after
deposit in the United States Post Office (whether or not actually received by the addressee), by registered or
certified mail with postage and fees prepaid, addressed at the following addresses, or at such other address(es) as a
party may designate by ten (10) days’ advance written notice to each of the other parties hereto:
COMPANY:
Aclaris Therapeutics, Inc.
Attn: Stock Administrator
640 Lee Road, Suite 200
Wayne, PA 19087
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and
shall not be deemed to constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the
Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the
benefit of, and be enforceable by, the Company’s successors and assigns.
(b) You agree upon request to execute any further documents or instruments necessary or
desirable in the sole determination of the Company to carry out the purposes or intent of your Award.
5.
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option
for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with
respect to any shares of Common Stock or other securities of the Company held by you, for a period of 180 days
following the effective date of a registration statement of the Company filed under the Securities Act or such longer
period as the underwriters or the Company will request to facilitate compliance with FINRA Rule 2711 or NYSE
Member Rule 472 or any successor or similar rules or regulation (the “Lock-Up Period”). You further agree to
execute and deliver such other agreements as may be reasonably requested by the Company or the underwriters that
are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common
Stock until the end of such period. You also agree that any transferee of any shares of Common Stock (or other
securities) of the Company held by you will be bound by this Section 16(c). The underwriters of the Company’s
stock are intended third party beneficiaries of this Section 16(c) and will have the right, power and authority to
enforce the provisions hereof as though they were a party hereto.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an
opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all
provisions of your Award.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such
approvals by any governmental agencies or national securities exchanges as may be required.
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any
successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the
provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments,
rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. Your Award
(and any compensation paid or shares issued under your Award) is subject to recoupment in accordance with The
Dodd–Frank Wall Street Reform and Consumer Protection Act and any implementing regulations thereunder, any
clawback policy adopted by the Company and any compensation recovery policy otherwise required by applicable
law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily
terminate employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term
under any plan of or agreement with the Company.
18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this
Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating
benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any Affiliate except as
such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate
any or all of the employee benefit plans of the Company or any Affiliate.
6.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be
governed by the law of the State of Delaware without regard to that state’s conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of
this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a
Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to
the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing
the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan
prospectus. In addition, you acknowledge receipt of the Company’s Insider Trading Policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an
instrument in writing, signed by you and by a duly authorized representative of the Company. Notwithstanding the
foregoing, this Agreement may be amended solely by the Board by a writing which specifically states that it is
amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that, except as
otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights hereunder
may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change,
by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry
out the purpose of the Award as a result of any change in applicable laws or regulations or any future law,
regulation, ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to
that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with
the “short-term deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the
foregoing, if it is determined that the Award fails to satisfy the requirements of the short-term deferral rule and is
otherwise deferred compensation subject to Section 409A, and if you are a “Specified Employee” (within the
meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your “separation from service” (within
the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition
thereunder), then the issuance of any shares that would otherwise be made upon the date of the separation from
service or within the first six (6) months thereafter will not be made on the originally scheduled date(s) and will
instead be issued in a lump sum on the date that is six (6) months and one day after the date of the separation from
service, with the balance of the shares issued thereafter in accordance with the original vesting and issuance
schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the
imposition of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of
shares that vests is intended to constitute a “separate payment” for purposes of Treasury Regulation Section 1.409A-
2(b)(2).
* * * * *
7.
This Restricted Stock Unit Award Agreement shall be deemed to be signed by the Company and the
Participant upon the signing by the Participant of the Restricted Stock Unit Grant Notice to which it is attached.
8.
ATTACHMENT II
2015 EQUITY INCENTIVE PLAN
9.
ACLARIS THERAPEUTICS, INC.
AMENDED & RESTATED
NON-EMPLOYEE DIRECTOR COMPENSATION POLICY
Exhibit 10.15
Each member of the Board of Directors (the “Board”) who is not also serving as an employee of Aclaris Therapeutics, Inc. (the
“Company”) or any of its affiliates or NeXeption, LLC or any affiliates of NeXeption, LLC (each such member, an “Eligible Director”)
will receive the compensation described in this Amended & Restated Non-Employee Director Compensation Policy (this “Policy”) for his
or her Board service effective as of the date of the Company’s 2019 annual meeting of stockholders (the date of the meeting being referred
to as the “Effective Date”). An Eligible Director may decline all or any portion of his or her compensation by giving notice to the
Company prior to the date cash is to be paid or equity awards are to be granted, as the case may be. This Policy may be amended at any
time in the sole discretion of the Board or the Compensation Committee of the Board. The terms and conditions of this Policy shall
supersede any prior Non-Employee Director Compensation Policy of the Company.
Annual Cash Compensation
The annual cash compensation amount set forth below is payable in equal quarterly installments, payable in arrears on the last day of each
fiscal quarter in which the service occurred. If an Eligible Director joins the Board or a committee of the Board at a time other than
effective as of the first day of a fiscal quarter, each annual retainer set forth below will be pro-rated based on days served in the applicable
fiscal year, with the pro-rated amount paid for the first fiscal quarter in which the Eligible Director provides the service, and regular full
quarterly payments thereafter. All annual cash fees are vested upon payment.
1. Annual Board Service Retainer:
a. All Eligible Directors: $40,000
2. Annual Committee Member Service Retainer:
a. Member of the Audit Committee: $7,500
b. Member of the Compensation Committee: $6,000
c. Member of the Nominating and Corporate Governance Committee: $4,500
3. Annual Committee Chair Service Retainer (in addition to Committee Member Service Retainer):
a. Chairman of the Audit Committee: $12,500
b. Chairman of the Compensation Committee: $8,000
c. Chairman of the Nominating and Corporate Governance Committee: $4,500
Equity Compensation
The equity compensation set forth below will be granted under the Company’s 2015 Equity Incentive Plan (the “Plan”). All stock options
granted under this Policy will be nonstatutory stock options, with an exercise price per share equal to 100% of the Fair Market Value (as
defined in the Plan) of the Company’s underlying common stock (the “Common Stock”) on the date of grant, and a term of ten years from
the date of grant (subject to earlier termination in connection with a termination of service as provided in the Plan).
1. Initial Grant: On the date of the Eligible Director’s initial election to the Board, for each Eligible Director who is first elected to
the Board following the Effective Date (or, if such date is not a market trading day, the first market trading day thereafter), the Eligible
Director will be automatically, and without further action by the Board or Compensation Committee of the Board, granted a stock option to
purchase 16,000 shares of the Company’s Common Stock, with an exercise price per share equal to 100% of the Fair Market Value of the
Company’s Common Stock on the date of grant. The shares subject to each such stock option will vest in equal monthly
installments for 36 months, subject to the Eligible Director’s Continuous Service (as defined in the Plan) through such vesting date[s].
2. Annual Grant: On the date of each annual stockholders meeting of the Company held on and after the Effective Date, each
Eligible Director who continues to serve as a non-employee member of the Board following such stockholders meeting will be
automatically, and without further action by the Board or Compensation Committee of the Board, granted (a) a stock option to purchase
11,000 shares of the Company’s Common Stock, with an exercise price per share equal to 100% of the Fair Market Value of the Company’s
Common Stock on the date of grant or (b) if approved by the Board or the Compensation Committee of the Board prior to any such
meeting, a number of restricted stock units at a ratio to the number of shares such Eligible Director would have received under clause (a) as
determined by the Board or the Compensation Committee (or any combination of clause (a) and this clause (b)). The shares subject to each
such stock option will vest in equal monthly installments for 12 months and the restricted stock units will vest in one installment on the
first anniversary of the grant date, subject to the Eligible Director’s Continuous Service through such vesting date[s].
FIRST AMENDMENT TO SUBLEASE
Exhibit 10.27
This First Amendment to Sublease (this “Amendment”) dated as of this 13th day of December, 2017 by and
between Aclaris Therapeutics, Inc., a Delaware corporation, with offices located at 101 Lindenwood Drive, Suite
400, Malvern, Pennsylvania 19355 (“Subtenant”), and Auxilium Pharmaceuticals, LLC, a Delaware limited
liability company, with offices located at 1400 Atwater Drive, Malvern, PA 19355 (“Sublandlord”).
W I T N E S S E T H:
WHEREAS, Sublandlord and Subtenant entered into that certain Sublease dated as of November 2, 2017
(the “Sublease”), pursuant to which Sublandlord subleased to Subtenant that certain Sublease Premises consisting of
33,019 square feet of space in the aggregate located at 640 Lee Road, Wayne, PA, comprised of the entire second
floor of the Master Lease Premises and a portion of the first floor, as more fully described in the Lease;
WHEREAS, Sublandlord and Subtenant have agreed to modify the Sublease to permit Subtenant to make
certain alterations to the Sublease Premises, subject to the terms and conditions hereof.
NOW, THEREFORE, for and in consideration of the aforesaid recitals and the covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the
parties hereto, Sublandlord and Subtenant hereby agree as follows:
1. Capitalized Terms. Capitalized terms used herein, but not defined herein, shall have the meanings
ascribed to such terms in the Sublease.
2. Alterations to Sublease Premises. Subtenant shall be permitted to make those certain alterations to
the Subleased Premises as shown on and in accordance with the plans attached hereto as Exhibit A, provided that
prior to the expiration of the Term, Subtenant, at its sole cost and expense, shall restore the Sublease Premises to its
original condition that existed immediately prior to Subtenant’s use of and alterations to the Sublease Premises. The
Master Landlord has consented to such alterations to the Sublease Premises, subject to the restoration condition
stated herein. Subtenant shall indemnify, defend and hold Sublandlord harmless from and against any and all
losses, costs, damages, expenses and liability, including, but not limited to, reasonable attorneys’ fees, which
Sublandlord may incur in connection with Subtenant’s alterations to and subsequent restoration of the Sublease
Premises, including, without limitation, Subtenant’s failure to restore the Sublease Premises to the satisfaction of
Master Landlord before the expiration of the Term.
3. Miscellaneous. Except as hereinabove provided, all other terms and conditions of the Sublease shall
remain unchanged and in full force and effect. This Amendment may be executed in counterparts, each of which
shall be deemed an original, and all of which together shall constitute one Amendment. This Amendment together
with the Sublease, is the complete understanding between the parties and supersedes all other prior agreements and
representations concerning its subject matter.
[Signatures on following page]
1
IN WITNESS WHEREOF, this Amendment has been duly executed by Sublandlord and Subtenant as of
the day and year first herein above written.
SUBLANDLORD:
AUXILIUM PHARMACEUTICALS, LLC
a Delaware limited liability company
By: /s/ Lawrence A. Cunningham
Name: Lawrence A. Cunningham
Title: Executive Vice President, Human Resources
SUBTENANT:
ACLARIS THERAPEUTICS, INC.
a Delaware corporation
By: /s/ Neal Walker
Name: Neal Walker
Title: President & CEO
EXHIBIT A
ALTERATION PLANS
LOAN AND SECURITY AGREEMENT
Exhibit 10.31
THIS LOAN AND SECURITY AGREEMENT (as the same may from time to time be amended, modified, supplemented or
restated, this “Agreement”) dated as of October 15, 2018 (the “Effective Date”) among OXFORD FINANCE LLC, a Delaware limited
liability company with an office located at 133 North Fairfax Street, Alexandria, Virginia 22314 (“Oxford”), as collateral agent (in such
capacity, “Collateral Agent”), the Lenders listed on Schedule 1.1 hereof or otherwise a party hereto from time to time including Oxford in
its capacity as a Lender (each a “Lender” and collectively, the “Lenders”), and ACLARIS THERAPEUTICS, INC., a Delaware
corporation (“Parent”) with offices located at 640 Lee Road, Suite 200, Wayne, PA 19087, Confluence Discovery Technologies, Inc., a
Delaware corporation with offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108 (“CDT”) and ACLARIS LIFE
SCIENCES, INC., a Delaware corporation with offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108 (“ALS”)
(Parent, CDT and ALS, individually and collectively, jointly and severally, “Borrower”), provides the terms on which the Lenders shall
lend to Borrower and Borrower shall repay the Lenders. The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
1.1 Accounting terms not defined in this Agreement shall be construed in accordance with GAAP. Calculations and
determinations must be made in accordance with GAAP. The term “financial statements” shall include the accompanying notes and
schedules. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined
therein. All references to “Dollars” or “$” are United States Dollars, unless otherwise noted.
2. LOANS AND TERMS OF PAYMENT
2.1 Promise to Pay. Borrower hereby unconditionally promises to pay each Lender, the outstanding principal amount of all
Term Loans advanced to Borrower by such Lender and accrued and unpaid interest thereon and any other amounts due hereunder as and
when due in accordance with this Agreement.
2.2 Term Loans.
(a) Availability.
(i) Subject to the terms and conditions of this Agreement, the Lenders agree, severally and not jointly, to
make term loans to Borrower during the First Draw Period in an aggregate amount of Thirty Million Dollars ($30,000,000.00) according to
each Lender’s Term A Loan Commitment as set forth on Schedule 1.1 hereto (such term loans are hereinafter referred to singly as a
“Term A Loan”, and collectively as the “Term A Loans”). After repayment, no Term A Loan may be re‑borrowed.
(ii) Subject to the terms and conditions of this Agreement, the Lenders agree, severally and not jointly,
during the Second Draw Period, to make term loans to Borrower in an aggregate amount up to Thirty Five Million Dollars
($35,000,000.00) according to each Lender’s Term B Loan Commitment as set forth on Schedule 1.1 hereto (such term loans are
hereinafter referred to singly as a “Term B Loan”, and collectively as the “Term B Loans”; each Term A Loan or Term B Loan is
hereinafter referred to singly as a “Term Loan” and the Term A Loans and the Term B Loans are hereinafter referred to collectively as the
“Term Loans”). After repayment, no Term B Loan may be re‑borrowed.
(b) Repayment. Borrower shall make monthly payments of interest only commencing on the first (1 ) Payment
st
Date following the Funding Date of the Term Loan, and continuing on the Payment Date of each
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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successive month thereafter through and including the Payment Date immediately preceding the Amortization Date. Borrower agrees to
pay, on the Funding Date of the Term Loan, any initial partial monthly interest payment otherwise due for the period between the Funding
Date of the Term Loan and the first Payment Date thereof. Commencing on the Amortization Date, and continuing on the Payment Date of
each month thereafter, Borrower shall make consecutive equal monthly payments of principal, together with applicable interest, in arrears,
to each Lender, as calculated by Collateral Agent (which calculations shall be deemed correct absent manifest error) based upon: (1) the
amount of such Lender’s Term Loan, (2) the effective rate of interest, as determined in Section 2.3(a), and (3) a repayment schedule equal
to twenty four (24) months. All unpaid principal and accrued and unpaid interest with respect to the Term Loan is due and payable in full
on the Maturity Date. The Term Loan may only be prepaid in accordance with Sections 2.2(c) and 2.2(d).
(c) Mandatory Prepayments. If the Term Loans are accelerated following the occurrence of an Event of Default,
Borrower shall immediately pay to Lenders, payable to each Lender in accordance with its respective Pro Rata Share, an amount equal to
the sum of: (i) all outstanding principal of the Term Loans plus accrued and unpaid interest thereon through the prepayment date, (ii) the
Final Payment, (iii) the Prepayment Fee, plus (iv) all other Obligations that are due and payable, including Lenders’ Expenses and interest
at the Default Rate with respect to any past due amounts. Notwithstanding (but without duplication with) the foregoing, on the Maturity
Date, if the Final Payment had not previously been paid in full in connection with the prepayment of the Term Loans in full, Borrower shall
pay to Collateral Agent, for payment to each Lender in accordance with its respective Pro Rata Share, the Final Payment in respect of the
Term Loans.
(d) Permitted Prepayment of Term Loans.
(i) Borrower shall have the option to prepay all, but not less than all, of the Term Loans advanced by the
Lenders under this Agreement, provided Borrower (i) provides written notice to Collateral Agent of its election to prepay the Term Loans
at least ten (10) days prior to such prepayment, and (ii) pays to the Lenders on the date of such prepayment, payable to each Lender in
accordance with its respective Pro Rata Share, an amount equal to the sum of (A) all outstanding principal of the Term Loans plus accrued
and unpaid interest thereon through the prepayment date, (B) the Final Payment, (C) the Prepayment Fee, plus (D) all other Obligations
that are due and payable, including Lenders’ Expenses and interest at the Default Rate with respect to any past due amounts.
(ii) Notwithstanding anything herein to the contrary, Borrower shall also have the option to prepay, once in
any given three month period, part of Term Loans advanced by the Lenders under this Agreement, provided Borrower (i) provides written
notice to Collateral Agent of its election to prepay the Term Loans at least ten (10) days prior to such prepayment, (ii) prepays such part of
the Term Loans in an amount not less than Two Million Dollars ($2,000,000.00), and (iii) pays to the Lenders on the date of such
prepayment, payable to each Lender in accordance with its respective Pro Rata Share, an amount equal to the sum of (A) the portion of
outstanding principal of such Term Loans plus all accrued and unpaid interest thereon through the prepayment date, (B) the applicable
Final Payment, and (C) all other Obligations that are then due and payable, including Lenders’ Expenses and interest at the Default Rate
with respect to any past due amounts, and (D) the applicable Prepayment Fee with respect to the portion of such Term Loans being prepaid.
For the purposes of clarity, any partial prepayment shall be applied pro-rata to all outstanding amounts under each Term Loan, and shall be
applied pro-rata within each Term Loan tranche to reduce amortization payments under Section 2.2(b) on a pro-rata basis. For the
avoidance of doubt, Borrower may make one or more partial prepayments prior to the Maturity Date.
2.3 Payment of Interest on the Credit Extensions.
(a) Interest Rate. Subject to Section 2.3(b), the principal amount outstanding under the Term Loans shall accrue
interest at a floating per annum rate equal to the Basic Rate, determined by Collateral Agent from time to time, which interest shall be
payable monthly in arrears in accordance with Sections 2.2(b) and 2.3(e). Interest shall accrue on each Term Loan commencing on, and
including, the Funding Date of such Term Loan, and
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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shall accrue on the principal amount outstanding under such Term Loan through and including the day on which such Term Loan is paid in
full.
(b) Default Rate. Immediately upon the occurrence and during the continuance of an Event of Default, Obligations
shall accrue interest at a floating per annum rate equal to the rate that is otherwise applicable thereto plus five percentage points (5.00%)
(the “Default Rate”). Payment or acceptance of the increased interest rate provided in this Section 2.3(b) is not a permitted alternative to
timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of
Collateral Agent.
number of days elapsed.
(c) 360‑Day Year. Interest shall be computed on the basis of a three hundred sixty (360) day year, and the actual
(d) Debit of Accounts. Collateral Agent and each Lender may debit (or ACH) any deposit accounts, maintained by
Borrower or any of its Subsidiaries, including the Designated Deposit Account, for principal and interest payments or any other amounts
Borrower owes the Lenders under the Loan Documents when due. Any such debits (or ACH activity) shall not constitute a set‑off.
(e) Payments. Except as otherwise expressly provided herein, all payments by Borrower under the Loan
Documents shall be made to the respective Lender to which such payments are owed, at such Lender’s office in immediately available
funds on the date specified herein. Unless otherwise provided, interest is payable monthly on the Payment Date of each month. Payments
of principal and/or interest received after 2:00 p.m. Eastern time are considered received at the opening of business on the next Business
Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest,
as applicable, shall continue to accrue until paid. All payments to be made by Borrower hereunder or under any other Loan Document,
including payments of principal and interest, and all fees, expenses, indemnities and reimbursements, shall be made without set‑off,
recoupment or counterclaim, in lawful money of the United States and in immediately available funds.
