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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-37581

Aclaris Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

(484) 324-7933

(Registrant’s telephone number, including area code)

N/A

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

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  o  No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  x  No  o

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

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

The number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, as of the close of business on November 17, 2015 was 20,157,503.

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ACLARIS THERAPEUTICS, INC.

INDEX TO FORM 10-Q

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)

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

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ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share data)

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

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ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ DEFICIT (UNAUDITED)
FOR THE PERIOD FROM JANUARY 1, 2015 TO SEPTEMBER 30, 2015

(In thousands, except share data)

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

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ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

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

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ACLARIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

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

1. Organization and Nature of Business

Aclaris Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in 2012. The Company is a clinical-stage specialty pharmaceutical company focused on identifying, developing and commercializing innovative and differentiated drugs to address significant unmet needs in dermatology. The Company’s lead drug candidate, A-101, is a proprietary high-concentration hydrogen peroxide topical solution that the Company is developing as a prescription treatment for seborrheic keratosis (“SK”), a common non-malignant skin tumor. The Company has completed three Phase 2 clinical trials of A-101 in patients with SK.

On July 17, 2015, Aclaris Therapeutics International Limited was established as a wholly-owned subsidiary of the Company.

Initial Public Offering

On October 6, 2015, the Company’s registration statement on Form S-1 relating to its initial public offering of its common stock (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”).  The shares began trading on The NASDAQ Global Select Market on October 7, 2015.  The IPO closed on October 13, 2015, and 5,000,000 shares of common stock were sold at a price to the public of $11.00 per share, for aggregate gross proceeds of $55,000.  In addition, upon the closing of the IPO, all of the Company’s outstanding convertible preferred stock was converted into an aggregate total of 11,677,076 shares of common stock.

On October 12, 2015, the underwriters of the IPO exercised in full their option to purchase additional shares, and on October 13, 2015, the Company’s sold 750,000 additional shares of common stock at a price to the public of $11.00 per share, for aggregate gross proceeds of $8,250.

The Company paid to the underwriters underwriting discounts and commissions of $4,428 in connection with the IPO, including the underwriters’ exercise of their option to purchase additional shares.  In addition, the Company incurred expenses of approximately $2,200 in connection with the IPO.  Thus, the net offering proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were $56,623.

Reverse Stock Split

On September 24, 2015, the Company effected a 1-for-3.45 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s convertible preferred stock (see Note 6). Accordingly, all share and per share amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

Liquidity

The Company’s 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 September 30, 2015, the Company had working capital of $37,463, an accumulated deficit of $38,119 and cash, cash equivalents and marketable securities of $38,405.  Upon consummation of its IPO on October 13, 2015, the Company received cash proceeds, net of underwriting discounts and commissions, of $58,823.  The Company has not generated any product revenues and has not achieved profitable operations.  There is 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 pre-clinical testing, and commercialization of the Company’s products will require significant additional financing.

The Company expects that its cash and cash equivalents as of September 30, 2015, together with the proceeds received in connection with its IPO in October 2015, will be sufficient to fund its operations for at least the next 24 months. The future

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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 condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The financial statements include the consolidated accounts of the Company and its wholly-owned subsidiary, Aclaris Therapeutics International Limited.  All 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, the accrual of research and development expenses and the valuation of common stock and 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.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of September 30, 2015, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014, the condensed consolidated statement of convertible preferred stock and stockholders’ deficit for the nine months ended September 30, 2015, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2015, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014 and its cash flows for the nine months ended September 30, 2015 and 2014.  The financial data and other information disclosed in these notes related to the nine months ended September 30, 2015 and 2014 are unaudited. The results for the nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015, any other interim periods, or any future year or period.  The unaudited interim financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2014 included in the Company’s final prospectus filed on October 8, 2015 with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended (the “Securities Act”).

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended December 31, 2014 included in the Company’s final prospectus filed on October 8, 2015 with the SEC pursuant to the Securities Act.  Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies, other than those detailed below.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs (non-current) until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. As of September 30, 2015, the Company had recorded $1,943 of deferred offering costs incurred in

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connection with the IPO. The deferred offering costs were offset against the net proceeds received upon completion of the IPO in October 2015.