2.4 Secured Promissory Notes. The Term Loans shall be evidenced by a Secured Promissory Note or Notes in the form
attached as Exhibit D hereto (each a “Secured Promissory Note”), and shall be repayable as set forth in this Agreement. Borrower
irrevocably authorizes each Lender to make or cause to be made, on or about the Funding Date of any Term Loan or at the time of receipt
of any payment of principal on such Lender’s Secured Promissory Note, an appropriate notation on such Lender’s Secured Promissory
Note Record reflecting the making of such Term Loan or (as the case may be) the receipt of such payment. The outstanding amount of
each Term Loan set forth on such Lender’s Secured Promissory Note Record shall be prima facie evidence of the principal amount thereof
owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender’s Secured
Promissory Note Record shall not limit or otherwise affect the obligations of Borrower under any Secured Promissory Note or any other
Loan Document to make payments of principal of or interest on any Secured Promissory Note when due. Upon receipt of an affidavit of an
officer of a Lender as to the loss, theft, destruction, or mutilation of its Secured Promissory Note, Borrower shall issue, in lieu thereof, a
replacement Secured Promissory Note in the same principal amount thereof and of like tenor.
2.5 Fees. Borrower shall pay to Collateral Agent:
(a) Good Faith Deposit. An amount of Fifty Thousand Dollars ($50,000.00) has been received by Collateral Agent
as good faith deposit from Borrower on or about August 21, 2018, which amount shall be applied towards the Lender’s Expenses due on
the Effective Date (it being agreed and understood that Borrower shall remain responsible for all Lender’s Expenses in accordance with
Section 2.5(d) hereof) and the balance, if any, shall be applied towards other payment Obligations of Borrower hereunder in accordance
with the Collateral Agent’s and Lenders’ discretion;
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
their respective Pro Rata Shares;
(b) Final Payment. The Final Payment, when due hereunder, to be shared between the Lenders in accordance with
(c) Prepayment Fee. The Prepayment Fee, when due hereunder, to be shared between the Lenders in accordance
with their respective Pro Rata Shares;
documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due;
(d) Lenders’ Expenses. All Lenders’ Expenses (including reasonable attorneys’ fees and expenses for
(e) Term A Loan Non-Utilization Fee. A full earned non-utilization fee equal to one percent (1.00%) of the amount
of the Term A Loan not funded hereunder (i.e., the difference between Thirty Million Dollars ($30,000,000.00) and the amount of Term A
Loan funded hereunder), which shall be due and payable immediately upon the expiration or earlier termination of the First Draw Period or
prepayment of the entire outstanding amount of the Term Loans pursuant to Section 2.2(d) of this Agreement, if upon such expiration,
earlier termination or prepayment of the entire outstanding amount of the Term Loans pursuant to Section 2.2(d) of this Agreement the
Borrower has not drawn the full amount of the Term A Loan in accordance with the provisions hereof; and
(f) Term B Loan Non-Utilization Fee. A full earned non-utilization fee equal to one percent (1.00%) of the amount
of the Term B Loan not funded hereunder (i.e., the difference between Thirty Five Million Dollars ($35,000,000.00) and the amount of
Term B Loan funded hereunder), which shall be due and payable immediately upon the expiration or earlier termination of the Second
Draw Period or prepayment of the entire outstanding amount of the Term Loans pursuant to Section 2.2(d) of this Agreement, if upon such
expiration, earlier termination or prepayment of the entire outstanding amount of the Term Loans pursuant to Section 2.2(d) of this
Agreement the Borrower has not drawn the full amount of the Term B Loan in accordance with the provisions hereof; provided, however,
the non-utilization fee set forth in this Section 2.5(f) shall not become due and payable if the Second Draw Period does not commence.
2.6 Withholding. Payments received by the Lenders from Borrower hereunder will be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges
imposed by any governmental authority (including any interest, additions to tax or penalties applicable thereto). Specifically, however, if at
any time any Governmental Authority, applicable law, regulation or international agreement requires Borrower to make any withholding or
deduction from any such payment or other sum payable hereunder to the Lenders, Borrower hereby covenants and agrees that the amount
due from Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that,
after the making of such required withholding or deduction, each Lender receives a net sum equal to the sum which it would have received
had no withholding or deduction been required and Borrower shall pay the full amount withheld or deducted to the relevant Governmental
Authority. Borrower will, upon request, furnish the Lenders with proof reasonably satisfactory to the Lenders indicating that Borrower has
made such withholding payment; provided, however, that Borrower need not make any withholding payment if the amount or validity of
such withholding payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or
reserved against by Borrower. The agreements and obligations of Borrower contained in this Section 2.6 shall survive the termination of
this Agreement.
3. CONDITIONS OF LOANS AND EFFECTIVENESS OF THIS AGREEMENT
3.1 Conditions Precedent to the Effectiveness of this Agreement. This Agreement shall not be deemed to have become
effective, unless on the Effective Date, Collateral Agent and each Lender shall consent to or shall have received, in form and substance
satisfactory to Collateral Agent and each Lender, such documents, and completion of such other matters, as Collateral Agent and each
Lender may reasonably deem necessary or appropriate, including, without limitation:
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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(a) original Loan Agreement;
any of its Subsidiaries that are required for Borrower’s compliance with the provisions of Section 6.6 hereof;
(b) duly executed original Control Agreements with respect to any Collateral Accounts maintained by Borrower or
(c) the good standing certificates of Borrower and its Subsidiaries certified by the Secretary of State (or equivalent
agency) of Borrower’s and such Subsidiaries’ jurisdiction of organization or formation and each jurisdiction in which Borrower and each
Subsidiary is qualified to conduct business and Operating Documents, each as of a date no earlier than thirty (30) days prior to the
Effective Date;
(d) a completed Perfection Certificate for Borrower and each of its Subsidiaries;
(e) the Annual Projections, for the current calendar year;
Documents, in a form acceptable to Collateral Agent and the Lenders;
(f) duly executed original officer’s certificate for Borrower and each Subsidiary that is a party to the Loan
(g) certified copies, dated as of date no earlier than thirty (30) days prior to the Effective Date, of financing
statement searches, as Collateral Agent shall request, accompanied by written evidence (including any UCC termination statements) that
the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit
Extension, will be terminated or released;
(h) a duly executed legal opinion of counsel to Borrower dated as of the Effective Date;
(i) evidence satisfactory to Collateral Agent and the Lenders that the insurance policies required by Section 6.5
hereof are in full force and effect, together with appropriate evidence showing loss payable and/or additional insured clauses or
endorsements in favor of Collateral Agent, for the ratable benefit of the Lenders; and
(j) payment of the fees and Lenders’ Expenses then due as specified in Section 2.5 hereof
3.2 Conditions Precedent to Initial Credit Extension. Each Lender’s obligation to make a Term A Loan is subject to the
condition precedent that Collateral Agent and each Lender shall consent to or shall have received, in form and substance satisfactory to
Collateral Agent and each Lender, such documents, and completion of such other matters, as Collateral Agent and each Lender may
reasonably deem necessary or appropriate, including, without limitation:
(a) original Loan Documents, each duly executed by Borrower and each Subsidiary, as applicable to the extent not
delivered (and not required to be delivered) under Section 3.1;
Commitment Percentage;
(b) duly executed original Secured Promissory Notes in favor of each Lender according to its Term A Loan
(c) the certificate(s) for the Shares, together with Assignment(s) Separate from Certificate, duly executed in blank;
(d) the UK Share Pledge;
(e) a landlord’s consent executed in favor of Collateral Agent in respect of all of Borrower’s and each Subsidiaries’
leased locations that either comprise the headquarters of Borrower or any Subsidiary or at
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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which either the books or records of Borrower or any Subsidiary are maintained or where Collateral having a value in excess of Two
Hundred Fifty Thousand Dollars ($250,000.00) is maintained;
any Subsidiary maintains Collateral having a value in excess of Two Hundred Fifty Thousand Dollars ($250,000.00); and
(f) a bailee waiver executed in favor of Collateral Agent in respect of each third party bailee where Borrower or
(g) payment of the fees and Lenders’ Expenses then due as specified in Section 2.5 hereof.
3.3 Conditions Precedent to all Credit Extensions. The obligation of each Lender to make each Credit Extension,
including the initial Credit Extension, is subject to the following conditions precedent:
(a) receipt by Collateral Agent of an executed Disbursement Letter in the form of Exhibit B attached hereto;
(b) the representations and warranties in Section 5 hereof shall be true, accurate and complete in all material
respects on the date of the Disbursement Letter and on the Funding Date of each Credit Extension; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and
complete in all material respects as of such date, and no Event of Default shall have occurred and be continuing or result from the Credit
Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in
Section 5 hereof are true, accurate and complete in all material respects; provided, however, that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided,
further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material
respects as of such date;
(c) in such Lender’s sole and reasonable discretion, there has not been any Material Adverse Change or any
material adverse deviation by Borrower from the Annual Projections of Borrower presented to and accepted by Collateral Agent and each
Lender;
(d) to the extent not delivered at the Effective Date, duly executed original Secured Promissory Notes, in number,
form and content acceptable to each Lender, and in favor of each Lender according to its Commitment Percentage, with respect to each
Credit Extension made by such Lender after the Effective Date; and
(e) payment of the fees and Lenders’ Expenses then due as specified in Section 2.5 hereof.
3.4 Covenant to Deliver. Borrower agrees to deliver to Collateral Agent and the Lenders each item required to be delivered
to Collateral Agent under this Agreement as a condition precedent to any Credit Extension. Borrower expressly agrees that a Credit
Extension made prior to the receipt by Collateral Agent or any Lender of any such item shall not constitute a waiver by Collateral Agent or
any Lender of Borrower’s obligation to deliver such item, and any such Credit Extension in the absence of a required item shall be made in
each Lender’s sole discretion.
3.5 Procedures for Borrowing. Subject to the prior satisfaction of all other applicable conditions to the making of a Term
Loan set forth in this Agreement, to obtain a Term Loan, Borrower shall notify the Lenders (which notice shall be irrevocable) by
electronic mail, facsimile, or telephone by 12:00 noon Eastern time five (5) Business Days prior to the date the Term Loan is to be
made. Together with any such electronic, facsimile or telephonic notification, Borrower shall deliver to the Lenders by electronic mail or
facsimile a completed Disbursement Letter executed by a Responsible Officer or his or her designee. The Lenders may rely on any
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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telephone notice given by a person whom a Lender reasonably believes is a Responsible Officer or designee. On the Funding Date, each
Lender shall credit and/or transfer (as applicable) to the Designated Deposit Account, an amount equal to its Term Loan Commitment.
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower hereby grants Collateral Agent, for the ratable benefit of the Lenders, to secure
the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Collateral Agent, for the
ratable benefit of the Lenders, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and
products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to
be a first priority perfected security interest in the Collateral, subject only to Permitted Liens that are permitted by the terms of this
Agreement to have priority to Collateral Agent’s Lien. If Borrower shall acquire a commercial tort claim (as defined in the Code),
Borrower, shall promptly notify Collateral Agent in a writing signed by Borrower, after Borrower becomes aware of such tort claim, as the
case may be, of the general details thereof (and further details as may be required by Collateral Agent) and grant to Collateral Agent, for
the ratable benefit of the Lenders, in such writing a security interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance reasonably satisfactory to Collateral Agent.
If this Agreement is terminated, Collateral Agent’s Lien in the Collateral shall continue until the Obligations (other than inchoate
indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity
obligations) and at such time as the Lenders’ obligation to make Credit Extensions has terminated, Collateral Agent shall, at the sole cost
and expense of Borrower, release its Liens in the Collateral and all rights therein shall revert to Borrower.
4.2 Authorization to File Financing Statements. Borrower hereby authorizes Collateral Agent to file financing statements
or take any other action required to perfect Collateral Agent’s security interests in the Collateral, without notice to Borrower, with all
appropriate jurisdictions to perfect or protect Collateral Agent’s interest or rights under the Loan Documents, including a notice that any
disposition of the Collateral, except to the extent permitted by the terms of this Agreement, by Borrower, or any other Person, shall be
deemed to violate the rights of Collateral Agent under the Code.
4.3 Pledge of Collateral. Borrower hereby pledges, assigns and grants to Collateral Agent, for the ratable benefit of the
Lenders, a security interest in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and
property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash
proceeds of the foregoing, as security for the performance of the Obligations. On the Effective Date, or, to the extent not certificated as of
the Effective Date, within twenty (20) days of the certification of any Shares, the certificate or certificates for the Shares will be delivered
to Collateral Agent, accompanied by an instrument of assignment duly executed in blank by Borrower. To the extent required by the terms
and conditions governing the Shares, Borrower shall cause the books of each entity whose Shares are part of the Collateral and any transfer
agent to reflect the pledge of the Shares. Upon the occurrence and during the continuance of an Event of Default hereunder, Collateral
Agent may effect the transfer of any securities included in the Collateral (including but not limited to the Shares) into the name of
Collateral Agent and cause new (as applicable) certificates representing such securities to be issued in the name of Collateral Agent or its
transferee. Borrower will execute and deliver such documents, and take or cause to be taken such actions, as Collateral Agent may
reasonably request to perfect or continue the perfection of Collateral Agent’s security interest in the Shares. Unless an Event of Default
shall have occurred and be continuing, Borrower shall be entitled to exercise any voting rights with respect to the Shares and to give
consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action
taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such
terms. All such rights to vote and give consents, waivers and ratifications shall terminate upon the occurrence and continuance of an Event
of Default.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Collateral Agent and the Lenders as follows:
5.1 Due Organization, Authorization: Power and Authority. Borrower and each of its Subsidiaries is duly existing and in
good standing as a Registered Organization in its jurisdictions of organization or formation and Borrower and each of its Subsidiaries is
qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its businesses or its ownership of
property requires that it be qualified except where the failure to do so could not reasonably be expected to have a Material Adverse
Change. In connection with this Agreement, Borrower and each of its Subsidiaries has delivered to Collateral Agent a completed
perfection certificate signed by an officer of Borrower or such Subsidiary (each as updated from time to time, as permitted hereunder, a
“Perfection Certificate” and collectively, the “Perfection Certificates”). Borrower represents and warrants that (a) Borrower and each of
its Subsidiaries’ exact legal name is that which is indicated on its respective Perfection Certificate and on the signature page of each Loan
Document to which it is a party; (b) Borrower and each of its Subsidiaries is an organization of the type and is organized in the jurisdiction
set forth on its respective Perfection Certificate; (c) each Perfection Certificate accurately sets forth each of Borrower’s and its
Subsidiaries’ organizational identification number or accurately states that Borrower or such Subsidiary has none; (d) each Perfection
Certificate accurately sets forth Borrower’s and each of its Subsidiaries’ place of business, or, if more than one, its chief executive office as
well as Borrower’s and each of its Subsidiaries’ mailing address (if different than its chief executive office); (e) Borrower and each of its
Subsidiaries (and each of its respective predecessors) have not, in the past five (5) years, changed its jurisdiction of organization,
organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the
Perfection Certificates pertaining to Borrower and each of its Subsidiaries, is accurate and complete in all material respects (it being
understood and agreed that Borrower and each of its Subsidiaries may from time to time update certain information in the Perfection
Certificates (including the information set forth in clause (d) above) after the Effective Date to the extent permitted by one or more specific
provisions in this Agreement); such updated Perfection Certificates subject to the review and approval of Collateral Agent. If Borrower or
any of its Subsidiaries is not now a Registered Organization but later becomes one, Borrower shall notify Collateral Agent of such
occurrence and provide Collateral Agent with such Person’s organizational identification number within five (5) Business Days of
receiving such organizational identification number.
The execution, delivery and performance by Borrower and each of its Subsidiaries of the Loan Documents to which it is a party
have been duly authorized, and do not (i) conflict with any of Borrower’s or such Subsidiaries’ organizational documents, including its
respective Operating Documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law
applicable thereto, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of
any Governmental Authority by which Borrower or such Subsidiary, or any of their property or assets may be bound or affected, (iv)
require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such
Governmental Approvals which have already been obtained and are in full force and effect) or are being obtained pursuant to
Section 6.1(b), or (v) constitute an event of default under any material agreement by which Borrower or any of such Subsidiaries, or their
respective properties, is bound. Neither Borrower nor any of its Subsidiaries is in default under any agreement to which it is a party or by
which it or any of its assets is bound in which such default could reasonably be expected to have a Material Adverse Change.
5.2 Collateral.
(a) Borrower and each its Subsidiaries have good title to, have rights in, and the power to transfer each item of the
Collateral upon which it purports to grant a Lien under the Loan Documents, free and clear of any and all Liens except Permitted Liens,
and neither Borrower nor any of its Subsidiaries have any Deposit Accounts, Securities Accounts, Commodity Accounts or other
investment accounts other than the Collateral Accounts or the other investment accounts, if any, described in the Perfection Certificates
delivered to Collateral Agent in connection herewith (as the same may be updated from time to time, provided that any such updates shall
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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be in form and substance acceptable to Collateral Agent and each Lender, in its sole discretion) with respect of which Borrower or such
Subsidiary has given Collateral Agent notice and taken such actions as are necessary to give Collateral Agent a perfected security interest
therein. The Accounts are bona fide, existing obligations of the Account Debtors.
(b) On the Effective Date, and except as disclosed on the Perfection Certificate (i) the Collateral is not in the
possession of any third party bailee (such as a warehouse), and (ii) no such third party bailee possesses components of the Collateral in
excess of Two Hundred Fifty Thousand Dollars ($250,000.00). None of the components of the Collateral shall be maintained at locations
other than as disclosed in the Perfection Certificates on the Effective Date or as permitted pursuant to Section 6.11.
(c) All Inventory is in all material respects of good and marketable quality, free from material defects.
(d) Borrower and each of its Subsidiaries is the sole owner of the Intellectual Property each respectively purports to
own, free and clear of all Liens other than Permitted Liens. Except as noted on the Perfection Certificates, neither Borrower nor any of its
Subsidiaries is a party to, nor is bound by, any material license or other material agreement with respect to which Borrower or such
Subsidiary is the licensee that (i) prohibits or otherwise restricts Borrower or its Subsidiaries from granting a security interest in Borrower’s
or such Subsidiaries’ interest in such material license or material agreement or any other property, or (ii) for which a default under or
termination of could interfere with Collateral Agent’s or any Lender’s right to sell any Collateral. Borrower shall provide written notice to
Collateral Agent and each Lender within ten (10) Business Days of Borrower or any of its Subsidiaries entering into or becoming bound by
any license or agreement with respect to which Borrower or any Subsidiary is the licensee (other than over‑the‑counter software that is
commercially available to the public).
5.3 Litigation. Except as disclosed (i) on the Perfection Certificates, or (ii) in accordance with Section 6.9 hereof, there are
no actions, suits, investigations, or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or
against Borrower or any of its Subsidiaries involving more than Two Hundred Fifty Thousand Dollars ($250,000.00).
5.4 No Material Deterioration in Financial Condition; Financial Statements. All consolidated financial statements for
Borrower and its Subsidiaries, delivered to Collateral Agent fairly present, in conformity with GAAP, in all material respects the
consolidated financial condition of Borrower and its Subsidiaries, and the consolidated results of operations of Borrower and its
Subsidiaries as of the dates and for the periods presented. Lender understands that interim financial statements may not be audited and
may be subject to normal year-end adjustments and the absence of footnotes; provided, however, that such adjustments shall not be
material and in the case of revenues and cash balances such adjustments shall not be in excess of de minimis amounts. There has not been
any material deterioration in the consolidated financial condition of Borrower and its Subsidiaries since the date of the most recent
financial statements submitted to any Lender.