3. Fair Value of Financial Assets and Liabilities

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

As of September 30, 2015 and December 31, 2014, the Company’s cash equivalents, which were invested in money market funds, were valued based on Level 1 inputs. In determining the fair value of its corporate debt securities and U.S. government agency debt securities as of September 30, 2015 and December 31, 2014, the Company relied on quoted prices for identical securities in markets that are not active, a Level 2 input. These quoted prices were obtained by the Company with the assistance of a third-party pricing service based on available trade, bid and other observable market data for identical securities. Quarterly, the Company compares the quoted prices obtained from the third-party pricing service to other available independent pricing information to validate the reasonableness of the quoted prices provided. The Company evaluates whether adjustments to third-party pricing is necessary and, historically, the Company has not made adjustments to quoted prices obtained from the third-party pricing service. During the nine months ended September 30, 2015 and the years ended December 31, 2014, there were no transfers between Level 1, Level 2 and Level 3.

As of September 30, 2015 and December 31, 2014, the fair value of the Company’s available-for-sale marketable securities by type of security was as follows:

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As of September 30, 2015 and December 31, 2014, the Company’s corporate debt securities had credit ratings of A and above and remaining maturities of less than 8 months and less than 13 months, respectively.

4. Property and Equipment, Net

Property and equipment, net consisted of the following:

Depreciation expense was $32 and $3 for the three months ended September 30, 2015 and 2014, respectively, and $57 and $9 for the nine months ended September 30, 2015 and 2014, respectively. Construction in progress as of September 30, 2015 consisted of manufacturing equipment, which is expected to be placed into service in 2016.

5. Accrued Expenses

Accrued expenses consisted of the following:

6. Convertible Preferred Stock

The Company issued Series A, Series B and Series C convertible preferred stock (collectively, the “Preferred Stock”).  As of September 30, 2015 and December 31, 2014, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 40,286,041 shares and 34,090,000 shares, respectively, of Preferred Stock, $0.00001 par value.

In September 2014, the Company entered into a stock purchase agreement pursuant to which the Company agreed to sell to the investors an initial issuance (the “First Tranche”) of 6,451,057 shares of Series B convertible preferred stock (the “Series B preferred stock”) at $1.65 per share for gross proceeds of $10,644. Per the terms of that stock purchase agreement, upon the successful attainment of two specified milestones, the Company was entitled to call a second tranche of 6,451,057 shares of Series B preferred stock at $1.65 per share (the “purchased put option”). The Company had the right, but not the obligation, to exercise its purchased put option after successful attainment of the specified milestones as confirmed by a vote of five-sixths of the members of the Company’s board of directors and 60% of voting stockholders of the Company. The two milestones related to (i) the successful achievement of the primary efficacy endpoint and demonstrated safety of a specified Phase 2b clinical trial of A-101 in patients with SK, and (ii) the occurrence of an end-of-Phase 2 meeting with the U.S. Food and Drug Administration (“FDA”), as a result of which the FDA did not raise any objection to the Company proceeding to a Phase 3 clinical trial of A-101 in patients with SK.

In connection with the initial issuance of Series B preferred stock in September 2014, the Company recorded the First Tranche transaction, net of issuance costs of $60, and the $1,039 issuance-date fair value of the purchased put option. The purchased put option was recorded as a charge to accumulated deficit within stockholders’ deficit and as an increase to the carrying value of Series B preferred stock based on the Company’s conclusion that the purchased put option met the equity classification criteria at time of issuance as the purchased put option (i) was a freestanding financial instrument that did not

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require the Company to issue shares that are potentially redeemable and (ii) required gross physical settlement in all circumstances.

The fair value of the purchased put option was determined on the date of its issuance using the Black-Scholes option-pricing model with the following assumptions and inputs: risk-free interest rate of 0.08%, expected term of nine months, expected volatility of 80.0%, no expected dividends and fair value of underlying instruments of $1.65. The fair value calculation also included an estimate of a 60% probability of occurrence of the successful attainment of the specified milestones that triggered the Company’s ability to exercise the purchased put option, as well as an estimate of a 60% probability of the Company exercising the purchased put option, if it became exercisable.

On August 28, 2015, the Company issued 12,944,984 shares of Series C convertible preferred stock (“Series C preferred stock”) at a price of $3.09 per share for gross proceeds of $40,000. The rights and preferences of the Series C preferred stock were similar to those of the Series A and Series B preferred stock, except that (1) the Original Issue Price for Series C preferred stock was $3.09 per share, (2) the holders of the Series C preferred stock did not have redemption rights, and (3) the holders of the Series C preferred stock had specified protective rights not held by the holders of the Series A and Series B preferred stock.

In connection with the closing of the Series C preferred stock financing, the redemption rights of the Series A and Series B preferred stock were removed at that time. As a result of the removal of the redemption rights, as of August 25, 2015, the Company ceased the periodic recording of adjustments to accrete the carrying values of Series A and Series B preferred stock to their respective redemption values through September 30, 2019, which had been the first required redemption date. The accretion for the three and nine months ended September 30, 2015 represents both the issuance costs and cumulative accrued but unpaid dividends through August 28, 2015.  Subsequent to August 28, 2015, the Company was no longer required to record the accumulated undeclared dividends on its balance sheet, but is required to deduct accumulated undeclared dividends as part of its loss per share calculation. 

Also in connection with the closing of the Series C preferred stock financing, the terms of a qualified public offering requiring the conversion of all shares of the Company’s Preferred Stock into common stock were changed and the Series B preferred stock purchase agreement was amended to terminate the Company’s purchased put option with respect to a second tranche of Series B preferred stock.

The Preferred Stock was subject to redemption under certain deemed liquidation events, and as such, the Preferred Stock was considered contingently redeemable for accounting purposes.  Accordingly, the Preferred Stock was recorded within temporary equity in the condensed consolidated financial statements.  The Company has not adjusted the Preferred Stock to its redemption amount at each reporting period, as the redemption of such Preferred Stock was not deemed probable of occurrence during the periods presented.  The redemption of the Preferred Stock was not considered probable as the redemption was contingent on the occurrence of such deemed liquidation events which the Company concluded were not probable for the periods presented.

Preferred Stock consisted of the following:

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Each share of Preferred Stock was convertible into common stock at the option of the stockholder at any time after the date of issuance. Each share of the Preferred Stock was convertible into shares of common stock, at the applicable conversion ratio of each series of Preferred Stock then in effect, upon the earlier of (i) a qualified public offering with net proceeds of not less than $40,000 and a price of not less than $12.80 per share, subject to appropriate adjustment for any stock dividend, stock split, combination or other similar recapitalization, and (ii) the date specified by written consent or agreement of the holders of 60% of the then-outstanding shares of Preferred Stock, voting together as a single class (on an as-converted basis).

The conversion ratio of each series of Preferred Stock was determined by dividing the Original Issue Price of each series of preferred stock by the Conversion Price of each series. The Conversion Price was $3.45 for Series A preferred stock, $5.6925 for Series B preferred stock and $10.6605 for Series C preferred stock and was subject to adjustment as set forth in the Company’s certificate of incorporation, as amended and restated. As of September 30, 2015 and December 31, 2014, all outstanding shares of Series A and Series B preferred stock were convertible into common stock on a 3.45-for-1 basis.

As previously discussed in Note 1, the Company completed its IPO in October 2015.  Upon the closing of the IPO, all of the Company’s outstanding Preferred Stock was converted into an aggregate total of 11,677,076 shares of common stock.

7. Stockholders’ Deficit

Common Stock

As of September 30, 2015 and December 31, 2014, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 110,000,000 shares and 77,000,000 shares, respectively, 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 the preferential dividend rights of the Preferred Stock. When dividends are declared on shares of common stock, the Company must declare at the same time a dividend payable to the holders of Preferred Stock equivalent to the dividend amount they would receive if each preferred share were converted into common stock. The Company may not pay dividends to common stockholders until all dividends accrued or declared but unpaid on the Preferred Stock have been paid in full. No dividends had been declared through September 30, 2015.