5.5 Solvency. Borrower is Solvent and Borrower and its Subsidiaries, on a consolidated basis, are Solvent.
5.6 Regulatory Compliance. Neither Borrower nor any of its Subsidiaries is an “investment company” or a company
“controlled” by an “investment company” under the Investment Company Act of 1940, as amended. Neither Borrower nor any of its
Subsidiaries is engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal
Reserve Board of Governors). Borrower and each of its Subsidiaries has complied in all material respects with the Federal Fair Labor
Standards Act. Neither Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or a
“subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of
2005. Neither Borrower nor any of its Subsidiaries has violated any laws, ordinances or rules, the
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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violation of which could reasonably be expected to have a Material Adverse Change. Neither Borrower’s nor any of its Subsidiaries’
properties or assets has been used by Borrower or such Subsidiary or, to Borrower’s knowledge, by previous Persons, in disposing,
producing, storing, treating, or transporting any hazardous substance other than in material compliance with applicable laws. Borrower and
each of its Subsidiaries has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all
notices to, all Governmental Authorities that are necessary to continue their respective businesses as currently conducted.
None of Borrower, any of its Subsidiaries, or any of Borrower’s or its Subsidiaries’ Affiliates or any of their respective agents
acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement is (i) in violation of any
Anti‑Terrorism Law, (ii) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or
avoiding or attempts to violate, any of the prohibitions set forth in any Anti‑Terrorism Law, or (iii) is a Blocked Person. None of Borrower,
any of its Subsidiaries, or to the knowledge of Borrower and any of their Affiliates or agents, acting or benefiting in any capacity in
connection with the transactions contemplated by this Agreement, (x) conducts any business or engages in making or receiving any
contribution of funds, goods or services to or for the benefit of any Blocked Person, or (y) deals in, or otherwise engages in any transaction
relating to, any property or interest in property blocked pursuant to Executive Order No. 13224, any similar executive order or other
Anti‑Terrorism Law.
5.7 Investments. Neither Borrower nor any of its Subsidiaries owns any stock, shares, partnership interests or other equity
securities except for Permitted Investments.
5.8 Tax Returns and Payments; Pension Contributions. Borrower and each of its Subsidiaries has timely filed all
required tax returns and reports, and Borrower and each of its Subsidiaries, has timely paid all foreign, federal, state, and material local
taxes, assessments, deposits and contributions (i.e. local taxes, assessments, deposits and contributions in an aggregate amount of $50,000
or more) owed by Borrower and such Subsidiaries, in all jurisdictions in which Borrower or any such Subsidiary is subject to taxes,
including the United States, unless such taxes are being contested in accordance with the following sentence. Borrower and each of its
Subsidiaries, may defer payment of any contested taxes, provided that Borrower or such Subsidiary, (a) in good faith contests its obligation
to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Collateral Agent in writing of the
commencement of, and any material development in, the proceedings, and (c) posts bonds or takes any other steps required to prevent the
Governmental Authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted
Lien.” Neither Borrower nor any of its Subsidiaries is aware of any claims or adjustments proposed for any of Borrower’s or such
Subsidiaries’, prior tax years which could result in additional taxes becoming due and payable by Borrower or its Subsidiaries. Borrower
and each of its Subsidiaries have paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in
accordance with their terms, and neither Borrower nor any of its Subsidiaries have, withdrawn from participation in, and have not
permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could
reasonably be expected to result in any liability of Borrower or its Subsidiaries, including any liability to the Pension Benefit Guaranty
Corporation or its successors or any other Governmental Authority.
5.9 Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as working capital and to fund its
general business requirements in accordance with the provisions of this Agreement, and not for personal, family, household or agricultural
purposes.
5.10 Shares. Borrower has full power and authority to create a first lien on the Shares and no disability or contractual
obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement. To Borrower’s knowledge, there are
no subscriptions, warrants, rights of first refusal or other restrictions on transfer relative to, or options exercisable with respect to the
Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non‑assessable. To Borrower’s
knowledge, the Shares are not the subject of any present or threatened in writing suit, action, arbitration, administrative or other
proceeding, and Borrower knows of no reasonable grounds for the institution of any such proceedings.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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5.11 Full Disclosure. No written representation, warranty or other statement of Borrower or any of its Subsidiaries in any
certificate or written statement given to Collateral Agent or any Lender, as of the date such representation, warranty, or other statement was
made, taken together with all such written certificates and written statements given to Collateral Agent or any Lender, contains any untrue
statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not
misleading (it being recognized that the projections and forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may
differ from the projected or forecasted results).
5.12 Definition of “Knowledge.” For purposes of the Loan Documents, whenever a representation or warranty is made to
Borrower’s knowledge or awareness, to the “best of” Borrower’s knowledge, or with a similar qualification, knowledge or awareness
means the actual knowledge, after reasonable investigation, of the Responsible Officers.
6. AFFIRMATIVE COVENANTS
Borrower shall, and shall cause each of its Subsidiaries to, do all of the following:
6.1 Government Compliance.
(a) Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of
organization and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to have a
Material Adverse Change. Comply with all laws, ordinances and regulations to which Borrower or any of its Subsidiaries is subject, the
noncompliance with which could reasonably be expected to have a Material Adverse Change. Notwithstanding anything herein to the
contrary, Parent shall be permitted to dissolve Aclaris Life Sciences, Inc. (the “Permitted Dissolution”); provided, however, in connection
with the Permitted Dissolution, (i) the parties shall enter into an amendment hereto, in such form and substance as are acceptable to
Collateral Agent and Lenders in their discretion to remove ALS as a Borrower from the Loan Documents and the Parent shall cause all
assets of ALS, after payment of reasonable costs in connection with the Permitted Dissolution, to be transferred to another Borrower and
(ii) CDT will become a directly wholly owned Subsidiary of Parent.
(b) Obtain and keep in full force and effect, all of the material Governmental Approvals necessary for the
performance by Borrower and its Subsidiaries of their respective businesses and obligations under the Loan Documents and the grant of a
security interest to Collateral Agent for the ratable benefit of the Lenders, in all of the Collateral. Borrower shall promptly provide copies
to Collateral Agent of any material Governmental Approvals obtained by Borrower or any of its Subsidiaries.
6.2 Financial Statements, Reports, Certificates.
(a) Deliver to each Lender:
(i) as soon as available, but no later than thirty (30) days after the last day of each month, a company
prepared consolidated balance sheet, income statement and cash flow statement covering the consolidated operations of Parent and its
Subsidiaries, on a consolidated basis, for such month certified by a Responsible Officer and in a form reasonably acceptable to Collateral
Agent;
(ii) as soon as available, but no later than one hundred twenty (120) days after the last day of Parent’s
fiscal year or within five (5) Business Days of filing with the SEC, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm
acceptable to Collateral Agent in its reasonable discretion; provided that such unqualified opinion may include a going concern explanatory
paragraph;
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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(iii) as soon as available after approval thereof by Parent’s Board of Directors, but no later than sixty (60)
days after the last day of each of Parent’s fiscal years, Parent’s annual financial projections for the entire current fiscal year as approved by
Parent’s Board of Directors, which such annual financial projections shall be set forth in a quarter‑by‑quarter format (such annual financial
projections as originally delivered to Collateral Agent and the Lenders are referred to herein as the “Annual Projections”; provided that,
any revisions of the Annual Projections approved by Parent’s Board of Directors shall be delivered to Collateral Agent and the Lenders no
later than seven (7) Business Days after such approval);
made generally available to Parent’s security holders or holders of Subordinated Debt;
(iv) within five (5) Business Days of delivery, copies of all material written statements, reports and notices
Securities and Exchange Commission,
(v) within five (5) Business Days of filing, all reports on Form 10‑K, 10‑Q and 8‑K filed with the
its Subsidiaries, together with any copies reflecting such amendments or changes with respect thereto;
(vi) prompt notice of any amendments or other changes to the Operating Documents of Borrower or any of
value of the Intellectual Property;
(vii) prompt notice of any event that could reasonably be expected to materially and adversely affect the
(viii) as soon as available, but no later than thirty (30) days after the last day of each month, copies of the
month‑end account statements for each Collateral Account maintained by Borrower or its Subsidiaries, which statements may be provided
to Collateral Agent and each Lender by Borrower or directly from the applicable institution(s), and
(ix) other information as reasonably requested by Collateral Agent or any Lender.
Notwithstanding the foregoing, documents required to be delivered pursuant to the terms hereof (to the extent any such documents are
included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been
delivered on the date on which Borrower posts such documents, or provides a link thereto, on Borrower’s website on the internet at
Borrower’s website address.
(b) Concurrently with the delivery of the financial statements specified in Section 6.2(a)(i) above but no later than
thirty (30) days after the last day of each month, deliver to each Lender, a duly completed Compliance Certificate signed by a Responsible
Officer.
(c) Keep proper books of record and account in accordance with GAAP in all material respects, in which full, true
and correct entries shall be made of all dealings and transactions in relation to its business and activities. Borrower shall, and shall cause
each of its Subsidiaries to, allow, at the sole cost of Borrower, Collateral Agent or any Lender, during regular business hours upon
reasonable prior notice (provided that no notice shall be required when an Event of Default has occurred and is continuing), to visit and
inspect any of its properties, to examine and make abstracts or copies from any of its books and records, and to conduct a collateral audit
and analysis of its operations and the Collateral. Such audits shall be conducted no more often than twice every year unless (and more
frequently if) an Event of Default has occurred and is continuing.
6.3 Inventory; Returns. Keep all Inventory in good and marketable condition, free from material defects. Returns and
allowances between Borrower, or any of its Subsidiaries, and their respective Account Debtors, shall follow Borrower’s, or such
Subsidiary’s practices that exist at the Effective Date or that may be implemented in the reasonable judgment of management. Borrower
must promptly notify Collateral Agent and the
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SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Lenders of all returns, recoveries, disputes and claims that involve more than Two Hundred Fifty Thousand Dollars ($250,000.00)
individually or in the aggregate in any calendar year.
6.4 Taxes; Pensions. Timely file and require each of its Subsidiaries to timely file, all required tax returns and reports or
extensions therefor (which are timely filed and accepted and approved by the applicable Governmental Authority) and timely pay, and
require each of its Subsidiaries to timely file, all foreign, federal, state, and local taxes, assessments, deposits and contributions owed by
Borrower or its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.8 hereof, and shall
deliver to Lenders, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present
pension, profit sharing and deferred compensation plans in accordance with the terms of such plans.
6.5 Insurance. Keep Borrower’s and its Subsidiaries’ business and the Collateral insured for risks and in amounts standard
for companies in Borrower’s and its Subsidiaries’ industry and location and as Collateral Agent may reasonably request. Insurance policies
shall be in a form, with companies, and in amounts that are reasonably satisfactory to Collateral Agent and Lenders. All property policies
shall have a lender’s loss payable endorsement showing Collateral Agent as lender loss payee and waive subrogation against Collateral
Agent, and all liability policies shall show, or have endorsements showing, Collateral Agent, as additional insured. The Collateral Agent
shall be named as lender loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any
Collateral, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent
instruments furnished to the Collateral Agent, that it will give the Collateral Agent thirty (30) days (ten (10) days for nonpayment of
premium) prior written notice before any such policy or policies shall be canceled. At Collateral Agent’s request, Borrower shall deliver
certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Collateral Agent’s option,
be payable to Collateral Agent, for the ratable benefit of the Lenders, on account of the Obligations. Notwithstanding the foregoing, (a) so
long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy
up to Five Hundred Thousand Dollars ($500,000.00) with respect to any loss, but not exceeding Five Hundred Thousand Dollars
($500,000.00), in the aggregate for all losses under all casualty policies in any one year, toward the replacement or repair of destroyed or
damaged property; provided that any such replaced or repaired property (i) shall be of equal or like value as the replaced or repaired
Collateral and (ii) shall be deemed Collateral in which Collateral Agent has been granted a first priority security interest, and (b) after the
occurrence and during the continuance of an Event of Default, all proceeds payable under such casualty policy shall, at the option of
Collateral Agent, be payable to Collateral Agent, for the ratable benefit of the Lenders, on account of the Obligations. If Borrower or any
of its Subsidiaries fails to obtain insurance as required under this Section 6.5 or to pay any amount or furnish any required proof of
payment to third persons, Collateral Agent and/or any Lender may make, at Borrower’s expense, all or part of such payment or obtain such
insurance policies required in this Section 6.5, and take any action under the policies Collateral Agent or such Lender deems prudent.
6.6 Operating Accounts.
(a) Maintain all of Borrower’s and each Subsidiary’s Collateral Accounts in accounts which are subject to a Control
Agreement in favor of Collateral Agent other than Excluded Accounts.
(b) Borrower shall provide Collateral Agent five (5) Business Days’ prior written notice before Borrower or any
Subsidiary establishes any Collateral Account. In addition, for each Collateral Account (other than Excluded Accounts) that Borrower or
any Loan Party, at any time maintains, Borrower or such Loan Party shall cause the applicable bank or financial institution at or with which
such Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such
Collateral Account to perfect Collateral Agent’s Lien in such Collateral Account in accordance with the terms hereunder prior to the
establishment of such Collateral Account, which Control Agreement may not be terminated without prior written consent of Collateral
Agent. The provisions of the previous sentence shall not apply to Excluded Accounts.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Sections 6.6(a) and (b).
(c) Borrower shall not maintain any Collateral Accounts except Collateral Accounts maintained in accordance with
6.7 Protection of Intellectual Property Rights. Borrower and each of its Subsidiaries shall: (a) use commercially
reasonable efforts to protect, defend and maintain the validity and enforceability of its Intellectual Property that is material to Borrower’s
business; (b) promptly advise Collateral Agent in writing of material infringement by a third party of its Intellectual Property; and (c) not
allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without Collateral
Agent’s prior written consent.
6.8 Litigation Cooperation. Commencing on the Effective Date and continuing through the termination of this Agreement,
make available to Collateral Agent and the Lenders, without expense to Collateral Agent or the Lenders, Borrower and each of Borrower’s
officers, employees and agents and Borrower’s Books, to the extent that Collateral Agent or any Lender may reasonably deem them
necessary to prosecute or defend any third‑party suit or proceeding instituted by or against Collateral Agent or any Lender with respect to
any Collateral or relating to Borrower.
6.9 Notices of Litigation and Default. Borrower will give prompt written notice to Collateral Agent and the Lenders of any
litigation or governmental proceedings pending or threatened (in writing) against Borrower or any of its Subsidiaries, which could
reasonably be expected to result in damages or costs to Borrower or any of its Subsidiaries of Two Hundred Fifty Thousand Dollars
($250,000.00) or more or which could reasonably be expected to have a Material Adverse Change. Without limiting or contradicting any
other more specific provision of this Agreement, promptly (and in any event within five (5) Business Days) upon Borrower becoming
aware of the existence of any Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an
Event of Default, Borrower shall give written notice to Collateral Agent and the Lenders of such occurrence, which such notice shall
include a reasonably detailed description of such Event of Default or event which, with the giving of notice or passage of time, or both,
would constitute an Event of Default.
6.10 Financial Covenant. Parent shall achieve the following:
(a) As tested on [***], consolidated revenues for Parent and its Subsidiaries from the sale of the products of Parent
and its Subsidiaries on a consolidated basis [***];
and its Subsidiaries on a consolidated basis [***]; and
(b) As tested on [***], consolidated revenues for Parent and its Subsidiaries from the sale of the products of Parent
(c) As tested on [***], consolidated revenues for Parent and its Subsidiaries from the sale of products of Parent and
its Subsidiaries on a consolidated basis [***].
6.11 Landlord Waivers; Bailee Waivers. In the event that Borrower or any of its Subsidiaries, after the Effective Date,
intends to add any new offices or business locations, including warehouses, or otherwise store any portion of the Collateral with, or deliver
any portion of the Collateral to, a bailee, in each case pursuant to Section 7.2, then Borrower or such Subsidiary will first receive the
written consent of Collateral Agent and, in the event that the new location is the chief executive office of the Borrower or a Loan Party or
the Collateral at any such new location is valued in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate, such
bailee or landlord, as applicable, must execute and deliver a bailee waiver or landlord waiver, as applicable, in form and substance
reasonably satisfactory to Collateral Agent prior to the addition of any new offices or business locations, or any such storage with or
delivery to any such bailee, as the case may be.
6.12 Creation/Acquisition of Subsidiaries. In the event Borrower, or any of its Subsidiaries creates or acquires any
Subsidiary, Borrower shall provide prior written notice to Collateral Agent and each Lender of the creation or acquisition of such new
Subsidiary and take all such action as may be reasonably required by Collateral
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
Agent or any Lender to cause each such Subsidiary to become a co‑Borrower hereunder or to guarantee the Obligations of Borrower under
the Loan Documents and, in each case, grant a continuing pledge and security interest in and to the assets of such Subsidiary (substantially
as described on Exhibit A hereto); and Borrower (or its Subsidiary, as applicable) shall grant and pledge to Collateral Agent, for the ratable
benefit of the Lenders, a perfected security interest in the Shares; provided, however, that solely in the circumstance in which Borrower or
any Subsidiary creates or acquires a Foreign Subsidiary in an acquisition permitted by Section 7.7 hereof or otherwise approved by the
Required Lenders, (i) such Foreign Subsidiary shall not be required to guarantee the Obligations of Borrower under the Loan Documents
and grant a continuing pledge and security interest in and to the assets of such Foreign Subsidiary, and (ii) Borrower shall not be required
to grant and pledge to Collateral Agent, for the ratable benefit of Lenders, a perfected security interest in more than sixty‑five percent
(65%) of the Shares of such Foreign Subsidiary, if Borrower demonstrates to the reasonable satisfaction of Collateral Agent that such
Foreign Subsidiary providing such guarantee or pledge and security interest (other than as a co-Borrower) or Borrower providing a
perfected security interest in more than sixty‑five percent (65%) of the Shares would create a present and existing adverse tax consequence
to Borrower under the U.S. Internal Revenue Code.
6.13 Further Assurances.
perfect or continue Collateral Agent’s Lien in the Collateral or to effect the purposes of this Agreement.
(a) Execute any further instruments and take further action as Collateral Agent or any Lender reasonably requests to
(b) Deliver to Collateral Agent and Lenders, within five (5) Business Days after the same are sent or received,
copies of all material correspondence, reports, documents and other filings with any Governmental Authority that could reasonably be
expected to have a material adverse effect on any of the Governmental Approvals material to Borrower’s business or otherwise could
reasonably be expected to have a Material Adverse Change.
7. NEGATIVE COVENANTS
Borrower shall not, and shall not permit any of its Subsidiaries to, do any of the following without the prior written consent of the
Required Lenders:
7.1 Dispositions. Convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “Transfer”), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business;
(b) of worn out, surplus or obsolete Equipment; (c) in connection with Permitted Liens, Permitted Investments and Permitted Licenses; (d)
from any Subsidiary of Borrower to Borrower or between Borrowers; (e) consisting of payment of reasonable expenses in connection with
the Permitted Dissolution, and (h) of property (other than Intellectual Property) having a book value not exceeding exceed Five Hundred
Thousand Dollars ($500,000.00) in the aggregate during any fiscal year.