As of September 30, 2015 and December 31, 2014, the Company had reserved 13,216,245 shares and 8,425,181 shares of common stock, respectively, for the conversion of the outstanding shares of Series A, Series B and Series C preferred stock (see Note 6) and the exercise of outstanding stock options and the number of shares remaining available for future grant under the Company’s 2012 Plan (see Note 8).

Restricted Common Stock

The Company has granted restricted common stock with time-based vesting conditions. Unvested shares of restricted common stock may not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting conditions of each award. Upon a qualified public offering or a change in control of the Company, all unvested shares of restricted common stock vest immediately.

In July 2012, the Company issued 2,730,427 shares of common stock to its founders in connection with the Company’s formation, of which 1,918,834 shares were subject to vesting pursuant to restricted stock agreements, with 25% of such shares vesting in July 2013 and the remaining 75% vesting in equal monthly installments over a three-year period thereafter. The estimated grant-date fair value of these restricted common shares was $0.00001 per share, equal to the par value of each share. As of September 30, 2015 and December 31, 2014, 399,757 shares and 759,538 shares, respectively, were subject to repurchase.

The table below summarizes the Company’s restricted stock activity since January 1, 2015:

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The aggregate intrinsic value of restricted stock awards that vested during the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015 and 2014 was $1,091, $170, $2,026 and $269, respectively.

As previously discussed in Note 1, the Company completed its IPO in October 2015.  As a result of the IPO, all of the Company’s remaining unvested restricted common stock vested in full.

8. Stock-Based Awards

2012 Equity Compensation Plan

The Company’s 2012 Equity Compensation Plan, as amended and restated (the “2012 Plan”), provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors and consultants of the Company. The 2012 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of stock options may not be greater than ten years. The Company generally grants stock-based awards with service conditions only (“service-based” awards).

Stock options granted under the 2012 Plan generally vest over four years and expire after ten years.

The total number of shares of common stock that may be issued under the 2012 Plan was 500,262 shares as of December 31, 2014. On August 25, 2015, the Company effected an increase in the number of shares of common stock reserved for issuance under the 2012 Plan from 500,262 shares to 1,539,169 shares.

As of September 30, 2015 and December 31, 2014, 398,645 and 0 shares remained available for grant under the 2012 Plan, respectively.

As required by the 2012 Plan, the exercise price for stock options granted is not to be less than the fair value of common shares as determined by the Company as of the date of grant. The Company values its common stock by taking into consideration its most recently available valuation of common shares performed by management and the board of directors as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant.

2015 Equity Incentive Plan

On September 15, 2015, the Company’s board of directors adopted and on September 16, 2015, the Company’s stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”), which became effective in connection with the IPO in October 2015. As of the time the 2015 Plan became effective, no further grants may be made under the 2012 Plan.  The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit 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 2,784,395 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, beginning on January 1, 2016 and 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.  On October 6, 2015, in conjunction with the pricing of the IPO, the Company issued 89,800 stock options.

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Stock Option Valuation

The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors were as follows, presented on a weighted average basis:

The Company recognizes compensation expense for only the portion of awards that are expected to vest. For the three and nine months ended September 30, 2015 and 2014, the Company applied an expected forfeiture rate of 0%.

Stock Options

The following table summarizes stock option activity under the 2012 Plan from January 1, 2015 through September 30, 2015:

(1)                                 All options granted to date 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 September 30, 2015.

The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2015  was $8.34 per share.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.

Stock-Based Compensation

For the three and nine months ended September 30, 2015 and 2014, the Company recorded stock-based compensation in the following expense categories of its statements of operations and comprehensive loss:

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As of September 30, 2015, the Company had an aggregate of $5,906 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 3.53 years.

9. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

To calculate net loss attributable to common stockholders for the period, the Company reduced the net loss for the accretion of issuance costs and cumulative dividends accrued but not paid through August 28, 2015, and the remaining cumulative dividends accrued but not paid through September 30, 2015.