7.2 Changes in Business, Management, Ownership, or Business Locations. (a) Engage in or permit any of its
Subsidiaries to engage in any business other than the businesses engaged in by Borrower as of the Effective Date or reasonably related
thereto; (b) liquidate or dissolve other than the Permitted Dissolution; or (c) (i) any Key Person shall cease to be actively engaged in the
management of Borrower unless written notice thereof is provided to Collateral Agent within five (5) days after the relevant SEC filing of
such change, or (ii) enter into any transaction or series of related transactions in which the stockholders of Borrower who were not
stockholders immediately prior to the first such transaction own more than forty nine percent (49%) of the voting stock of Borrower
immediately after giving effect to such transaction or related series of such transactions (other than by the sale of Borrower’s equity
securities in a public offering, a private placement of public equity or to venture capital investors so long as Borrower identifies to
Collateral Agent the venture capital investors prior to the closing of the transaction). Borrower shall not, without at least thirty (30) days’
prior written notice to Collateral Agent: (A) add any new offices or business locations, including warehouses (unless such new offices or
business locations (i) contain less than Two Hundred Fifty Thousand Dollars ($250,000.00) in assets or property of
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
Borrower; and (ii) are not Borrower’s or any Loan Party’s chief executive office); (B) change its jurisdiction of organization, (C) change its
organizational structure or type, (D) change its legal name, or (E) change any organizational number (if any) assigned by its jurisdiction of
organization.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any
other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock, shares or property of
another Person other than pursuant to a Permitted Investment. A Subsidiary may merge or consolidate into another Subsidiary (provided
such surviving Subsidiary is a “co‑Borrower” hereunder or has provided a secured Guaranty of Borrower’s Obligations hereunder) or with
(or into) Borrower provided Borrower is the surviving legal entity, and as long as no Event of Default is occurring prior thereto or arises as
a result therefrom. Without limiting the foregoing, Borrower shall not, without Collateral Agent’s prior written consent, enter into any
binding contractual arrangement with any Person to attempt to facilitate a merger or acquisition of Borrower, unless (i) no Event of Default
exists when such agreement is entered into by Borrower, (ii) such agreement does not give such Person the right to claim any fees,
payments or damages from Borrower in excess of Five Hundred Thousand Dollars ($500,000.00) as a result of any failure to proceed with
or close such merger or acquisition and (iii) Borrower notifies Collateral Agent in advance of entering into such an agreement.
7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than
Permitted Indebtedness.
7.5 Encumbrance. Create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive
income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral
not to be subject to the first priority security interest granted herein (except for Permitted Liens that are permitted by the terms of this
Agreement to have priority over Collateral Agent’s Lien), or enter into any agreement, document, instrument or other arrangement (except
with or in favor of Collateral Agent, for the ratable benefit of the Lenders) with any Person which directly or indirectly prohibits or has the
effect of prohibiting Borrower, or any of its Subsidiaries, from assigning, mortgaging, pledging, granting a security interest in or upon, or
encumbering any of Borrower’s or such Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 7.1 hereof and the
definition of “Permitted Liens” herein.
7.6 Maintenance of Collateral Accounts. Maintain any Collateral Account except pursuant to the terms of Section 6.6
hereof.
7.7 Distributions; Investments. (a) Pay any dividends (other than dividends payable solely in capital stock) or make any
distribution or payment in respect of or redeem, retire or purchase any capital stock except that Borrower or any Subsidiary may (i)
repurchase the stock of current or former employees, officers, directors or consultants, (ii) repurchase the stock of current or former
employees, officers, directors or consultants pursuant to stock repurchase agreements by the cancellation of indebtedness owed by such
former employees regardless of whether an Event of Default exists, (iii) purchase for value of any rights distributed in connection with any
stockholder rights plan, (iv) purchases of capital stock or options to acquire such capital stock with the proceeds received from a
substantially concurrent issuance of capital stock or convertible securities; (v) purchases of capital stock pledged as collateral for loans to
employees, officers or directors; (vi) purchases of capital stock in connection with (x) the exercise of stock options or stock appreciation
rights or (y) the satisfaction of withholding tax obligations; in each case, by way of cashless (or, “net”) exercise; (vii) cash payments in lieu
of the issuance of fractional shares upon conversion of convertible securities; and (viii) repurchases of stock pursuant to rights of first
refusal in Borrowers’ bylaws; so long as such repurchases and purchasers (described in (i) through (viii)) do not exceed Two Hundred Fifty
Thousand Dollars ($250,000.00) in the aggregate per fiscal year; or (b) directly or indirectly make any Investment other than Permitted
Investments, or permit any of its Subsidiaries to do so.
7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any
Affiliate of Borrower or any of its Subsidiaries, except for (a) transactions that are in the ordinary course of Borrower’s or such
Subsidiary’s business, upon fair and reasonable terms that are no less
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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favorable to Borrower or such Subsidiary than would be obtained in an arm’s length transaction with a non‑affiliated Person,
(b) Subordinated Debt or equity investments by Borrower’s investors in Borrower or its Subsidiaries, (c) any transaction expressly allowed
under Section 7.1, (d) compensation and indemnification of, and other employment arrangements with, directors, officers and employees of
Borrower or any Subsidiary, in each case, entered into in the ordinary course of business in accordance with Borrower’s Annual Projections
and corporate governance practices, (e) loans and advances otherwise explicitly permitted hereunder to be made to the applicable Affiliate,
(f) intercompany services agreement between Borrowers, and (g) transactions disclosed in the Borrower’s Perfection Certificates on the
Effective Date (and without any amendments to the terms of such transactions which amendments would constitute such incremental or
new transactions as would require consent of the Required Lenders or Collateral Agent hereunder).
7.9 Subordinated Debt. (a) Make or permit any payment on any Subordinated Debt, except under the terms of the
subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any
document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to
Obligations owed to the Lenders.
7.10 Compliance. Become an “investment company” or a company controlled by an “investment company”, under the
Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin
stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension
for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation
could reasonably be expected to have a Material Adverse Change, or permit any of its Subsidiaries to do so; withdraw or permit any
Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with
respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability
of Borrower or any of its Subsidiaries, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other
Governmental Authority.
7.11 Compliance with Anti‑Terrorism Laws. Collateral Agent hereby notifies Borrower and each of its Subsidiaries that
pursuant to the requirements of Anti‑Terrorism Laws, and Collateral Agent’s policies and practices, Collateral Agent is required to obtain,
verify and record certain information and documentation that identifies Borrower and each of its Subsidiaries and their principals, which
information includes the name and address of Borrower and each of its Subsidiaries and their principals and such other information that
will allow Collateral Agent to identify such party in accordance with Anti‑Terrorism Laws. Neither Borrower nor any of its Subsidiaries
shall, nor shall Borrower or any of its Subsidiaries permit any Affiliate to, directly or indirectly, knowingly enter into any documents,
instruments, agreements or contracts with any Person listed on the OFAC Lists. Borrower and each of its Subsidiaries shall immediately
notify Collateral Agent if Borrower or such Subsidiary has knowledge that Borrower, or any Subsidiary or Affiliate of Borrower, is listed
on the OFAC Lists or (a) is convicted on, (b) pleads nolo contendere to, (c) is indicted on, or (d) is arraigned and held over on charges
involving money laundering or predicate crimes to money laundering. Neither Borrower nor any of its Subsidiaries shall, nor shall
Borrower or any of its Subsidiaries, permit any Affiliate to, directly or indirectly, (i) conduct any business or engage in any transaction or
dealing with any Blocked Person, including, without limitation, the making or receiving of any contribution of funds, goods or services to
or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property
blocked pursuant to Executive Order No. 13224 or any similar executive order or other Anti‑Terrorism Law, or (iii) engage in or conspire
to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions
set forth in Executive Order No. 13224 or other Anti‑Terrorism Law.
7.12 UK Subsidiary Assets. Allow the cash and Cash Equivalent assets held by the UK Subsidiary to exceed Two Million
Dollars ($2,000,000.00) at any given time.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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8. EVENTS OF DEFAULT
Any one of the following shall constitute an event of default (an “Event of Default”) under this Agreement:
8.1 Payment Default. Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due
date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) Business
to
Day grace period shall not apply
Section 9.1(a) hereof). During the cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension
will be made during the cure period);
the date of acceleration pursuant
the Maturity Date or
to payments due on
8.2 Covenant Default.
(a) Borrower or any of its Subsidiaries fails or neglects to perform any obligation in Sections 6.2 (Financial
Statements, Reports, Certificates), 6.4 (Taxes), 6.5 (Insurance), 6.6 (Operating Accounts), 6.7 (Protection of Intellectual Property Rights),
6.9 (Notice of Litigation and Default), 6.10 (Financial Covenant), 6.11 (Landlord Waivers; Bailee Waivers), 6.12 (Creation/Acquisition of
Subsidiaries) or 6.13 (Further Assurances) or Borrower violates any covenant in Section 7; or
(b) Borrower, or any of its Subsidiaries, fails or neglects to perform, keep, or observe any other term, provision,
condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in
this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within
twenty (20) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the twenty (20)
day period or cannot after diligent attempts by Borrower be cured within such twenty (20) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional period (which additional period shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of
Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this Section shall not apply,
among other things, to financial covenants or any other covenants set forth in subsection (a) above;
8.3 Material Adverse Change. A Material Adverse Change occurs;
8.4 Attachment; Levy; Restraint on Business.
(a) (i) The service of process seeking to attach, by trustee or similar process, any funds of Borrower or any of its
Subsidiaries or of any entity under control of Borrower or its Subsidiaries on deposit with any Lender or any Lender’s Affiliate or any bank
or other institution at which Borrower or any of its Subsidiaries maintains a Collateral Account, or (ii) a notice of lien, levy, or assessment
is filed against Borrower or any of its Subsidiaries or their respective assets by any government agency, and the same under subclauses
(i) and (ii) hereof are not, within ten (10) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or
otherwise); provided, however, no Credit Extensions shall be made during any ten (10) day cure period; and
(b) (i) any material portion of Borrower’s or any of its Subsidiaries’ assets is attached, seized, levied on, or comes
into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents Borrower or any of its Subsidiaries from
conducting any part of its business;
8.5 Insolvency. (a) Borrower is or becomes insolvent or Borrower and its Subsidiaries, taken as a whole, are or become
Insolvent; (b) Borrower or any of its Subsidiaries begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against
Borrower or any of its Subsidiaries and not dismissed or stayed within forty‑five (45) days (but no Credit Extensions shall be made while
Borrower or any Subsidiary is Insolvent and/or until any Insolvency Proceeding is dismissed);
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
8.6 Other Agreements. There is a default in any agreement to which Borrower or any of its Subsidiaries is a party with a
third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any
Indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) or that could reasonably be expected to have a
Material Adverse Change; provided, however, that the Event of Default under this Section 8.6 caused by the occurrence of a breach or
default under such other agreement shall be cured or waived for purposes of this Agreement upon Collateral Agent receiving written notice
from the party asserting such breach or default of such cure or waiver of the breach or default under such other agreement, if at the time of
such cure or waiver under such other agreement (x) Collateral Agent or any Lender has not declared an Event of Default under this
Agreement and/or exercised any rights with respect thereto; (y) any such cure or waiver does not result in an Event of Default under any
other provision of this Agreement or any Loan Document; and (z) in connection with any such cure or waiver under such other agreement,
the terms of any agreement with such third party are not modified or amended in any manner which could in the good faith business
judgment of Collateral Agent be materially less advantageous to Borrower;
8.7 Judgments. One or more judgments, orders, or decrees for the payment of money in an amount, individually or in the
aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000.00) (not covered by independent third party insurance as to which
liability has been accepted by such insurance carrier) shall be rendered against Borrower or any of its Subsidiaries and shall remain
unsatisfied, unvacated, or unstayed for a period of ten (10) days after the entry thereof (provided that no Credit Extensions will be made
prior to the satisfaction, vacation, or stay of such judgment, order or decree);
8.8 Misrepresentations. Borrower or any of its Subsidiaries or any Person acting for Borrower or any of its Subsidiaries
makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to
Collateral Agent and/or Lenders or to induce Collateral Agent and/or the Lenders to enter this Agreement or any Loan Document, and such
representation, warranty, or other statement is incorrect in any material respect when made;
8.9 Subordinated Debt. A default or breach occurs under any agreement between Borrower or any of its Subsidiaries and
any creditor of Borrower or any of its Subsidiaries that signed a subordination, intercreditor, or other similar agreement with Collateral
Agent or the Lenders, or any creditor that has signed such an agreement with Collateral Agent or the Lenders breaches any terms of such
agreement;
8.10 Guaranty. (a) Any Guaranty terminates or ceases for any reason to be in full force and effect; (b) any Guarantor does
not perform any obligation or covenant under any Guaranty; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8 occurs
with respect to any Guarantor, or (d) the liquidation, winding up, or termination of existence of any Guarantor;
8.11 Governmental Approvals. Any Governmental Approval shall have been revoked, rescinded, suspended, modified in an
adverse manner, or not renewed in the ordinary course for a full term and such revocation, rescission, suspension, modification or
non‑renewal has resulted in or could reasonably be expected to result in a Material Adverse Change; or
8.12 Lien Priority. Any Lien created hereunder or by any other Loan Document shall at any time fail to constitute a valid
and perfected Lien on any of the Collateral purported to be secured thereby, subject to no prior or equal Lien, other than Permitted Liens
which are permitted to have priority in accordance with the terms of this Agreement.
8.13 Delisting. The shares of common stock of Borrower are delisted from NASDAQ Stock Market because of failure to
comply with continued listing standards thereof or due to a voluntary delisting which results in such shares not being listed on any other
nationally recognized stock exchange in the United States having listing standards at least as restrictive as the NASDAQ Stock Market.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
9. RIGHTS AND REMEDIES
9.1 Rights and Remedies.
(a) Upon the occurrence and during the continuance of an Event of Default, Collateral Agent may, and at the
written direction of Required Lenders shall, without notice or demand, do any or all of the following: (i) deliver notice of the Event of
Default to Borrower, (ii) by notice to Borrower declare all Obligations immediately due and payable (but if an Event of Default described
in Section 8.5 occurs all Obligations shall be immediately due and payable without any action by Collateral Agent or the Lenders) or
(iii) by notice to Borrower suspend or terminate the obligations, if any, of the Lenders to advance money or extend credit for Borrower’s
benefit under this Agreement or under any other agreement between Borrower and Collateral Agent and/or the Lenders (but if an Event of
Default described in Section 8.5 occurs all obligations, if any, of the Lenders to advance money or extend credit for Borrower’s benefit
under this Agreement or under any other agreement between Borrower and Collateral Agent and/or the Lenders shall be immediately
terminated without any action by Collateral Agent or the Lenders).
(b) Without limiting the rights of Collateral Agent and the Lenders set forth in Section 9.1(a) above, upon the
occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right, without notice or demand, to do any or
all of the following:
(i) foreclose upon and/or sell or otherwise liquidate, the Collateral;
(ii) apply to the Obligations any (a) balances and deposits of Borrower that Collateral Agent or any Lender
holds or controls, or (b) any amount held or controlled by Collateral Agent or any Lender owing to or for the credit or the account of
Borrower; and/or
Insolvency Proceeding.
(iii) commence and prosecute an Insolvency Proceeding or consent to Borrower commencing any
(c) Without limiting the rights of Collateral Agent and the Lenders set forth in Sections 9.1(a) and (b) above, upon
the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right, without notice or demand, to do
any or all of the following:
(i) settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any
order that Collateral Agent considers advisable, notify any Person owing Borrower money of Collateral Agent’s security interest in such
funds, and verify the amount of such account;
(ii) make any payments and do any acts it considers necessary or reasonable to protect the Collateral
and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Collateral Agent requests and make it available in a
location as Collateral Agent reasonably designates. Collateral Agent may enter premises where the Collateral is located, take and maintain
possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its
security interest and pay all expenses incurred. Borrower grants Collateral Agent a license to enter and occupy any of its premises, without
charge, to exercise any of Collateral Agent’s rights or remedies;
(iii) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, and/or advertise for sale, the
Collateral. Collateral Agent is hereby granted a non‑exclusive, royalty‑free license or other right to use, without charge, Borrower’s and
each of its Subsidiaries’ labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and
selling any Collateral and, in connection with Collateral Agent’s exercise of its rights under this Section 9.1, Borrower’s and each of its
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
Subsidiaries’ rights under all licenses and all franchise agreements inure to Collateral Agent, for the benefit of the Lenders;
(iv) place a “hold” on any account maintained with Collateral Agent or the Lenders and/or deliver a notice
of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements
providing control of any Collateral;
(v) demand and receive possession of Borrower’s Books;
(vi) appoint a receiver to seize, manage and realize any of the Collateral, and such receiver shall have any
right and authority as any competent court will grant or authorize in accordance with any applicable law, including any power or authority
to manage the business of Borrower or any of its Subsidiaries; and
(vii) subject to clauses 9.1(a) and (b), exercise all rights and remedies available to Collateral Agent and each
Lender under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral
pursuant to the terms thereof.
Notwithstanding any provision of this Section 9.1 to the contrary, upon the occurrence of any Event of Default, Collateral Agent shall have
the right to exercise any and all remedies referenced in this Section 9.1 without the written consent of Required Lenders following the
occurrence of an Exigent Circumstance. As used in the immediately preceding sentence, “Exigent Circumstance” means any event or
circumstance that, in the reasonable judgment of Collateral Agent, imminently threatens the ability of Collateral Agent to realize upon all
or any material portion of the Collateral, such as, without limitation, fraudulent removal, concealment, or abscondment thereof, destruction
or material waste thereof, or failure of Borrower or any of its Subsidiaries after reasonable demand to maintain or reinstate adequate
casualty insurance coverage, or which, in the judgment of Collateral Agent, could reasonably be expected to result in a material diminution
in value of the Collateral.
9.2 Power of Attorney. Borrower hereby irrevocably appoints Collateral Agent as its lawful attorney‑in‑fact, exercisable
upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s or any of its Subsidiaries’ name on any
checks or other forms of payment or security; (b) sign Borrower’s or any of its Subsidiaries’ name on any invoice or bill of lading for any
Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for
amounts and on terms Collateral Agent determines reasonable; (d) make, settle, and adjust all claims under Borrower’s insurance policies;
(e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Collateral Agent or
a third party as the Code or any applicable law permits. Borrower hereby appoints Collateral Agent as its lawful attorney‑in‑fact to sign
Borrower’s or any of its Subsidiaries’ name on any documents necessary to perfect or continue the perfection of Collateral Agent’s security
interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations (other than inchoate indemnity
obligations) have been satisfied in full and Collateral Agent and the Lenders are under no further obligation to make Credit Extensions
hereunder. Collateral Agent’s foregoing appointment as Borrower’s or any of its Subsidiaries’ attorney in fact, and all of Collateral Agent’s
rights and powers, coupled with an interest, are irrevocable until all Obligations (other than inchoate indemnity obligations) have been fully
repaid and performed and Collateral Agent’s and the Lenders’ obligation to provide Credit Extensions terminates.
9.3 Protective Payments. If Borrower or any of its Subsidiaries fail to obtain the insurance called for by Section 6.5 or fails
to pay any premium thereon or fails to pay any other amount which Borrower or any of its Subsidiaries is obligated to pay under this
Agreement or any other Loan Document, Collateral Agent may obtain such insurance or make such payment, and all amounts so paid by
Collateral Agent are Lenders’ Expenses and immediately due and payable, bearing interest at the Default Rate, and secured by the
Collateral. Collateral Agent will make reasonable efforts to provide Borrower with notice of Collateral Agent obtaining such insurance or
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
making such payment at the time it is obtained or paid or within a reasonable time thereafter. No such payments by Collateral Agent are
deemed an agreement to make similar payments in the future or Collateral Agent’s waiver of any Event of Default.
9.4 Application of Payments and Proceeds. Notwithstanding anything to the contrary contained in this Agreement, upon
the occurrence and during the continuance of an Event of Default, (a) Borrower irrevocably waives the right to direct the application of any
and all payments at any time or times thereafter received by Collateral Agent from or on behalf of Borrower or any of its Subsidiaries of all
or any part of the Obligations, and, as between Borrower on the one hand and Collateral Agent and Lenders on the other, Collateral Agent
shall have the continuing and exclusive right to apply and to reapply any and all payments received against the Obligations in such manner
as Collateral Agent may deem advisable notwithstanding any previous application by Collateral Agent, and (b) the proceeds of any sale of,
or other realization upon all or any part of the Collateral shall be applied: first, to the Lenders’ Expenses; second, to accrued and unpaid
interest on the Obligations (including any interest which, but for the provisions of the United States Bankruptcy Code, would have accrued
on such amounts); third, to the principal amount of the Obligations outstanding; and fourth, to any other indebtedness or obligations of
Borrower owing to Collateral Agent or any Lender under the Loan Documents. Any balance remaining shall be delivered to Borrower or
to whoever may be lawfully entitled to receive such balance or as a court of competent jurisdiction may direct. In carrying out the
foregoing, (x) amounts received shall be applied in the numerical order provided until exhausted prior to the application to the next
succeeding category, and (y) each of the Persons entitled to receive a payment in any particular category shall receive an amount equal to
its pro rata share of amounts available to be applied pursuant thereto for such category. Any reference in this Agreement to an allocation
between or sharing by the Lenders of any right, interest or obligation “ratably,” “proportionally” or in similar terms shall refer to Pro Rata
Share unless expressly provided otherwise. Collateral Agent, or if applicable, each Lender, shall promptly remit to the other Lenders such
sums as may be necessary to ensure the ratable repayment of each Lender’s portion of any Term Loan and the ratable distribution of
interest, fees and reimbursements paid or made by Borrower. Notwithstanding the foregoing, a Lender receiving a scheduled payment shall
not be responsible for determining whether the other Lenders also received their scheduled payment on such date; provided, however, if it
is later determined that a Lender received more than its ratable share of scheduled payments made on any date or dates, then such Lender
shall remit to Collateral Agent or other Lenders such sums as may be necessary to ensure the ratable payment of such scheduled payments,
as instructed by Collateral Agent. If any payment or distribution of any kind or character, whether in cash, properties or securities, shall be
received by a Lender in excess of its ratable share, then the portion of such payment or distribution in excess of such Lender’s ratable share
shall be received by such Lender in trust for and shall be promptly paid over to the other Lender for application to the payments of amounts
due on the other Lenders’ claims. To the extent any payment for the account of Borrower is required to be returned as a voidable transfer
or otherwise, the Lenders shall contribute to one another as is necessary to ensure that such return of payment is on a pro rata basis. If any
Lender shall obtain possession of any Collateral, it shall hold such Collateral for itself and as agent and bailee for Collateral Agent and
other Lenders for purposes of perfecting Collateral Agent’s security interest therein.
9.5 Liability for Collateral. So long as Collateral Agent and the Lenders comply with reasonable banking practices
regarding the safekeeping of the Collateral in the possession or under the control of Collateral Agent and the Lenders, Collateral Agent and
the Lenders shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any
diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all
risk of loss, damage or destruction of the Collateral.
9.6 No Waiver; Remedies Cumulative. Failure by Collateral Agent or any Lender, at any time or times, to require strict
performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of
Collateral Agent or any Lender thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall
be effective unless signed by Collateral Agent and the Required Lenders and then is only effective for the specific instance and purpose for
which it is given. The rights and remedies of Collateral Agent and the Lenders under this Agreement and the other Loan
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
22
Confidential and Proprietary
Documents are cumulative. Collateral Agent and the Lenders have all rights and remedies provided under the Code, any applicable law, by
law, or in equity. The exercise by Collateral Agent or any Lender of one right or remedy is not an election, and Collateral Agent’s or any
Lender’s waiver of any Event of Default is not a continuing waiver. Collateral Agent’s or any Lender’s delay in exercising any remedy is
not a waiver, election, or acquiescence.
9.7 Demand Waiver. Borrower waives, to the fullest extent permitted by law, demand, notice of default or dishonor, notice
of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of
accounts, documents, instruments, chattel paper, and guarantees held by Collateral Agent or any Lender on which Borrower or any
Subsidiary is liable.
10. NOTICES
All notices, consents, requests, approvals, demands, or other communication (collectively, “Communication”) by any party to
this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered:
(a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return
receipt requested, with proper postage prepaid; (b) upon transmission, when sent by facsimile transmission; (c) one (1) Business Day after
deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand‑delivered by messenger, all of which
shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Any of Collateral
Agent, Lender or Borrower may change its mailing address or facsimile number by giving the other party written notice thereof in
accordance with the terms of this Section 10.
If to Borrower:
with a copy (which shall not constitute notice) to:
If to Collateral Agent:
with a copy (which shall not constitute notice) to:
ACLARIS THERAPEUTICS, INC.
CONFLUENCE DISCOVERY
TECHNOLOGIES, INC.
ACLARIS LIFE SCIENCES, INC.
640 Lee Road, Suite 200
Wayne, PA 19087
Attn: Kamil Ali-Jackson, Chief Legal Officer
Email: kalijackson@aclaristx.com
th
Cooley LLP
101 California Street, 5 Floor
San Francisco, CA 94111
Attn: Maricel Mojares-Moore
Fax: (415) 693-2222
Email:mmoore@cooley.com
OXFORD FINANCE LLC
133 North Fairfax Street
Alexandria, Virginia 22314
Attention: Legal Department
Fax: (703) 519‑5225
Email: LegalDepartment@oxfordfinance.com
Greenberg Traurig, LLP
One International Place
Boston, MA 02110
Attn: Jonathan Bell
Fax: (617) 310‑6001
Email: bellj@gtlaw.com
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
in
to
the exclusive
jurisdiction of
New York law governs the Loan Documents without regard to principles of conflicts of law. Borrower, Lenders and Collateral Agent each
submit
the City of New York, Borough of
the State and Federal courts
Manhattan. NOTWITHSTANDING THE FOREGOING, COLLATERAL AGENT AND THE LENDERS SHALL HAVE THE RIGHT
TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION WHICH COLLATERAL AGENT AND THE LENDERS (IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 9.1) DEEM NECESSARY OR APPROPRIATE TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE
COLLATERAL AGENT’S AND THE LENDERS’ RIGHTS AGAINST BORROWER OR ITS PROPERTY. Borrower expressly submits
and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby waives any objection
that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of
such legal or equitable relief as is deemed appropriate by such court. Borrower hereby waives personal service of the summons,
complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be
made by registered or certified mail addressed to Borrower at the address set forth in, or subsequently provided by Borrower in accordance
with, Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual
receipt thereof or three (3) days after deposit in the U.S. mails, first class, registered or certified mail return receipt requested, proper
postage prepaid.
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, COLLATERAL AGENT, AND THE
LENDERS EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF
OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL
INDUCEMENT FOR EACH PARTY TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER
WITH ITS COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each
party. Borrower may not transfer, pledge or assign this Agreement or any rights or obligations under it without Collateral Agent’s and each
Lender’s prior written consent (which may be granted or withheld in Collateral Agent’s and each Lender’s discretion, subject to
Section 12.6). The Lenders have the right, without the consent of or notice to Borrower, to sell, transfer, assign, pledge, negotiate, or grant
participation in (any such sale, transfer, assignment, negotiation, or grant of a participation, a “Lender Transfer”) all or any part of, or any
interest in, the Lenders’ obligations, rights, and benefits under this Agreement and the other Loan Documents; provided, however, that any
such Lender Transfer (other than a transfer, pledge, sale or assignment to an Eligible Assignee) of its obligations, rights, and benefits under
this Agreement and the other Loan Documents shall require the prior written consent of the Required Lenders (such approved assignee, an
“Approved Lender”). Borrower and Collateral Agent shall be entitled to continue to deal solely and directly with such Lender in
connection with the interests so assigned until Collateral Agent shall have received and accepted an effective assignment agreement in form
satisfactory to Collateral Agent executed, delivered and fully completed by the applicable parties thereto, and shall have received such
other information regarding such Eligible Assignee or Approved Lender as Collateral Agent reasonably shall require. Notwithstanding
anything to the contrary contained herein, so long as no Event of Default has occurred and is continuing, no Lender Transfer (other than a
Lender Transfer in connection with (x) assignments by a Lender due to a forced divestiture at the request of any regulatory agency; or (y)
upon the occurrence of a default, event of default or similar occurrence with respect to a Lender’s own financing or securitization
transactions) shall be permitted, without Borrower’s consent, to any Person which is an Affiliate or Subsidiary of Borrower, a direct
competitor of Borrower or a vulture hedge fund, each as determined by Collateral Agent.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
12.2 Indemnification. Borrower agrees to indemnify, defend and hold Collateral Agent and the Lenders and their respective
directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Collateral Agent or the Lenders (each,
an “Indemnified Person”) harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “Claims”) asserted by any
other party in connection with; related to; following; or arising from, out of or under, the transactions contemplated by the Loan
Documents; and (b) all losses or Lenders’ Expenses incurred, or paid by Indemnified Person in connection with; related to; following; or
arising from, out of or under, the transactions contemplated by the Loan Documents between Collateral Agent, and/or the Lenders and
Borrower (including reasonable attorneys’ fees and expenses), except for Claims and/or losses directly caused by such Indemnified
Person’s gross negligence or willful misconduct. Borrower hereby further indemnifies, defends and holds each Indemnified Person
harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses
and disbursements of any kind or nature whatsoever (including the fees and disbursements of counsel for such Indemnified Person) in
connection with any investigative, response, remedial, administrative or judicial matter or proceeding, whether or not such Indemnified
Person shall be designated a party thereto and including any such proceeding initiated by or on behalf of Borrower, and the reasonable
expenses of investigation by engineers, environmental consultants and similar technical personnel and any commission, fee or
compensation claimed by any broker (other than any broker retained by Collateral Agent or Lenders) asserting any right to payment for the
transactions contemplated hereby which may be imposed on, incurred by or asserted against such Indemnified Person as a result of or in
connection with the transactions contemplated hereby and the use or intended use of the proceeds of the loan proceeds except for liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements directly caused by such
Indemnified Person’s gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all Obligations in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining
the enforceability of any provision.
12.5 Correction of Loan Documents. Collateral Agent and the Lenders may correct patent errors and fill in any blanks in
this Agreement and the other Loan Documents consistent with the agreement of the parties.
12.6 Amendments in Writing; Integration. (a) No amendment, modification, termination or waiver of any provision of this
Agreement or any other Loan Document, no approval or consent thereunder, or any consent to any departure by Borrower or any of its
Subsidiaries therefrom, shall in any event be effective unless the same shall be in writing and signed by Borrower, Collateral Agent and the
Required Lenders provided that:
(i) no such amendment, waiver or other modification that would have the effect of increasing or reducing
a Lender’s Term Loan Commitment or Commitment Percentage shall be effective as to such Lender without such Lender’s written consent;
shall be effective without Collateral Agent’s written consent or signature;
(ii) no such amendment, waiver or modification that would affect the rights and duties of Collateral Agent
(iii) no such amendment, waiver or other modification shall, unless signed by all the Lenders directly
affected thereby, (A) reduce the principal of, rate of interest on or any fees with respect to any Term Loan or forgive any principal, interest
(other than default interest) or fees (other than late charges) with respect to any Term Loan (B) postpone the date fixed for, or waive, any
payment of principal of any Term Loan or of interest on any Term Loan (other than default interest) or any fees provided for hereunder
(other than late charges or for any termination of any commitment); (C) change the definition of the term “Required Lenders” or the
percentage of Lenders which shall be required for the Lenders to take any action hereunder; (D) release all or substantially all of any
material portion of the Collateral, authorize Borrower to sell or otherwise dispose of all or substantially all or any material portion of the
Collateral or release any Guarantor of all or any portion of the
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
25
Confidential and Proprietary
Obligations or its guaranty obligations with respect thereto, except, in each case with respect to this clause (D), as otherwise may be
expressly permitted under this Agreement or the other Loan Documents (including in connection with any disposition permitted
hereunder); (E) amend, waive or otherwise modify this Section 12.6 or the definitions of the terms used in this Section 12.6 insofar as the
definitions affect the substance of this Section 12.6; (F) consent to the assignment, delegation or other transfer by Borrower of any of its
rights and obligations under any Loan Document or release Borrower of its payment obligations under any Loan Document, except, in each
case with respect to this clause (F), pursuant to a merger or consolidation permitted pursuant to this Agreement; (G) amend any of the
provisions of Section 9.4 or amend any of the definitions of Pro Rata Share, Term Loan Commitment, Commitment Percentage or that
provide for the Lenders to receive their Pro Rata Shares of any fees, payments, setoffs or proceeds of Collateral hereunder; (H) subordinate
the Liens granted in favor of Collateral Agent securing the Obligations; or (I) amend any of the provisions of Section 12.10. It is hereby
understood and agreed that all Lenders shall be deemed directly affected by an amendment, waiver or other modification of the type
described in the preceding clauses (C), (D), (E), (F), (G) and (H) of the preceding sentence;
(iv) the provisions of the foregoing clauses (i), (ii) and (iii) are subject to the provisions of any interlender
or agency agreement among the Lenders and Collateral Agent pursuant to which any Lender may agree to give its consent in connection
with any amendment, waiver or modification of the Loan Documents only in the event of the unanimous agreement of all Lenders.
(b) Other than as expressly provided for in Section 12.6(a)(i)‑(iii), Collateral Agent may, if requested by the
Required Lenders, from time to time designate covenants in this Agreement less restrictive by notification to a representative of Borrower.
(c) This Agreement and the Loan Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties
about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.
12.7 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement.
12.8 Survival. All covenants, representations and warranties made in this Agreement continue in full force and effect until
this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other
obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrower in
Section 12.2 to indemnify each Lender and Collateral Agent, as well as the confidentiality provisions in Section 12.9 below, shall survive
until the statute of limitations with respect to such claim or cause of action shall have run.
12.9 Confidentiality. In handling any confidential information of Borrower, the Lenders and Collateral Agent shall exercise
the same degree of care that it exercises for their own proprietary information, but disclosure of information may be made: (a) subject to
the terms and conditions of this Agreement, to the Lenders’ and Collateral Agent’s Subsidiaries or Affiliates, or in connection with a
Lender’s own financing or securitization transactions and upon the occurrence of a default, event of default or similar occurrence with
respect to such financing or securitization transaction; (b) to prospective transferees (other than those identified in (a) above) or purchasers
of any interest in the Credit Extensions (provided, however, the Lenders and Collateral Agent shall, except upon the occurrence and during
the continuance of an Event of Default, obtain such prospective transferee’s or purchaser’s agreement to the terms of this provision or to
similar confidentiality terms); (c) as required by law, regulation, subpoena, or other order; (d) to Lenders’ or Collateral Agent’s regulators
or as otherwise required in connection with an examination or audit; (e) as Collateral Agent reasonably considers appropriate in exercising
remedies under the Loan Documents; and (f) to third party service providers of the Lenders and/or Collateral Agent so long as such service
providers have executed a confidentiality agreement with the Lenders and Collateral Agent
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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with terms no less restrictive than those contained herein. Confidential information does not include information that either: (i) is in the
public domain or in the Lenders’ and/or Collateral Agent’s possession when disclosed to the Lenders and/or Collateral Agent, or becomes
part of the public domain after disclosure to the Lenders and/or Collateral Agent through no fault of the Lenders and/or Collateral Agent in
breach of this Agreement; or (ii) is disclosed to the Lenders and/or Collateral Agent by a third party, if the Lenders and/or Collateral Agent
does not know that the third party is prohibited from disclosing the information. Collateral Agent and the Lenders may use confidential
information for any purpose, including, without limitation, for the development of client databases, reporting purposes, and market
analysis. The provisions of the immediately preceding sentence shall survive the termination of this Agreement. The agreements provided
under this Section 12.9 supersede all prior agreements, understanding, representations, warranties, and negotiations between the parties
about the subject matter of this Section 12.9.
12.10 Right of Set Off. Borrower hereby grants to Collateral Agent and to each Lender, a lien, security interest and right of set
off as security for all Obligations to Collateral Agent and each Lender hereunder, whether now existing or hereafter arising upon and
against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Collateral Agent
or the Lenders or any entity under the control of Collateral Agent or the Lenders (including a Collateral Agent affiliate) or in transit to any
of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Collateral Agent
or the Lenders may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though
unmatured and regardless of the adequacy of any other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE
COLLATERAL AGENT TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH
SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS,
CREDITS OR OTHER PROPERTY OF BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.
12.11 Cooperation of Borrower. If necessary, Borrower agrees to (i) execute any documents (including new Secured
Promissory Notes) reasonably required to effectuate and acknowledge each assignment of a Term Loan Commitment or Loan to an
assignee in accordance with Section 12.1, (ii) make Borrower’s management available to meet with Collateral Agent and prospective
participants and assignees of Term Loan Commitments or Credit Extensions (which meetings shall be conducted no more often than twice
every twelve months unless an Event of Default has occurred and is continuing), and (iii) assist Collateral Agent or the Lenders in the
preparation of information relating to the financial affairs of Borrower as any prospective participant or assignee of a Term Loan
Commitment or Term Loan reasonably may request. Subject to the provisions of Section 12.9, Borrower authorizes each Lender to disclose
to any prospective participant or assignee of a Term Loan Commitment, any and all information in such Lender’s possession concerning
Borrower and its financial affairs which has been delivered to such Lender by or on behalf of Borrower pursuant to this Agreement, or
which has been delivered to such Lender by or on behalf of Borrower in connection with such Lender’s credit evaluation of Borrower prior
to entering into this Agreement.
12.12 Borrower Liability. Either Borrower may, acting singly, request Credit Extensions hereunder. Each Borrower hereby
appoints the other as agent for the other for all purposes hereunder, including with respect to requesting Credit Extensions hereunder. Each
Borrower hereunder shall be jointly and severally obligated to repay all Credit Extensions made hereunder, regardless of which Borrower
actually receives said Credit Extension, as if each Borrower hereunder directly received all Credit Extensions. Each Borrower waives
(a) any suretyship defenses available to it under the Code or any other applicable law, and (b) any right to require Collateral Agent or any
Lender to: (i) proceed against any Borrower or any other person; (ii) proceed against or exhaust any security; or (iii) pursue any other
remedy. Collateral Agent and or any Lender may exercise or not exercise any right or remedy it has against any Borrower or any security it
holds (including the right to foreclose by judicial or non‑judicial sale) without affecting any Borrower’s liability. Notwithstanding any
other provision of this Agreement or other related document, each Borrower irrevocably waives all rights that it may have at law or in
equity (including, without limitation, any law subrogating Borrower to the rights of Collateral Agent and the Lenders under this
Agreement) to seek contribution, indemnification or any other form of reimbursement from any other Borrower, or any other
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by Borrower with respect to the
Obligations in connection with this Agreement or otherwise and all rights that it might have to benefit from, or to participate in, any
security for the Obligations as a result of any payment made by Borrower with respect to the Obligations in connection with this
Agreement or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this
Section shall be null and void. If any payment is made to a Borrower in contravention of this Section, such Borrower shall hold such
payment in trust for Collateral Agent and the Lenders and such payment shall be promptly delivered to Collateral Agent for application to
the Obligations, whether matured or unmatured.
13. DEFINITIONS
13.1 Definitions. As used in this Agreement, the following terms have the following meanings:
“Account” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes,
without limitation, all accounts receivable and other sums owing to Borrower.
“Account Debtor” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.
“Acquisition Event” is the acquisition by Borrower, before October 31, 2018, of RHOFADE®, on such terms and conditions as
are satisfactory to Collateral Agent and Lenders in their discretion.
“Affiliate” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is
controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for
any Person that is a limited liability company, that Person’s managers and members.
“Agreement” is defined in the preamble hereof.
“Amortization Date” is November 1, 2021.
“Annual Projections” is defined in Section 6.2(a).
“Anti‑Terrorism Laws” are any laws relating to terrorism or money laundering, including Executive Order No. 13224 (effective
September 24, 2001), the USA PATRIOT Act, the laws comprising or implementing the Bank Secrecy Act, and the laws administered by
OFAC.
“Approved Fund” is any (i) investment company, fund, trust, securitization vehicle or conduit that is (or will be) engaged in
making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its
business or (ii) any Person (other than a natural person) which temporarily warehouses loans for any Lender or any entity described in the
preceding clause (i) and that, with respect to each of the preceding clauses (i) and (ii), is administered or managed by (a) a Lender, (b) an
Affiliate of a Lender or (c) a Person (other than a natural person) or an Affiliate of a Person (other than a natural person) that administers or
manages a Lender.