The Company’s potential dilutive securities, which include stock options, unvested restricted common stock and Preferred Stock, have been excluded from the computation of diluted net loss per share as 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 potential common shares, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net loss per share attributable to common stockholders for both the three and nine months ended September 30, 2015 and 2014 because including them would have had an anti-dilutive effect:

10. Commitments and Contingencies

Lease

In September 2013, the Company entered into a sublease agreement for its office space with related parties (see Note 11), with a term ending on November 30, 2016. As part of an amendment to the sublease agreement entered into in December 2014, the Company increased the amount of office space to be leased and agreed to new monthly lease terms commencing in January 2015.  On August 14, 2015, the Company further amended its sublease agreement to increase the square footage of the space and to extend the term of the lease to November 2019. Rent expense under operating leases was $34 and $17 for the three months ended September 30, 2015 and 2014, respectively, and $86 and $50 for the nine months

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ended September 30, 2015 and 2014, respectively. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not yet paid.

As of September 30, 2015, future minimum lease payments under the sublease were as follows:

11. Related Party Transactions

In September 2013, the Company entered into a direct sublease agreement with NeXeption, Inc. (“NeXeption”) for its leased space (see Note 10). A member of the Company’s board of directors is a current executive officer of NeXeption. Total payments made during the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015 and 2014 under these sublease agreements were $34, $17, $86 and $50, respectively.

In February 2014, the Company entered into a services agreement with NST, LLC (“NST”) under which NST provides certain pharmaceutical development, management and other administrative services to the Company. Certain officers of the Company are also founding partners of NST. Under the same agreement, the Company also provides services to NST and is reimbursed for those services. The Company may offset any payments owed by the Company to NST against payments that are owed by NST to the Company for the provision of NST personnel, including consultants, to the Company. During the three months ended September 30, 2015 and 2014 and nine months ended September 30, 2015 and 2014, gross expenses incurred by the Company under the services agreement totaled $105, $119, $358 and $358, respectively, and gross expenses charged to NST by the Company totaled $132, $103, $376 and $310, respectively. For the three months ended September 30, 2015 and 2014 and nine months ended September 30, 2015 and 2014, the Company recorded $36, $79, $172 and $238, respectively, of general and administrative expenses and $63, $63, $190 and $190, respectively, as a reduction of research and development expenses related to these transactions. During the three months ended September 30, 2015 and 2014 and nine months ended September 30, 2015 and 2014, payments made to NST by the Company totaled $0, $5, $16 and $37, respectively. Related to this agreement, no amounts were due to or due from NST at September 30, 2015.

12. 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 potentially for other dermatological conditions. During the three months ended September 30, 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.

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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 Accounting Standards Codification Topic 805, Business Combinations. Accordingly, the Company recorded the $8,000 upfront payment as research and development expense in the three months ended September 30, 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 Company will expense the acquired intellectual property asset as of the acquisition date on the basis that costs of intangible assets that are purchased from others for use in research and development activities and that have no alternative future uses are research and development costs at the time the costs are incurred.

13. Income Taxes

The Company did not record a federal or state income tax benefit for the Company’s losses for the three and nine months ended September 30, 2015 and 2014 due to the Company’s conclusion that a valuation allowance is required.

14. Subsequent Events

On October 6, 2015, in connection with the IPO, the Company’s Registration Statement on Form S-1 was declared effective by the SEC, and on October 7, 2015, the Company’s Common Stock began trading on the NASDAQ Global Select Market under the symbol ACRS.

On October 13, 2015, immediately prior to the closing of the IPO, all outstanding shares of Preferred Stock automatically converted into shares of Common Stock at the applicable conversion ratio then in effect.  As a result of the conversion, as of October 13, 2015, the Company had no shares of Preferred Stock outstanding.

On October 13, 2015, the Company closed the IPO.  The Company received net proceeds of $56,623 from the IPO, net of underwriting discounts and commissions and other estimated offering expenses (see Note 1).

On October 13, 2015, the Board granted 89,800 options with an exercise price of $11.00 per share pursuant to the 2015 Plan.  The awards vest over periods of between three and four years and expire after ten years (see Note 8).

On October 13, 2015, in connection with the IPO, the Company amended and restated its certificate of incorporation to reflect the following authorized share increases: 110,000,000 shares of capital stock, consisting of 100,000,000 shares of common stock, par value $0.00001 per share and 10,000,000 shares of preferred stock, par value $0.00001 per share.

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

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements due to a number of factors, including risks related to:

·                  our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

·                  the success and timing of our preclinical studies and clinical trials and regulatory approval of protocols for future clinical trials;

·                  the difficulties in obtaining and maintaining regulatory approval of our product candidates, and the labeling under any approval we may obtain;

·                  our plans and ability to develop, manufacture and commercialize our product candidates;

·                  our failure to recruit or retain key scientific or management personnel or to retain our executive officers;

·                  the size and growth of the potential markets for our product candidates and our ability to serve those markets;

·                  regulatory developments in the United States and foreign countries;

·                  the rate and degree of market acceptance of any of our product candidates;

·                  obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology;

·                  the successful development of our commercialization capabilities, including sales and marketing capabilities;

·                  recently enacted and future legislation and regulation regarding the healthcare system;

·                  the success of competing therapies and products that are or become available; and

·                  the performance of third parties, including contract research organizations and third-party manufacturers.

These and other factors that could cause or contribute to these differences are described in this Quarterly Report on Form 10-Q in Part II – Item 1A, “Risk Factors,” and under similar captions in our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2014, which are included in our final prospectus filed with the Securities and Exchange Commission, or SEC, on October 8, 2015 pursuant to Rule 424(b) of the Securities Act of 1933, as amended, or the Securities Act.

Overview

We are a clinical-stage specialty pharmaceutical company focused on identifying, developing and commercializing innovative and differentiated drugs to address significant unmet needs in dermatology. Our lead drug candidate, A-101, is a proprietary high-concentration hydrogen peroxide topical solution that we are developing as a prescription treatment for seborrheic keratosis, or SK, a common non-malignant skin tumor. We have completed three Phase 2 clinical trials of A-101 in over 300 patients with SK. In these trials, following one or two applications of A-101, we observed clinically relevant and

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statistically significant improvements in clearing SK lesions on the face, trunk and extremities of the body. We plan to commence three Phase 3 clinical trials of A-101 in patients with SK in the first quarter of 2016 and, if the results of these trials are favorable, to submit a New Drug Application, or NDA, for A-101 for the treatment of SK to the U.S. Food and Drug Administration, or FDA, in the fourth quarter of 2016. We also intend to develop A-101 as a prescription treatment for common warts and A-102, a proprietary gel dosage form of hydrogen peroxide, as a prescription treatment for SK and common warts. We recently in-licensed the exclusive, worldwide rights to inhibitors of the Janus kinase, or JAK, family of enzymes, for specified dermatological conditions. We plan to develop these JAK inhibitors, A-201 and A-301, as potential treatments for hair loss associated with an autoimmune skin disease known as alopecia areata, or AA, and potentially for other dermatological conditions. We intend to in-license or acquire additional drug candidates for other dermatological conditions to build a fully integrated dermatology company.

Since our inception in July 2012, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing A-101 for the treatment of SK, building our intellectual property portfolio, developing our supply chain and engaging in other discovery and clinical activities in dermatology. Through the date of this report, we have not generated any revenue and have financed our operations with $71.5 million of gross proceeds from sales of our convertible preferred stock and net proceeds of $56.6 million from our initial public offering, or IPO, in October 2015. We do not expect to generate significant revenue unless and until we obtain marketing approval for and commercialize A-101 for the treatment of SK or one of our other future drug candidates.

Since our inception, we have incurred significant operating losses. Our net loss was $8.5 million for the year ended December 31, 2014 and $15.8 million for the nine months ended September 30, 2015. As of September 30, 2015, we had an accumulated deficit of $38.1 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical development and clinical trials, and seek regulatory approval and pursue commercialization of any approved drug candidate. 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. In addition, we may incur expenses in connection with the in-license or acquisition of additional drug candidates. Furthermore, as a result of the IPO, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. 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 favorable 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 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 specified JAK inhibitors developed by Rigel. Under this agreement, we intend to develop these JAK inhibitors for the treatment of AA and potentially for other dermatological conditions. Under this agreement, we paid Rigel an upfront non-refundable payment of $8.0 million. 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 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. 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.