“Approved Lender” is defined in Section 12.1.
“Basic Rate” is with respect to any Term Loan, the per annum rate of interest (based on a year of three hundred sixty (360) days)
equal to the greater of (a) Eight and Thirty-Five Hundredths percent (8.35%) and (b) the sum of (i) thirty (30) day U.S. LIBOR rate
reported in The Wall Street Journal on the last Business Day of the month that immediately precedes the month in which the interest will
accrue, plus (ii) Six and Twenty-Five
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Hundredths percent (6.25%). If The Wall Street Journal (or another nationally recognized rate reporting source acceptable to Collateral
Agent) no longer reports the U.S. LIBOR Rate or if such interest rate no longer exists or if The Wall Street Journal no longer publishes the
U.S. LIBOR Rate or ceases to exist, Collateral Agent may in good faith select a replacement interest rate or replacement publication, as the
case may be.
“Blocked Person” is any Person: (a) listed in the annex to, or is otherwise subject to the provisions of, Executive Order No.
13224, (b) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to
the provisions of, Executive Order No. 13224, (c) a Person with which any Lender is prohibited from dealing or otherwise engaging in any
transaction by any Anti‑Terrorism Law, (d) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in
Executive Order No. 13224, or (e) a Person that is named a “specially designated national” or “blocked person” on the most current list
published by OFAC or other similar list.
“Borrower” is defined in the preamble hereof.
“Borrower’s Books” are Borrower’s or any of its Subsidiaries’ books and records including ledgers, federal, and state tax returns,
records regarding Borrower’s or its Subsidiaries’ assets or liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.
“Business Day” is any day that is not a Saturday, Sunday or a day on which Collateral Agent is closed.
“Cash Equivalents” are (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency
or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more
than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors
Service, Inc., and (c) certificates of deposit maturing no more than one (1) year after issue provided that the account in which any such
certificate of deposit is maintained is subject to a Control Agreement in favor of Collateral Agent. For the avoidance of doubt, the direct
purchase by Borrower or any of its Subsidiaries of any Auction Rate Securities, or purchasing participations in, or entering into any type of
swap or other derivative transaction, or otherwise holding or engaging in any ownership interest in any type of Auction Rate Security by
Borrower or any of its Subsidiaries shall be conclusively determined by the Lenders as an ineligible Cash Equivalent, and any such
transaction shall expressly violate each other provision of this Agreement governing Permitted Investments. Notwithstanding the
foregoing, Cash Equivalents does not include and Borrower, and each of its Subsidiaries, are prohibited from purchasing, purchasing
participations in, entering into any type of swap or other equivalent derivative transaction, or otherwise holding or engaging in any
ownership interest in any type of debt instrument, including, without limitation, any corporate or municipal bonds with a long‑term
nominal maturity for which the interest rate is reset through a dutch auction and more commonly referred to as an auction rate security
(each, an “Auction Rate Security”).
“Claims” are defined in Section 12.2.
“Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of New York;
provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in
different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that
in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect
to, Collateral Agent’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of
New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for
purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to
such provisions.
“Collateral” is any and all properties, rights and assets of Borrower described on Exhibit A.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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“Collateral Account” is any Deposit Account, Securities Account, or Commodity Account, or any other bank account maintained
by Borrower or any Subsidiary at any time.
“Collateral Agent” is, Oxford, not in its individual capacity, but solely in its capacity as agent on behalf of and for the benefit of
the Lenders.
“Commitment Percentage” is set forth in Schedule 1.1, as amended from time to time.
“Commodity Account” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be
made.
“Communication” is defined in Section 10.
“Compliance Certificate” is that certain certificate in the form attached hereto as Exhibit C.
“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any
indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed,
endorsed, co‑made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in
the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for
which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the
Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.
“Control Agreement” is any control agreement entered into among the depository institution at which Borrower or any of its
Subsidiaries maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower or any of its
Subsidiaries maintains a Securities Account or a Commodity Account, Borrower and such Subsidiary, and Collateral Agent pursuant to
which Collateral Agent obtains control (within the meaning of the Code) for the benefit of the Lenders over such Deposit Account,
Securities Account, or Commodity Account.
“Copyrights” are any and all copyright rights, copyright applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret.
“Credit Extension” is any Term Loan or any other extension of credit by Collateral Agent or Lenders for Borrower’s benefit.
“Default Rate” is defined in Section 2.3(b).
“Deposit Account” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.
“Designated Deposit Account” is Borrower’s deposit account, account number 5609, maintained with Silicon Valley Bank.
“Domestic Subsidiary” is a Subsidiary that is an entity organized under the laws of the United States or any territory thereof.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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“Disbursement Letter” is that certain form attached hereto as Exhibit B.
“Dollars,” “dollars” and “$” each mean lawful money of the United States.
“Effective Date” is defined in the preamble of this Agreement.
“Eligible Assignee” is (i) a Lender, (ii) an Affiliate of a Lender, (iii) an Approved Fund and (iv) any commercial bank, savings
and loan association or savings bank or any other entity which is an “accredited investor” (as defined in Regulation D under the Securities
Act of 1933, as amended) and which extends credit or buys loans as one of its businesses, including insurance companies, mutual funds,
lease financing companies and commercial finance companies, in each case, which either (A) has a rating of BBB or higher from Standard
& Poor’s Rating Group and a rating of Baa2 or higher from Moody’s Investors Service, Inc. at the date that it becomes a Lender or (B) has
total assets in excess of Five Billion Dollars ($5,000,000,000.00), and in each case of clauses (i) through (iv), which, through its applicable
lending office, is capable of lending to Borrower without the imposition of any withholding or similar taxes; provided that notwithstanding
the foregoing, “Eligible Assignee” shall not include, unless an Event of Default has occurred and is continuing, (i) Borrower or any of
Borrower’s Affiliates or Subsidiaries or (ii) a direct competitor of Borrower or a vulture hedge fund, each as determined by Collateral
Agent. Notwithstanding the foregoing, (x) in connection with assignments by a Lender due to a forced divestiture at the request of any
regulatory agency, the restrictions set forth herein shall not apply and Eligible Assignee shall mean any Person or party and (y) in
connection with a Lender’s own financing or securitization transactions, the restrictions set forth herein shall not apply and Eligible
Assignee shall mean any Person or party providing such financing or formed to undertake such securitization transaction and any transferee
of such Person or party upon the occurrence of a default, event of default or similar occurrence with respect to such financing or
securitization transaction; provided that no such sale, transfer, pledge or assignment under this clause (y) shall release such Lender from
any of its obligations hereunder or substitute any such Person or party for such Lender as a party hereto until Collateral Agent shall have
received and accepted an effective assignment agreement from such Person or party in form satisfactory to Collateral Agent executed,
delivered and fully completed by the applicable parties thereto, and shall have received such other information regarding such Eligible
Assignee as Collateral Agent reasonably shall require.
“Equipment” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes
without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.
“ERISA” is the Employee Retirement Income Security Act of 1974, as amended, and its regulations.
“Event of Default” is defined in Section 8.
“Excluded Accounts” means any (i) Deposit Accounts exclusively used for payroll, payroll taxes and other employee wage and
benefit payments to or for the benefit of Borrower’s or its Subsidiaries employees, (ii) escrow accounts in which funds have been deposited
by Borrower (and are yet to be released) to meet its obligations related to an acquisition by Borrower which has been consented to by
Collateral Agent and Required Lenders, and (iii) Collateral Accounts of any Subsidiary that is not a Loan Party.
“Final Payment” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued
interest) due on the earliest to occur of (a) the Maturity Date, or (b) the acceleration of any Term Loan, or (c) the prepayment of a Term
Loan pursuant to Section 2.2(c) or (d), equal to the original principal amount of such funded Term Loan multiplied by the Final Payment
Percentage, payable to Lenders in accordance with their respective Pro Rata Shares. For the avoidance of doubt, the calculation of any
Final Payment shall not include the principal amount prepaid in accordance with Section 2.2(d)(ii) if a Final Payment based on such
principal amount was made at the time of such prepayment.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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“Final Payment Percentage” is Five and seventy-five hundredths percent (5.75%).
“First Draw Period” is the period commencing on the Effective Date and ending on the earlier of (i) October 31, 2018 and
(ii) the occurrence of an Event of Default.
“Foreign Subsidiary” is a Subsidiary that is not an entity organized under the laws of the United States or any territory thereof.
“Funding Date” is any date on which a Credit Extension is made to or on account of Borrower which shall be a Business Day.
“GAAP” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting
profession in the United States, which are applicable to the circumstances as of the date of determination.
“General Intangibles” are all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such
term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and,
to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any
rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase
or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance
policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to
payment of any kind.
“Governmental Approval” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation,
registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.
“Governmental Authority” is any nation or government, any state or other political subdivision thereof, any agency, authority,
instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative functions of or pertaining to government, any securities exchange and any self‑regulatory organization.
“Guarantor” is any Person providing a Guaranty in favor of Collateral Agent.
“Guaranty” is any guarantee of all or any part of the Obligations, as the same may from time to time be amended, restated,
modified or otherwise supplemented.
“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and
other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments,
(c) capital lease obligations, and (d) Contingent Obligations.
“Indemnified Person” is defined in Section 12.2.
“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other
bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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“Insolvent” means not Solvent.
“Intellectual Property” means all of Borrower’s or any Subsidiary’s right, title and interest in and to the following:
(a) its Copyrights, Trademarks and Patents;
(b) any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented
inventions, know‑how, operating manuals;
(c) any and all source code;
(d) any and all design rights which may be available to Borrower;
(e) any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the
right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified
above; and
(f) all amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents.
“Inventory” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may
hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in
process and finished products, including without limitation such inventory as is temporarily out of any Person’s custody or possession or in
transit and including any returned goods and any documents of title representing any of the above.
“Investment” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any
loan, advance, payment or capital contribution to any Person.
“Key Person” is each of Borrower’s (i) Chief Executive Officer, who is Dr. Neal Walker as of the Effective Date, and (ii) Chief
Financial Officer, who is Frank Ruffo as of the Effective Date.
“Lender” is any one of the Lenders.
“Lenders” are the Persons identified on Schedule 1.1 hereto and each assignee that becomes a party to this Agreement pursuant to
Section 12.1.
“Lenders’ Expenses” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses, as
well as appraisal fees, fees incurred on account of lien searches, inspection fees, and filing fees) for preparing, amending, negotiating,
administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or
Insolvency Proceedings) or otherwise incurred by Collateral Agent and/or the Lenders in connection with the Loan Documents.
“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest, or other encumbrance of any kind, whether
voluntarily incurred or arising by operation of law or otherwise against any property.
“Loan Party” is any Borrower or Guarantor.
“Loan Documents” are, collectively, this Agreement, the Perfection Certificates, each Compliance Certificate, each Disbursement
Letter, the UK Share Pledge, any subordination agreements, any note, or notes or
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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guaranties executed by Borrower or any other Person, and any other present or future agreement entered into by Borrower, any Guarantor
or any other Person for the benefit of the Lenders and Collateral Agent in connection with this Agreement; all as amended, restated, or
otherwise modified.
“Material Adverse Change” is (a) a material impairment in the perfection or priority of Collateral Agent’s Lien in the Collateral
or in the value of such Collateral; (b) a material adverse change in the business, operations or condition (financial or otherwise) of
Borrower or any Subsidiary; or (c) a material impairment of the prospect of repayment of any portion of the Obligations.
“Maturity Date” is, for each Term Loan, October 1, 2023.
“Obligations” are all of Borrower’s obligations to pay when due any debts, principal, interest, Lenders’ Expenses, the Prepayment
Fee, the Final Payment, and other amounts Borrower owes the Lenders now or later, in connection with, related to, following, or arising
from, out of or under, this Agreement or, the other Loan Documents, or otherwise, and including interest accruing after Insolvency
Proceedings begin (whether or not allowed) and debts, liabilities, or obligations of Borrower assigned to the Lenders and/or Collateral
Agent, and the performance of Borrower’s duties under the Loan Documents.
“OFAC” is the U.S. Department of Treasury Office of Foreign Assets Control.
“OFAC Lists” are, collectively, the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to
Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or other restricted Persons maintained
pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders.
“Operating Documents” are, for any Person, (a) such Person’s formation documents, as certified by the Secretary of State (or
equivalent agency) of such Person’s jurisdiction of organization on a date that is no earlier than thirty (30) days prior to the Effective Date,
and, (b) (x) if such Person is a corporation, its bylaws in current form, (y) if such Person is a limited liability company, its limited liability
company agreement (or similar agreement), and (z) if such Person is a partnership, its partnership agreement (or similar agreement), each
of the foregoing with all current amendments or modifications thereto.
“Parent” is defined in the Recitals.
“Patents” means all patents, patent applications and like protections including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the same.
“Payment Date” is the first (1 ) calendar day of each calendar month, commencing on November 1, 2018.
st
“Perfection Certificate” and “Perfection Certificates” is defined in Section 5.1.
“Permitted Dissolution” is defined in Section 6.1.
“Permitted Indebtedness” is:
Documents;
(a) Borrower’s Indebtedness to the Lenders and Collateral Agent under this Agreement and the other Loan
(b) Indebtedness existing on the Effective Date and disclosed on the Perfection Certificate(s) (provided, however,
the amount of such Indebtedness of the UK Subsidiary to the Parent on the Effective Date that shall be deemed to be Permitted
Indebtedness pursuant to this clause (b) is only $578,000);
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
(c) Subordinated Debt;
(d) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;
(e) Indebtedness consisting of capitalized lease obligations and purchase money Indebtedness, in each case incurred
by Borrower or any of its Subsidiaries to finance the acquisition, repair, improvement or construction of fixed or capital assets of such
person, provided that (i) the aggregate outstanding principal amount of all such Indebtedness does not exceed Five Hundred Thousand
Dollars ($500,000.00) at any time and (ii) the principal amount of such Indebtedness does not exceed the lower of the cost or fair market
value of the property so acquired or built or of such repairs or improvements financed with such Indebtedness (each measured at the time
of such acquisition, repair, improvement or construction is made); furthermore, notwithstanding anything to the contrary herein and strictly
for the purposes of this clause (e) of the definition of Permitted Indebtedness and for no other purpose, any obligations of a Person that are
or would have been treated as operating leases for purposes of GAAP prior to the issuance by the Financial Accounting Standards Board on
February 25, 2016 of an Accounting Standards Update (the “ASU”) shall continue to be accounted for as operating leases for purposes of
all financial definitions, calculations and covenants for purpose of this Agreement (whether or not such operating lease obligations were in
effect on such date) notwithstanding the fact that such obligations are required in accordance with the ASU (on a prospective or retroactive
basis or otherwise) to be treated as capitalized lease obligations in accordance with GAAP;
(f) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of
Borrower’s business;
(g) Any obligations with respect to corporate credit cards or merchant services for the account of Borrower or any
Subsidiary in an aggregate amount outstanding at any time not to exceed Seven Hundred Fifty Thousand Dollars ($750,000.00);
(h) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement designated to protect Borrower or a Subsidiary against
fluctuation in interest rates, currency exchange rates or commodity prices; provided the aggregate amount of Indebtedness under this clause
(h) may not exceed One Hundred Thousand Dollars ($100,000.00) at any given time;
(i) Indebtedness in respect of letters of credit, bank guarantees and similar instruments issued for the account of the
Borrower or any Subsidiary in the ordinary course of business supporting obligations under (A) workers’ compensation, unemployment
insurance and other social security laws and (B) bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance
bonds and obligations of a like nature; provided the aggregate amount of Indebtedness under this clause (i) may not exceed Two Hundred
Fifty Thousand Dollars ($250,000.00) at any given time;
(j) Indebtedness constituting of Investments under clause (f) of the definition of “Permitted Investments” but
without duplication;
(k) Indebtedness of a Person (other than Borrower or one of its Subsidiaries which constituted a Subsidiary prior to
the consummation of the applicable merger referenced below) existing at the time such Person is merged with or into Borrower or a
Subsidiary or becomes a Subsidiary as a result of the Acquisition Event; provided that (i) such Indebtedness was not, in any case, incurred
by such other Person in connection with, or in contemplation of, the Acquisition Event, (ii) such merger or acquisition constitutes
Acquisition Event, and (iii) with respect to any such Person who becomes a Subsidiary, (A) such Subsidiary is the only obligor in respect
of such Indebtedness, and (B) to the extent such Indebtedness is permitted to be secured by Collateral Agent and Lenders in their
discretion, only the assets of such Subsidiary secure such Indebtedness;
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
payments of similar nature arising under agreements entered into in connection with Acquisition Event;
(l) Indebtedness consisting of earn outs, obligations with respect to purchase price adjustments, and other deferred
(m) Other unsecured Indebtedness not to exceed Five Hundred Thousand Dollars ($500,000.00) in the aggregate at
any time;
(n) Parent guaranties of real estate leases and capital leases of another Borrower; and
(o) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness
(a) through (n) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose materially
more burdensome terms upon Borrower, or its Subsidiary, as the case may be.
“Permitted Investments” are:
(a) Investments disclosed on the Perfection Certificate(s) and existing on the Effective Date;
(b) (i) Investments consisting of cash and Cash Equivalents, and (ii) any other Investments permitted by Borrower’s
investment policy, as amended from time to time, provided that such investment policy (and any such amendment thereto) has been
approved in writing by Collateral Agent (and Collateral Agent acknowledges the investment policy delivered on or prior to the Effective
Date is hereby approved);
(c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of Borrower;
(d) Investments consisting of deposit and securities accounts in which Collateral Agent has a perfected security
interest (other than Excluded Accounts to the extent not required under Section 6.6) which Investments are in accordance with the
Borrower’s investment policy (and any such amendment thereto) has been approved in writing by Collateral Agent;
(e) Investments in connection with Transfers permitted by Section 7.1;
Million Dollars ($1,000,000.00) in the aggregate in any fiscal year; and (ii) by Borrower or any Subsidiary in or to any Loan Party;
(f) Investments (i) by Borrower or any Subsidiary in Subsidiaries that are not Loan Parties not to exceed One
(g) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and
advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of
Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s Board of Directors; not to
exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate for (i) and (ii) in any fiscal year;
(h) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of
customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary
course of business;
(i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and
suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (i) shall not apply to Investments of
Borrower in any Subsidiary;
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
(j) non-cash Investments in joint ventures or strategic alliances in the ordinary course of Borrower’s business
consisting of the non-exclusive licensing of technology and Intellectual Property, the development of technology and Intellectual Property
or the providing of technical support;
(k) Investments constituting interest rate, currency or commodity swap agreement, interest rate cap agreement,
interest rate collar agreement, or other agreement or arrangement designated to protect Borrower or a Subsidiary against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, that the aggregate amount of Investments allowed under this clause
(k) shall not exceed One Hundred Thousand Dollars ($100,000.00) in any given fiscal year;
any cash Investments by Borrower do not exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate in any fiscal year;
(l) Investments in joint ventures or strategic alliances in the ordinary course of Borrower’s business, provided that
(m) Acquisition Event;
(n) Investments acquired after the date of this Agreement in connection with Acquisition Event, to the extent that
such Investments were not made in contemplation of such acquisition, merger, amalgamation or consolidation and were in existence on the
date of such acquisition, merger, amalgamation or consolidation; and
any year shall not exceed Five Hundred Thousand Dollars ($500,000.00).