We 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 Accounting Standards Codification Topic 805, Business Combinations. Accordingly, we recorded the $8.0 million upfront payment as research and development expense in the three months ended September 30, 2015. We will record as expense any contingent milestone payments or royalties in the period in which such liabilities are incurred.

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We concluded that the licensing arrangement with Rigel did not meet the definition of a business because the transaction principally resulted in the acquisition of intellectual property. As part of the transaction, we 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. We will expense the acquired intellectual property assets as of the acquisition date because we will use it in our research and development activities and believe it has no alternative future uses.

Third-Party Agreements

Under an assignment agreement, pursuant to which we acquired intellectual property, we have agreed to pay royalties on sales of A-101 or related products at rates ranging in low single-digit percentages of net sales, as defined in the agreement. Under this assignment agreement, we have paid aggregate milestone payments of $0.2 million and there are no remaining milestone payment obligations under this agreement.

In connection with this acquisition of intellectual property, we also entered into a finder’s services agreement under which we have paid aggregate milestone payments of $0.2 million and have agreed to make aggregate payments of up to $1.3 million upon the achievement of specified pre-commercialization milestones, such as clinical trials and regulatory approvals, as described in the agreement. We have also agreed to make aggregate payments of up to $4.5 million upon the achievement of specified commercial milestones. In addition, we have agreed to pay royalties on sales of A-101 or related products at a low single-digit percentage of net sales, as defined in the agreement.

Components of Our Results of Operations

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future.

Research and Development Expenses

Research and development expense consists of expenses incurred in connection with the discovery and development of our drug candidates. We expense research and development costs as incurred. These expenses 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 and related analytical services;

·                  outsourced professional scientific development services;

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

·                  payments made under a third-party assignment agreement, under which we acquired 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

·                  allocated expenses for utilities and other facility-related costs.

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 and long-term toxicology studies. We expect our research and development expenses to increase significantly over the next several years as we increase personnel costs, including stock-based compensation, commence Phase 3 clinical trials of A-101 in patients with SK and conduct other clinical trials and prepare regulatory filings for A-101 and our other drug candidates.

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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 other 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 duration of the trials;

·                  the number of doses patients receive;

·                  the duration of patient follow-up; and

·                  the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving regulatory 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. Drug commercialization will take several years and millions of dollars in development costs.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance, legal and business development functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include facility related costs, patent filing and prosecution costs and professional fees for marketing, legal, auditing and tax services, insurance costs, as well as payments made under our related-party services agreement and milestone payments under our finder’s services agreement.

We anticipate that our general and administrative expenses will 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 stock exchange listing and SEC requirements, accounting and investor relations costs, director compensation, and director and officer insurance premiums associated with being a public company. Additionally, if and when we believe a regulatory approval of a drug candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our drug candidate.

Interest Income

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

Critical Accounting Policies and Significant Judgments and Estimates

This management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and

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stock-based compensation. 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. Actual results may differ from these estimates under different assumptions or conditions.  We believe there have been no material changes to our critical accounting policies and use of estimates as disclosed in the footnotes to our audited financial statements for the year ended December 31, 2014 included in our final prospectus filed on October 8, 2015 with the SEC pursuant to Rule 424(b)(4) of the Securities Act.

Results of Operations

Comparison of Three Months Ended September 30, 2015 and 2014

The following table summarizes our results of operations for the three months ended September 30, 2015 and 2014:

Research and Development Expenses

Research and development expenses were $9.4 million for the three months ended September 30, 2015, compared to $2.1 million for the three months ended September 30, 2014. The increase of $7.3 million was primarily attributable to an $8.0 million upfront payment to Rigel in connection with our license of rights to JAK inhibitors and related intellectual property, partially offset by a decrease of $0.7 million in direct costs associated with the three Phase 2 clinical trials of our lead drug candidate, A-101 for the treatment of SK, being conducted during the period.  This overall decrease in direct costs for the trials consisted of decreases of $0.7 million in clinical expenses and $0.3 million in development-related expenses, partially offset by a $0.2 million increase in manufacturing scale-up expenses.