(o) other Investments not otherwise permitted herein provided that the aggregate amount of all such Investments in
“Permitted Licenses” are (A) licenses of over-the-counter software that is commercially available to the public, and (B)
non‑exclusive and exclusive licenses for the use of the Intellectual Property of Borrower or any of its Subsidiaries entered into in the
ordinary course of business, provided, that, with respect to each such license described in clause (B), (i) no Event of Default has occurred
or is continuing at the time of such license; (ii) the license constitutes an arms‑length transaction, the terms of which, on their face, do not
provide for a sale or assignment of any Intellectual Property and do not restrict the ability of Borrower or any of its Subsidiaries, as
applicable, to pledge, grant a security interest in or lien on, or assign or otherwise Transfer any Intellectual Property; (iii) in the case of any
exclusive license, (x) Borrower delivers ten (10) days’ prior written notice and a brief summary of the terms of the proposed license to
Collateral Agent and the Lenders and delivers to Collateral Agent and the Lenders copies of the final executed licensing documents in
connection with the exclusive license promptly upon consummation thereof, and (y) any such license could not result in a legal transfer of
title of the licensed property but may be exclusive in respects other than territory and may be exclusive as to territory only as to discrete
geographical areas outside of the United States; and (iv) all upfront payments, royalties, milestone payments or other proceeds arising from
the licensing agreement that are payable to Borrower or any of its Subsidiaries are paid to a Deposit Account that is governed by a Control
Agreement.
“Permitted Liens” are:
(a) Liens existing on the Effective Date and disclosed on the Perfection Certificates or arising under this Agreement
and the other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or levies, either (i) not due and payable or
(ii) being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such
Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;
provided that (i) such Liens exist prior to the acquisition of, or attach substantially simultaneous
(c) Liens securing Indebtedness permitted under clause (e) of the definition of “Permitted Indebtedness,”
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
with, or within ninety (90) days after the, acquisition, lease, repair, improvement or construction of, such property financed or leased by
such Indebtedness and (ii) such Liens do not extend to any property of Borrower other than the property (and proceeds thereof) acquired,
leased or built, or the improvements or repairs, financed by such Indebtedness;
(d) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary
course of business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed One Hundred
Thousand Dollars ($100,000.00), and which are not delinquent or remain payable without penalty or which are being contested in good
faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;
and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);
(e) Liens to secure payment of workers’ compensation, employment insurance, old‑age pensions, social security
(f) leases or subleases of real property granted in the ordinary course of Borrower’s business (or, if referring to
another Person, in the ordinary course of such Person’s business), and leases, subleases, non‑exclusive licenses or sublicenses of personal
property (other than Intellectual Property) granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the
ordinary course of such Person’s business), if the leases, subleases, licenses and sublicenses do not prohibit granting Collateral Agent or
any Lender a security interest therein;
(g) banker’s liens, rights of setoff and Liens in favor of financial institutions incurred in the ordinary course of
business arising in connection with Borrower’s deposit accounts or securities accounts held at such institutions solely to secure payment of
fees and similar costs and expenses and provided such accounts are maintained in compliance with Section 6.6(b) hereof;
(h) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default
under Section 8.4 or 8.7;
(i) Liens consisting of Permitted Licenses;
(j) Liens consisting of deposits made in the ordinary course of Borrower’s or a Subsidiary’s business, securing
liabilities to secure the performance of tenders, statutory obligations, surety, bid and appeal bonds, bids, leases, government contracts, trade
contracts, performance and return-of-money bonds and other similar obligations; provided, however, the aggregate amount of such deposits
at any given time may not exceed Two Hundred Fifty Thousand Dollars ($250,000.00);
(k) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar Liens
affecting real property not interfering in any material respect with the ordinary course of the business of Borrower;
(l) Liens or deposits to secure the performance of leases incurred in the ordinary course of business and not
representing an obligation for borrowed money and Liens to secure tenant improvements, provided the lessor thereof has executed a
landlord consent in favor of, and in form and content reasonably acceptable to Collateral Agent if required pursuant to Section 7.2;
provided, however, the sum of the aggregate amount of the Indebtedness secured by such Liens and the aggregate amount of such deposits
at any given time may not exceed Two Hundred Fifty Thousand Dollars ($250,000.00); and
Borrower’s business, to secure payment of customs duties in connection with the importation of
(m) Liens in favor of customs and revenue authorities arising as a matter of law, in the ordinary course of
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
goods; provided, however, the aggregate amount of Indebtedness secured by such Liens may not exceed Two Hundred Fifty Thousand
Dollars ($250,000.00) at any given time.
“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust,
unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or
government agency.
“Prepayment Fee” is, with respect to any Term Loan subject to prepayment prior to the Maturity Date, whether by mandatory or
voluntary prepayment, acceleration or otherwise, an additional fee payable to the Lenders in amount equal to:
anniversary of the Funding Date of such Term Loan, three percent (3.00%) of the principal amount of such Term Loan prepaid;
(i) for a prepayment made on or after the Funding Date of such Term Loan through and including the first
(ii) for a prepayment made after the date which is after the first anniversary of the Funding Date of such
Term Loan through and including the second anniversary of the Funding Date of such Term Loan, two percent (2.00%) of the principal
amount of the Term Loans prepaid; and
Term Loan and prior to the Maturity Date, one percent (1.00%) of the principal amount of the Term Loans prepaid.
(iii) for a prepayment made after the date which is after the second anniversary of the Funding Date of such
“Pro Rata Share” is, as of any date of determination, with respect to each Lender, a percentage (expressed as a decimal, rounded
to the ninth decimal place) determined by dividing the outstanding principal amount of Term Loans held by such Lender by the aggregate
outstanding principal amount of all Term Loans.
“Registered Organization” is any “registered organization” as defined in the Code with such additions to such term as may
hereafter be made.
“Required Lenders” means (i) for so long as all of the Persons that are Lenders on the Effective Date (each an “Original
Lender”) have not assigned or transferred any of their interests in their Term Loan, Lenders holding one hundred percent (100%) of the
aggregate outstanding principal balance of the Term Loan, or (ii) at any time from and after any Original Lender has assigned or transferred
any interest in its Term Loan, Lenders holding at least sixty six percent (66%) of the aggregate outstanding principal balance of the Term
Loan and, in respect of this clause (ii), (A) each Original Lender that has not assigned or transferred any portion of its Term Loan, (B) each
assignee or transferee of an Original Lender’s interest in the Term Loan, but only to the extent that such assignee or transferee is an
Affiliate or Approved Fund of such Original Lender, and (C) any Person providing financing to any Person described in clauses (A) and
(B) above; provided, however, that this clause (C) shall only apply upon the occurrence of a default, event of default or similar occurrence
with respect to such financing.
“Requirement of Law” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to
or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“Responsible Officer” is any of the President and Chief Executive Officer, or Chief Financial Officer of Borrower acting alone.
“Second Draw Period” is the period commencing on the earliest date by which both the Acquisition Event shall have occurred
and the entire amount of Term A Loans shall have been funded hereunder, and ending on the earlier of (i) March 31, 2019 and (ii) the
occurrence of an Event of Default; provided, however, that the Second
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Confidential and Proprietary
Draw Period shall not commence if on the date of the occurrence of the Acquisition Event an Event of Default has occurred and is
continuing.
“Secured Promissory Note” is defined in Section 2.4.
“Secured Promissory Note Record” is a record maintained by each Lender with respect to the outstanding Obligations owed by
Borrower to Lender and credits made thereto.
“Securities Account” is any “securities account” as defined in the Code with such additions to such term as may hereafter be
made.
“Shares” is one hundred percent (100%) of the issued and outstanding capital stock, membership units or other securities owned
or held of record by Borrower or Borrower’s Subsidiary, in any Subsidiary; provided that, in the event Borrower, demonstrates to Collateral
Agent’s reasonable satisfaction, that a pledge of more than sixty five percent (65%) of the Shares of such Subsidiary which is a Foreign
Subsidiary, creates a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code, “Shares” shall mean
sixty‑five percent (65%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by
Borrower or its Subsidiary in such Foreign Subsidiary.
“Solvent” is, with respect to any Person: the fair salable value of such Person’s consolidated assets (including goodwill minus
disposition costs) exceeds the fair value of such Person’s liabilities; such Person is not left with unreasonably small capital after the
transactions in this Agreement; and such Person is able to pay its debts (including trade debts) as they mature.
“Subordinated Debt” is indebtedness incurred by Borrower or any of its Subsidiaries subordinated to all Indebtedness of
Borrower and/or its Subsidiaries to the Lenders (pursuant to a subordination, intercreditor, or other similar agreement in form and
substance reasonably satisfactory to Collateral Agent and the Lenders entered into between Collateral Agent, Borrower, and/or any of its
Subsidiaries, and the other creditor), on terms reasonably acceptable to Collateral Agent and the Lenders.
“Subsidiary” is, with respect to any Person, any Person of which more than fifty percent (50%) of the voting stock or other equity
interests (in the case of Persons other than corporations) is owned or controlled, directly or indirectly, by such Person or through one or
more intermediaries (other than any joint venture or strategic alliances).
“Term Loan” is defined in Section 2.2(a)(ii) hereof.
“Term A Loan” is defined in Section 2.2(a)(i) hereof.
“Term B Loan” is defined in Section 2.2(a)(ii) hereof.
“Term Loan Commitment” is, for any Lender, the obligation of such Lender to make a Term Loan, up to the principal amount
shown on Schedule 1.1. “Term Loan Commitments” means the aggregate amount of such commitments of all Lenders.
“Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations
of the same and like protections, and the entire goodwill of the business of Borrower or the applicable Subsidiary connected with and
symbolized by such trademarks.
“Transfer” is defined in Section 7.1.
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Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
“UK Share Pledge” is a share pledge agreement, under the laws of England and Wales, with respect to the Shares of the UK
Subsidiary, in such form and substance as are satisfactory to Collateral Agent and Lenders
“UK Subsidiary” is Aclaris Therapeutics International Limited, a private limited company existing under the laws of England and
Wales.
[Balance of Page Intentionally Left Blank]
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Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Effective Date.
BORROWER:
ACLARIS THERAPEUTICS, INC.
/s/ Neal Walker
By
Name:Neal Walker
Title: President & Chief Executive Officer
CONFLUENCE DISCOVERY TECHNOLOGIES, INC.
/s/ Neal Walker
By
Name:Neal Walker
Title: President & Chief Executive Officer
ACLARIS LIFE SCIENCES, INC.
/s/ Neal Walker
By
Name:Neal Walker
Title: President
COLLATERAL AGENT AND LENDER:
OXFORD FINANCE LLC
/s/ Colette H. Featherly
By
Name:Colette H. Featherly
Title: Senior Vice President
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
Lender
OXFORD FINANCE LLC
TOTAL
Lender
OXFORD FINANCE LLC
TOTAL
Lender
OXFORD FINANCE LLC
TOTAL
SCHEDULE 1.1
Lenders and Commitments
Term A Loans
Term A Loan Commitment
$30,000,000.00
$30,000,0000.00
Term B Loans
Term B Loan Commitment
$35,000,000.00
$35,000,0000.00
Aggregate (all Term Loans)
Term Loan Commitment
$65,000,000.00
$65,000,000.00
Confidential and Proprietary
Commitment Percentage
100.00%
100.00%
Commitment Percentage
100.00%
100.00%
Commitment Percentage
100.00%
100.00%
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT A
Description of Collateral
The Collateral consists of all of Borrower’s right, title and interest in and to the following personal property:
All goods, Accounts (including health‑care receivables), Equipment, Inventory, contract rights or rights to payment of money,
leases, license agreements, franchise agreements, General Intangibles (except as noted below), commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts and other Collateral
Accounts, all certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities,
and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located;
and
All Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all
substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance
proceeds of any or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include (i) any Intellectual Property; provided, however, the Collateral
shall include all Accounts and all proceeds of Intellectual Property. If a judicial authority (including a U.S. Bankruptcy Court) would hold
that a security interest in the underlying Intellectual Property is necessary to have a security interest in such Accounts and such property
that are proceeds of Intellectual Property, then the Collateral shall automatically, and effective as of the Effective Date, include the
Intellectual Property to the extent necessary to permit perfection of Collateral Agent’s security interest in such Accounts and such other
property of Borrower that are proceeds of the Intellectual Property; (ii) more than sixty five percent (65%) of the Shares of a Foreign
Subsidiary, if Borrower demonstrates to Collateral Agent’s reasonable satisfaction that a pledge of more than sixty five percent (65%) of
the Shares of such Subsidiary creates a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code;
(iii) Excluded Accounts, and (iv) any license, contract or interest of Borrower as a lessee under a lease, in each case if the granting of a
Lien in such license, contract or interest is prohibited by or would constitute a default under the agreement governing such license, contract
or interest (but (A) only to the extent such prohibition is enforceable under applicable law and (B) other than to the extent that any such
term would be rendered ineffective pursuant to Section 9-406, 9-408 or 9-409 (or any other Section) or Division 9 of the Code); provided
that upon the termination, lapsing or expiration of any such prohibition, such license, contract or interest, as applicable, shall automatically
be subject to the security interest granted in favor of Collateral Agent hereunder and become part of the “Collateral”.
Pursuant to the terms of a certain negative pledge arrangement with Collateral Agent and the Lenders, Borrower has agreed not to
encumber any of its Intellectual Property.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
EXHIBIT B
Form of Disbursement Letter
[see attached]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
DISBURSEMENT LETTER
[DATE]
The undersigned, being the duly elected and acting of ACLARIS THERAPEUTICS, INC., a Delaware
corporation (“Parent”) with offices located at 640 Lee Road, Suite 200, Wayne, PA 19087, CONFLUENCE DISCOVERY
TECHNOLOGIES, INC., a Delaware corporation with offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108
(“CDT”) and ACLARIS LIFE SCIENCES, INC., a Delaware corporation with offices located at 4320 Forest Park Avenue, Suite 303, St.
Louis, MO 63108 (“ALS”) (Parent, CDT and ALS, individually and collectively, jointly and severally, “Borrower”), does hereby certify to
OXFORD FINANCE LLC (“Oxford” and “Lender”), as collateral agent (the “Collateral Agent”) in connection with that certain Loan
and Security Agreement dated as of October 15, 2018, by and among Borrower, Collateral Agent and the Lenders from time to time party
thereto (the “Loan Agreement”; with other capitalized terms used below having the meanings ascribed thereto in the Loan Agreement)
that:
1. The representations and warranties made by Borrower in Section 5 of the Loan Agreement and in the other Loan
Documents are true and correct in all material respects as of the date hereof; provided, that those representations and warranties expressly
referring to a specific date shall be true and correct in all material respects as of such date.
2. No event or condition has occurred that would constitute an Event of Default under the Loan Agreement or any other
Loan Document.
3. Borrower is in compliance with the covenants and requirements contained in Sections 4, 6 and 7 of the Loan Agreement.
4. All conditions referred to in Section 3 of the Loan Agreement to the making of the Loan to be made on or about the date
hereof have been satisfied or waived by Collateral Agent.
5. No Material Adverse Change has occurred.
6. The undersigned is a Responsible Officer.
[Balance of Page Intentionally Left Blank]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
7. The proceeds of the Term [A][B] Loan shall be disbursed as follows:
Disbursement from Oxford:
Loan Amount
Plus:
—Deposit Received
Less:
—Facility Fee
[—Interim Interest
—Lender’s Legal Fees
$_______________
$__________
($_________)
($_________)]
($________)
*
Net Proceeds due from Oxford:
$_______________
TOTAL TERM LOAN NET PROCEEDS FROM LENDERS
$_______________
8. The Term [A][B] Loan shall amortize in accordance with the Amortization Table attached hereto.
9. The aggregate net proceeds of the Term [A][B] Loans shall be transferred to the Designated Deposit Account as follows:
Account Name:
Bank Name:
Bank Address:
[ACLARIS THERAPEUTICS, INC.]
[_____]
[__________]
Account Number:
____________________________________
ABA Number:
[____________]
[Balance of Page Intentionally Left Blank]
*
Legal fees and costs are through the Effective Date. Post‑closing legal fees and costs, payable after the Effective Date, to be invoiced and
paid post‑closing.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
Dated as of the date first set forth above.
BORROWER:
ACLARIS THERAPEUTICS, INC.
By
Name:
Title:
CONFLUENCE DISCOVERY TECHNOLOGIES, INC.
By
Name:
Title:
ACLARIS LIFE SCIENCES, INC.
By
Name:
Title:
COLLATERAL AGENT AND LENDER:
OXFORD FINANCE LLC
By
Name:
Title:
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
AMORTIZATION TABLE
(Term [A][B] Loan)
[see attached]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT C
Compliance Certificate
TO:
OXFORD FINANCE LLC, as Collateral Agent and Lender
FROM:
ACLARIS THERAPEUTICS, INC., on behalf of itself and all Borrowers
The undersigned authorized officer (“Officer”) of ACLARIS THERAPEUTICS, INC., on behalf of itself and all Borrowers hereby
certifies that in accordance with the terms and conditions of the Loan and Security Agreement by and among Borrower, Collateral Agent,
and the Lenders from time to time party thereto (the “Loan Agreement;” capitalized terms used but not otherwise defined herein shall
have the meanings given them in the Loan Agreement),
(a) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted
below;
(b) There are no Events of Default, except as noted below;
(c) Except as noted below, all representations and warranties of Borrower stated in the Loan Documents are true and correct
in all material respects on this date and for the period described in (a), above; provided, however, that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided,
further that those representations and warranties expressly referring to a specific date shall be true and correct in all material respects as of
such date.
(d) Borrower, and each of Borrower’s Subsidiaries, has timely filed all required tax returns and reports, Borrower, and each
of Borrower’s Subsidiaries, has timely paid all foreign, federal, state, and material local taxes, assessments, deposits and contributions (i.e.
local taxes, assessments, deposits and contributions in an aggregate amount of $50,000 or more) owed by Borrower, or Subsidiary, except
as otherwise permitted pursuant to the terms of Section 5.8 of the Loan Agreement;
(e) No Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee
payroll or benefits of which Borrower has not previously provided written notification to Collateral Agent and the Lenders.
Attached are the required documents, if any, supporting our certification(s). The Officer, on behalf of Borrower, further certifies that the
attached financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently
applied from one period to the next except as explained in an accompanying letter or footnotes and except, in the case of unaudited
financial statements, for the absence of footnotes and subject to year‑end audit adjustments as to the interim financial statements, which
unaudited financial statements are considered to be in draft form and subject to adjustment in accordance with Section 5.4 of the Loan
Agreement.
Please indicate compliance status since the last Compliance Certificate by circling Yes, No, or N/A under “Complies” column.
Reporting Covenant
Requirement
Actual
Complies
1) Financial statements
Monthly within 30 days
Yes
No
N/A
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
2) Annual (CPA Audited) statements
3)
Annual Financial Projections/Budget
(prepared on a monthly basis)
4) A/R & A/P agings
5)
8‑K, 10‑K and 10‑Q Filings
Within 120 days after FYE
Annually (within 60 days of
FYE), and when revised
If applicable
If applicable, within 5
Business Days of filing
Monthly within 30 days
6) Compliance Certificate
7)
IP Report of material adverse changes When required
Total amount of Borrower’s cash and
cash equivalents at the last day of the
measurement period
Total amount of Borrower’s
Subsidiaries’ cash and cash equivalents
at the last day of the measurement
period
[***] product revenues
8)
9)
10)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
N/A
N/A
N/A
N/A
N/A
N/A
N/A
No
N/A
No
N/A
$________
$________
$________
Deposit and Securities Accounts
(Please list all accounts; attach separate sheet if additional space needed)
Institution Name
Account Number
1)
2)
3)
4)
Financial Covenants
New Account?
No
Yes
No
Yes
No
Yes
No
Yes
Account Control Agreement in place?
Yes
Yes
Yes
Yes
No
No
No
No
1)
[***] product revenues
[$_____________]
Covenant
Requirement
Actual
[$________]
Compliance
Yes
No
Other Matters
1)
Have there been any changes in management since the last Compliance Certificate?
2)
Have there been any transfers/sales/disposals/retirement of Collateral or IP prohibited by the Loan
Agreement?