General and Administrative Expenses

General and administrative expenses were $1.2 million for the three months ended September 30, 2015, compared to $0.6 million for the three months ended September 30, 2014. The increase of $0.6 million was primarily attributable to increases of $0.2 million in payroll-related expenses due to increased headcount, $0.2 million in market research expenses, $0.1 million in fees related to the formation of our wholly-owned subsidiary, and $0.1 million in professional fees for accounting and auditing services.

Comparison of Nine Months Ended September 30, 2015 and 2014

The following table summarizes our results of operations for the nine months ended September 30, 2015 and 2014:

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Research and Development Expenses

Research and development expenses were $12.9 million for the nine months ended September 30, 2015, compared to $4.5 million for the nine months ended September 30, 2014. The increase of $8.4 million was primarily attributable to the $8.0 million upfront payment to Rigel, as well as an increase of $0.5 million in regulatory expenses, partially offset by a decrease of $0.1 million in direct costs associated with the three Phase 2 clinical trials of A-101 for the treatment of SK.  The overall decrease in direct costs for the trials consisted of decreases of $0.7 million in clinical expenses and $0.6 million in development-related expenses, partially offset by an increase of $1.1 million in manufacturing scale-up expenses.

General and Administrative Expenses

General and administrative expenses were $2.9 million for the nine months ended September 30, 2015, compared to $1.5 million for the nine months ended September 30, 2014. The increase of $1.4 million was primarily attributable to increases of $0.5 million in payroll-related expenses due to increased headcount, $0.4 million in market research expenses, $0.2 million in stock-based compensation, $0.1 million in fees related to the formation of our wholly-owned subsidiary, and $0.2 million in professional fees for accounting and auditing services.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue and have incurred net losses and negative cash flows from our operations. We have financed our operations since inception through sales of our convertible preferred stock, receiving aggregate gross proceeds of $71.5 million through September 30, 2015.

As of September 30, 2015, we had cash, cash equivalents and marketable securities of $38.4 million. Subsequent to September 30, 2015, as described below we received cash proceeds of $58.8 million, net of underwriting discounts and commissions, from our IPO. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to 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 lease obligations and contingent obligations under intellectual property licensing agreements, each of which are described below.

Initial Public Offering

On October 13, 2015, we closed our IPO in which we sold 5,750,000 shares of common stock at a price to the public of $11.00 per share, for aggregate gross proceeds of $63.3 million.  We paid underwriting discounts and commissions of $4.4 million, and we also incurred expenses of $2.2 million in connection with the offering.  As a result, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were $56.6 million.  See Notes 1, 6 and 14 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details.

Cash Flows

The following table summarizes our cash flows for each of the periods presented:

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Operating Activities

During the nine months ended September 30, 2015, operating activities used $16.2 million of cash, primarily resulting from our net loss of $15.8 million and from cash used by our changes in our operating assets and liabilities of $0.7 million offset by non-cash expenses of $0.3 million. Net cash used in changes in our operating assets and liabilities during the nine months ended September 30, 2015 consisted primarily of a $0.5 million decrease in accounts payable and a $0.8 million increase in prepaid expenses and other current assets, both of which were partially offset by a $0.6 million increase in accrued expenses. The decrease in accounts payable was due to the timing of vendor invoicing and payments. The increase in prepaid expenses and other current assets was primarily due to prepayments for clinical trials. The increase in accrued expenses was due to increases in accruals for payroll and payroll-related costs due primarily to bonuses, as well as increases in accruals for IPO-related expenses incurred.

During the nine months ended September 30, 2014, operating activities used $4.9 million of cash, primarily resulting from our net loss of $5.9 million, partially offset by cash provided by changes in our operating assets and liabilities of $1.0 million. Net cash provided by changes in our operating assets and liabilities during the nine months ended September 30, 2014 consisted primarily of a $0.9 million increase in accounts payable and a $0.5 million increase in accrued expenses, both of which were partially offset by a $0.4 million increase in prepaid expenses and other current assets. The increases in accounts payable and accrued expenses were primarily due to costs related to our clinical trials of A-101. The increase in prepaid expenses and other current assets was primarily due to a prepayment for manufacturing scale-up expenses and clinical trials.