Yes
Yes
No
No
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
3)
4)
Have there been any new or pending claims or causes of action against Borrower that involve more
than Five Hundred Thousand Dollars ($500,000.00)?
Have there been any amendments of or other changes to the capitalization table of Borrower and to
the Operating Documents of Borrower or any of its Subsidiaries? If yes, provide copies of any such
amendments or changes with this Compliance Certificate.
Yes
Yes
No
No
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
Exceptions
Please explain any exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions.” Attach separate sheet
if additional space needed.)
ACLARIS THERAPEUTICS, INC., on behalf of itself and all Borrowers
By
Name:
Title:
Date:
LENDER USE ONLY
Received by:
Verified by:
Compliance Status: Yes
Confidential and Proprietary
Date:
Date:
No
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT D
Form of Secured Promissory Note
[see attached]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
SECURED PROMISSORY NOTE
(Term [A][B] Loan)
$____________________
Dated: [DATE]
FOR VALUE RECEIVED, the undersigned, ACLARIS THERAPEUTICS, INC., a Delaware corporation (“Parent”) with offices
located at 640 Lee Road, Suite 200, Wayne, PA 19087, CONFLUENCE DISCOVERY TECHNOLOGIES, INC., a Delaware corporation
with offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108 (“CDT”) and ACLARIS LIFE SCIENCES, INC., a
Delaware corporation with offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108 (“ALS”) (Parent, CDT and ALS,
individually and collectively, jointly and severally, “Borrower”) HEREBY PROMISES TO PAY to the order of OXFORD FINANCE LLC
(“Lender”) the principal amount of [___________] MILLION DOLLARS ($______________) or such lesser amount as shall equal the
outstanding principal balance of the Term [A][B] Loan made to Borrower by Lender, plus interest on the aggregate unpaid principal
amount of such Term [A][B] Loan, at the rates and in accordance with the terms of the Loan and Security Agreement dated October 15,
2018 by and among Borrower, Lender, Oxford Finance LLC, as Collateral Agent, and the other Lenders from time to time party thereto (as
amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”). If not sooner paid, the entire principal
amount and all accrued and unpaid interest hereunder shall be due and payable on the Maturity Date as set forth in the Loan
Agreement. Any capitalized term not otherwise defined herein shall have the meaning attributed to such term in the Loan Agreement.
Principal, interest and all other amounts due with respect to the Term [A][B] Loan, are payable in lawful money of the United States of
America to Lender as set forth in the Loan Agreement and this Secured Promissory Note (this “Note”). The principal amount of this Note
and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender and, prior to any transfer
hereof, endorsed on the grid attached hereto which is part of this Note.
The Loan Agreement, among other things, (a) provides for the making of a secured Term [A][B] Loan by Lender to Borrower, and
(b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events.
This Note may not be prepaid except as set forth in Section 2.2 (c) and Section 2.2(d) of the Loan Agreement.
This Note and the obligation of Borrower to repay the unpaid principal amount of the Term [A][B] Loan, interest on the Term [A][B] Loan
and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement.
Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution,
delivery, performance and enforcement of this Note are hereby waived.
Borrower shall pay all reasonable fees and expenses, including, without limitation, reasonable attorneys’ fees and costs, incurred by Lender
in the enforcement or attempt to enforce any of Borrower’s obligations hereunder not performed when due.
This Note shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York.
The ownership of an interest in this Note shall be registered on a record of ownership maintained by Lender or its agent. Notwithstanding
anything else in this Note to the contrary, the right to the principal of, and stated interest on, this Note may be transferred only if the
transfer is registered on such record of ownership and the transferee is identified as the owner of an interest in the obligation. Borrower
shall be entitled to treat the registered holder of
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
this Note (as recorded on such record of ownership) as the owner in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in this Note on the part of any other person or entity.
[Balance of Page Intentionally Left Blank]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on
the date hereof.
BORROWER:
ACLARIS THERAPEUTICS, INC.
By
Name:
Title:
CONFLUENCE DISCOVERY TECHNOLOGIES, INC.
By
Name:
Title:
ACLARIS LIFE SCIENCES, INC.
By
Name:
Title:
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL
Date
Principal
Amount
Interest Rate
Scheduled
Payment Amount
Notation By
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
CORPORATE BORROWING CERTIFICATE
BORROWER:
LENDER:
[BORROWER]
OXFORD FINANCE LLC, as Collateral Agent and Lender
DATE: [DATE]
I hereby certify as follows, as of the date set forth above:
1. I am the Secretary, Assistant Secretary or other officer of Borrower. My title is as set forth below.
2. Borrower’s exact legal name is set forth above. Borrower is a [BORROWER ORGANIZATION] existing under the laws of the
State of [BORROWER STATE].
3. Attached hereto as Exhibit A and Exhibit B, respectively, are true, correct and complete copies of (i) Borrower’s
Articles/Certificate of Incorporation (including amendments), as filed with the Secretary of State of the state in which Borrower is
incorporated as set forth in paragraph 2 above; and (ii) Borrower’s Bylaws. Neither such Articles/Certificate of Incorporation nor such
Bylaws have been amended, annulled, rescinded, revoked or supplemented, and such Articles/Certificate of Incorporation and such Bylaws
remain in full force and effect as of the date hereof.
4. The following resolutions were duly and validly adopted by Borrower’s Board of Directors at a duly held meeting of such
directors (or pursuant to a unanimous written consent or other authorized corporate action). Such resolutions are in full force and effect as
of the date hereof and have not been in any way modified, repealed, rescinded, amended or revoked, and the Lenders may rely on them
until each Lender receives written notice of revocation from Borrower.
[Balance of Page Intentionally Left Blank]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Name
Title
Signature
Authorized to
Add or Remove
Signatories
□
□
□
□
RESOLVED FURTHER, that any one of the persons designated above with a checked box beside his or her name may, from
time to time, add or remove any individuals to and from the above list of persons authorized to act on behalf of Borrower.
RESOLVED FURTHER, that such individuals may, on behalf of Borrower:
Borrow Money. Borrow money from the Lenders.
Execute Loan Documents. Execute any loan documents any Lender requires.
Grant Security. Grant Collateral Agent a security interest in any of Borrower’s assets.
Negotiate Items. Negotiate or discount all drafts, trade acceptances, promissory notes, or other indebtedness in which Borrower
has an interest and receive cash or otherwise use the proceeds.
Further Acts. Designate other individuals to request advances, pay fees and costs and execute other documents or agreements
(including documents or agreement that waive Borrower’s right to a jury trial) they believe to be necessary to effectuate such
resolutions.
RESOLVED FURTHER, that all acts authorized by the above resolutions and any prior acts relating thereto are ratified.
[Balance of Page Intentionally Left Blank]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
5. The persons listed above are Borrower’s officers or employees with their titles and signatures shown next to their names.
By:
Name:
Title:
*** If the Secretary, Assistant Secretary or other certifying officer executing above is designated by the resolutions set forth in paragraph 4
as one of the authorized signing officers, this Certificate must also be signed by a second authorized officer or director of Borrower.
I, the __________________________ of Borrower, hereby certify as to paragraphs 1 through 5 above, as
of the date set forth above.
[print title]
By:
Name:
Title:
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT A
Articles/Certificate of Incorporation (including amendments)
[see attached]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT B
Bylaws
[see attached]
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
DEBTOR:
SECURED PARTY: OXFORD FINANCE LLC,
[BORROWER]
as Collateral Agent
EXHIBIT A TO UCC FINANCING STATEMENT
Description of Collateral
The Collateral consists of all of Debtor’s right, title and interest in and to the following personal property:
All goods, Accounts (including health‑care receivables), Equipment, Inventory, contract rights or rights to payment of money,
leases, license agreements, franchise agreements, General Intangibles (except as noted below), commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts and other Collateral
Accounts, all certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities,
and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located;
and
All Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all
substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance
proceeds of any or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include (i) any Intellectual Property; provided, however, the Collateral
shall include all Accounts and all proceeds of Intellectual Property. If a judicial authority (including a U.S. Bankruptcy Court) would hold
that a security interest in the underlying Intellectual Property is necessary to have a security interest in such Accounts and such property
that are proceeds of Intellectual Property, then the Collateral shall automatically, and effective as of the Effective Date, include the
Intellectual Property to the extent necessary to permit perfection of Collateral Agent’s security interest in such Accounts and such other
property of Borrower that are proceeds of the Intellectual Property; (ii) more than sixty five percent (65%) of the Shares of a Foreign
Subsidiary, if Borrower demonstrates to Collateral Agent’s reasonable satisfaction that a pledge of more than sixty five percent (65%) of
the Shares of such Subsidiary creates a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code;
(iii) Excluded Accounts, and (iv) any license, contract or interest of Borrower as a lessee under a lease, in each case if the granting of a
Lien in such license, contract or interest is prohibited by or would constitute a default under the agreement governing such license, contract
or interest (but (A) only to the extent such prohibition is enforceable under applicable law and (B) other than to the extent that any such
term would be rendered ineffective pursuant to Section 9-406, 9-408 or 9-409 (or any other Section) or Division 9 of the Code); provided
that upon the termination, lapsing or expiration of any such prohibition, such license, contract or interest, as applicable, shall automatically
be subject to the security interest granted in favor of Collateral Agent hereunder and become part of the “Collateral”.
Pursuant to the terms of a certain negative pledge arrangement with Collateral Agent and the Lenders, Debtor has agreed not to
encumber any of its Intellectual Property.
Capitalized terms used but not defined herein have the meanings ascribed in the Uniform Commercial Code in effect in the State
of New York as in effect from time to time (the “Code”) or, if not defined in the Code, then in the Loan and Security Agreement by and
between Debtor, Secured Party and the other Lenders party thereto (as modified, amended and/or restated from time to time).
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT to Loan and Security Agreement (this “Amendment”) is entered into as of January 28, 2019 (the
“Amendment Date”), by and among OXFORD FINANCE LLC, a Delaware limited liability company with an office located at 133 North
Fairfax Street, Alexandria, Virginia 22314 (“Oxford”), as collateral agent (in such capacity, “Collateral Agent”), the Lenders listed on
Schedule 1.1 to the Loan Agreement (as defined below) or otherwise a party thereto from time to time including Oxford in its capacity as a
Lender (each a “Lender” and collectively, the “Lenders”), and ACLARIS THERAPEUTICS, INC., a Delaware corporation (“Parent”)
with offices located at 640 Lee Road, Suite 200, Wayne, PA 19087, Confluence Discovery Technologies, Inc., a Delaware corporation with
offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108 (“CDT”) and ACLARIS LIFE SCIENCES, INC., a Delaware
corporation with offices located at 4320 Forest Park Avenue, Suite 303, St. Louis, MO 63108 (“ALS”) (Parent, CDT and ALS, individually
and collectively, jointly and severally, “Borrower”).
WHEREAS, Collateral Agent, Borrower and Lenders have entered into that certain Loan and Security Agreement, dated as of October 15,
2018 (as amended, supplemented or otherwise modified from time to time, the “Loan Agreement”) pursuant to which Lenders have
provided to Borrower certain loans in accordance with the terms and conditions thereof; and
WHEREAS, Borrower, Lenders and Collateral Agent desire to amend certain provisions of the Loan Agreement and the
Disbursement Letters entered into pursuant to the Loan Agreement as provided herein and subject to the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the promises, covenants and agreements contained herein, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, Borrower, Lenders and Collateral Agent hereby agree as
follows:
1. Capitalized terms used herein but not otherwise defined shall have the respective meanings given to them in the Loan Agreement.
2. Section 13.1 of the Loan Agreement is hereby amended by amending and restating the following definition therein as follows:
“Excluded Accounts” means any (i) Deposit Accounts exclusively used for payroll, payroll taxes and other employee wage and
benefit payments to or for the benefit of Borrower’s or its Subsidiaries employees, (ii) escrow accounts in which funds have been
deposited by Borrower (and are yet to be released) to meet its obligations related to an acquisition by Borrower which has been
consented to by Collateral Agent and Required Lenders, (iii) LC Account and (iv) Collateral Accounts of any Subsidiary that is
not a Loan Party.
3. Section 13.1 of the Loan Agreement is hereby further amended by adding the following definition thereto in alphabetical order:
“LC Account” means an account maintained by Borrower exclusively for the purposes of securing Indebtedness permitted under
clause (i) of the definition of “Permitted Indebtedness” and identified by Borrower to Collateral Agent as such in the Perfection
Certificate(s); provided, however, the aggregate balance in such account may not exceed at any time the amount of Indebtedness
then outstanding that is permitted under clause (i) of the definition of “Permitted Indebtedness.”
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
4. Section 13.1 of the Loan Agreement is hereby further amended by amending and restating clause (i) of the definition of
“Permitted Indebtedness” therein as follows:
(i) Indebtedness in respect of letters of credit, bank guarantees and similar instruments issued for the account of the
Borrower or any Subsidiary in the ordinary course of business supporting obligations under (A) workers’ compensation,
unemployment insurance and other social security laws and (B) bids, trade contracts, leases, statutory obligations, surety and
appeal bonds, performance bonds and obligations of a like nature; provided the aggregate amount of Indebtedness under this
clause (i) may not exceed One Million Four Hundred Thousand Dollars ($1,500,000.00) at any given time;
5. Section 13.1 of the Loan Agreement is hereby further amended by amending the definition of “Permitted Liens” by removing
“and” at the end of clause (l) thereof, replacing “.” at the end of clause (m) thereof with “; and” and adding the following clause
(n) thereto:
(n) Liens on LC Account securing Indebtedness permitted under clause (i) of the definition of “Permitted Indebtedness.”
6. Limitation of Amendment.
a. The amendments set forth above are effective for the purposes set forth herein and shall be limited precisely as written
and shall not be deemed to (a) be a consent to any amendment, waiver or modification of any other term or condition of
any Loan Document, or (b) otherwise prejudice any right, remedy or obligation which Lenders or Borrower may now
have or may have in the future under or in connection with any Loan Document, as amended hereby.
b. This Amendment shall be construed in connection with and as part of the Loan Documents and all terms, conditions,
representations, warranties, covenants and agreements set forth in the Loan Documents, are hereby ratified and
confirmed and shall remain in full force and effect.
7. To induce Collateral Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Collateral
Agent and Lenders as follows:
a. Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan
Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such
representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (b) no
Event of Default has occurred and is continuing;
b. Borrower has the power and due authority to execute and deliver this Amendment and to perform its obligations under
the Loan Agreement, as amended by this Amendment;
c. The organizational documents of Borrower delivered to Collateral Agent on the Effective Date, and updated pursuant to
subsequent deliveries by or on behalf of the Borrower to the Collateral Agent, remain true, accurate and complete and
have not been amended, supplemented or restated and are and continue to be in full force and effect;
d. The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under
the Loan Agreement, as amended by this Amendment, do not contravene (i) any material law or regulation binding on or
affecting Borrower, (ii) any material contractual
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
2
Confidential and Proprietary
restriction with a Person binding on Borrower, (iii) any material order, judgment or decree of any court or other
governmental or public body or authority, or subdivision thereof, binding on Borrower, or (iv) the organizational
documents of Borrower;
e. The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under
the Loan Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization
or validation of, or filing, recording or registration with, or exemption by any governmental or public body or authority,
or subdivision thereof, binding on Borrower, except as already has been obtained or made; and
f. This Amendment has been duly executed and delivered by Borrower and is the binding obligation of Borrower,
enforceable against Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles
relating to or affecting creditors’ rights.
8. Except as expressly set forth herein, the Loan Agreement shall continue in full force and effect without alteration or
amendment. This Amendment and the Loan Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements.
9. The Borrower hereby remises, releases, acquits, satisfies and forever discharges the Lenders and Collateral Agent, their agents,
employees, officers, directors, predecessors, attorneys and all others acting or purporting to act on behalf of or at the direction of
the Lenders and Collateral Agent (“Releasees”), of and from any and all manner of actions, causes of action, suit, debts, accounts,
covenants, contracts, controversies, agreements, variances, damages, judgments, claims and demands whatsoever, in law or in
equity, which any of such parties ever had, now has or, to the extent arising from or in connection with any act, omission or state
of facts taken or existing on or prior to the date hereof, may have after the date hereof against the Releasees, for, upon or by reason
of any matter, cause or thing whatsoever relating to or arising out of the Loan Agreement or the other Loan Documents on or prior
to the date hereof and through the date hereof. Without limiting the generality of the foregoing, the Borrower waives and
affirmatively agrees not to allege or otherwise pursue any defenses, affirmative defenses, counterclaims, claims, causes of action,
setoffs or other rights they do, shall or may have as of the date hereof, including the rights to contest: (a) the right of Collateral
Agent and each Lender to exercise its rights and remedies described in the Loan Documents; (b) any provision of this Amendment
or the Loan Documents; or (c) any conduct of the Lenders or other Releasees relating to or arising out of the Loan Agreement or
the other Loan Documents on or prior to the date hereof.
10. This Amendment shall be deemed effective as of the Amendment Date upon (a) the due execution and delivery to Collateral
Agent of this Amendment by each party hereto and (b) Borrower’s payment of all Lenders’ Expenses incurred through the date
hereof, which may be debited (or ACH’d) from the Designated Deposit Account in accordance with Section 2.3(d) of the Loan
Agreement.
11. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which,
taken together, shall constitute one and the same instrument.
12. This Amendment and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the
laws of the State of New York.
[Balance of Page Intentionally Left Blank]
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
3
Confidential and Proprietary
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to the Loan Agreement to be executed as of the date first
set forth above.
BORROWER:
ACLARIS THERAPEUTICS, INC.
/s/ Neal Walker
By
Name:Neal Walker
Title: President & CEO
CONFLUENCE DISCOVERY TECHNOLOGIES, INC.
/s/ Neal Walker
By
Name:Neal Walker
Title: President & CEO
ACLARIS LIFE SCIENCES, INC.
/s/ Neal Walker
By
Name:Neal Walker
Title: President
COLLATERAL AGENT AND LENDER:
OXFORD FINANCE LLC
/s/ Colette H. Featherly
By
Name:Colette H. Featherly
Title: Senior Vice President
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION
SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Confidential and Proprietary
Subsidiaries of Aclaris Therapeutics, Inc.
Exhibit 21.1
Name of Subsidiary
Aclaris Therapeutics International Limited
Aclaris Life Sciences, Inc.
Confluence Discovery Technologies, Inc.
Jurisdiction of Incorporation or
Organization
United Kingdom
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-212095) and Form
S-8 (Nos. 333-223922, 333-220149, 333-216703, 333-210379, and 333-307434) of Aclaris Therapeutics, Inc. of our report
dated March 18, 2019 relating to the financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 18, 2019
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Neal Walker, certify that:
1. I have reviewed this annual report on Form 10-K of Aclaris Therapeutics, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 18, 2019
/s/ Neal Walker
Neal Walker
President & Chief Executive Officer
(principal executive officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank Ruffo, certify that:
1. I have reviewed this annual report on Form 10-K of Aclaris Therapeutics, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 18, 2019
/s/ Frank Ruffo
Frank Ruffo
Chief Financial Officer
(principal financial officer and principal accounting officer)
CERTIFICATIONS OF
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Neal Walker,
President and Chief Executive Officer of Aclaris Therapeutics, Inc. (the “Company”), and Frank Ruffo, Chief Financial
Officer of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2018 (the “Annual Report”), to
which this Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or
Section 15(d) of the Exchange Act, and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of
the Company as of the end of the period covered by the Annual Report and results of operations of the Company
for the periods covered by the Annual Report.
In Witness Whereof, the undersigned have set their hands hereto as of the 18th day of March, 2019.
/s/ Neal Walker
Neal Walker
President & Chief Executive Officer
/s/ Frank Ruffo
Frank Ruffo
Chief Financial Officer
* This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as
amended, or the Exchange Act (whether made before or after the date of the Form 10-K), irrespective of any general
incorporation language contained in such filing.