What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-07 · 174 added, 98 removed, 247 unchanged (52% of the section changed)

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Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II – Item 1A, “Risk Factors,” in our Annual Report on Form 10-K in Part I, Item 1A, “Risk Factors,” and in our other filings with the Securities and Exchange Commission, or SEC.

Factors that could cause or contribute to these differences include those below in this Quarterly Report on Form 10-Q and those in our Annual Report on Form 10-K, in each case under the caption “Risk Factors,” and in our other filings with the Securities and Exchange Commission, or SEC.

Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2019, which are included in our Annual Report on Form 10-K filed with the SEC on February 25, 2020.

We are a physician-led biopharmaceutical company focused on immuno-inflammatory diseases.

We are a clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases.

We currently have a pipeline of drug candidates focused on immuno-inflammatory diseases, as well as one product approved by the U.S.

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The most common adverse events (reported by 2 or more subjects who received ATI-450) observed during the trial were dizziness, headache, upper respiratory tract infection, constipation, abdominal pain, and nausea.

We started subject enrollment in a Phase 2a clinical trial for ATI-450 in subjects with moderate-to-severe rheumatoid arthritis in the first quarter of 2020.

Due to the COVID-19 pandemic, we temporarily paused enrollment of subjects in the trial.

At this time, we have decided to resume enrolling subjects at one clinical trial site.

The initiation of additional clinical trial sites will be determined on an ongoing basis as the COVID-19 pandemic evolves.

We previously anticipated reporting data from this trial in the second half of 2020;

however, we expect that the reporting of the data may be delayed.

We are also planning to initiate a Phase 2a clinical trial of ATI-450 in an additional immuno-inflammatory indication.

We expect to submit an IND for ATI-1777, an investigational topical soft-Janus kinase, or JAK, inhibitor compound, for the treatment of atopic dermatitis in mid-2020.

Following the completion of the Phase 1 clinical trial, in March 2020 we initiated a Phase 2a clinical trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-450 in subjects with moderate to severe rheumatoid arthritis.

Due to the COVID-19 pandemic, we temporarily paused enrollment.

We resumed enrolling subjects, and the first subject was dosed, in May 2020.

At this time, we are actively recruiting for this trial.

Given the continuing evolution of the COVID-19 pandemic, we now anticipate reporting data from this trial in the first half of 2021.

We are also planning to initiate a Phase 2a clinical trial of ATI-450 in cryopyrin-associated periodic syndrome (CAPS), an Ilβ-driven disease, in the second half of 2020.

We are also supporting an investigator-initiated Phase 2a, randomized, double-blind, placebo-controlled clinical trial to investigate the safety and efficacy of ATI-450, when used in addition to standard of care therapy, as a potential treatment for cytokine release syndrome in 36 hospitalized patients with COVID-19.

The primary endpoint in this trial is the proportion of subjects who are free from respiratory failure by day 14.

We are providing funding and clinical drug supply to the University of Kansas Medical Center, the sponsor of the trial.

The first subject was dosed in August 2020.

We submitted an IND in June 2020 for ATI-1777, an investigational topical “soft” Janus kinase, or JAK, 1/3 inhibitor compound, for the treatment of moderate to severe atopic dermatitis, and now plan to progress to the first-in-human trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

“Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure.

If the IND is allowed, we expect to initiate a Phase 1/2 clinical trial in subjects with atopic dermatitis in the second half of 2020 evaluating ATI-1777 as a potential treatment for moderate-to-severe atopic dermatitis.

We are also developing ATI-2138, our investigational oral ITK/TXK/JAK3, or ITJ, inhibitor compound, as a potential treatment for psoriasis and/or inflammatory bowel disease, which are both T-cell mediated autoimmune diseases.

We expect to initiate a Phase 1/2a multicenter, randomized, double-blind, vehicle-controlled trial to investigate the safety, tolerability, pharmacokinetics and efficacy of topically applied ATI-1777 in subjects with moderate to severe atopic dermatitis in the second half of 2020.

The primary endpoint will assess efficacy at four weeks.

We are developing ATI-2138, an investigational oral ITK/TXK/JAK3, or ITJ, inhibitor compound, as a potential treatment for psoriasis and/or inflammatory bowel disease, which are both T-cell mediated autoimmune diseases.

The ITJ compound interrupts T cell signaling through the combined inhibition of ITK/TXK/JAK3 pathways in lymphocytes.

We expect to file an IND for ATI-2138 in the fourth quarter of 2020 or the first quarter of 2021.

We are pursuing strategic alternatives, including seeking a partner, to further develop, obtain regulatory approval and/or commercialize, as applicable, A-101 45% Topical Solution as a potential treatment for common warts, ATI-501 and ATI-502, our JAK inhibitors, as potential treatments for alopecia, and ESKATA.

We expect to file an IND for ATI-2138 in 2021.

We are pursuing strategic alternatives, including seeking a partner, to further develop, obtain regulatory approval and/or commercialize, as applicable, our drug candidate A-101 45% Topical Solution as a potential treatment for common warts, as well as ATI-501 and ATI-502, our other JAK inhibitor candidates, as potential treatments for alopecia, and ESKATA, our non-marketed FDA-approved product.

Since our inception, we have incurred significant operating losses.

Our net loss was $15.6 million for the three months ended March 31, 2020 and $161.4 million for the year ended December 31, 2019.

As of March 31, 2020, we had an accumulated deficit of $469.1 million.

Our net loss was $27.2 million for the six months ended June 30, 2020 and $161.4 million for the year ended December 31, 2019.

As of June 30, 2020, we had an accumulated deficit of $480.7 million.

We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical and clinical development.

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As a result, we will need substantial additional funding to support our continuing operations.

We have historically financed our operations primarily with sales of our convertible preferred stock, as well as net proceeds from our initial public offering, or IPO, in October 2015, subsequent public offerings of, and a private placement of, our common stock, and borrowing debt.

In the near term, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential partnerships with other companies or other strategic transactions.

We have historically financed our operations primarily with sales of equity securities and incurring indebtedness in the form of loans from commercial lenders.

In the near term, we expect to finance our operations through these and other capital sources, including potential partnerships with other companies or other strategic transactions.

We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms, or at all.

If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development of one or more of our drug candidates.

Recent Developments

Loan and Security Agreement with Silicon Valley Bank

In March 2020, we entered into a Loan and Security Agreement, or the Loan and Security Agreement, with Silicon Valley Bank, or SVB, which provides for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020.

In connection with the Loan and Security Agreement, we issued a warrant to SVB to purchase up to 460,251 shares of our common stock with a term of ten years and an initial exercise price of $0.956 per share.

Impact of COVID-19 on Our Business

The global outbreak of the COVID-19 coronavirus continues to rapidly evolve.

We implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for all employees, thereby guarding the health and safety of our employees and enabling us to continue our focus on the development of our pipeline of drug candidates and providing contract research services to our clients.

We are focused on ensuring continuity of our operations.

Due to the COVID-19 pandemic, we temporarily paused enrollment of subjects in our Phase 2a trial of ATI-450;

however, at this time, we have decided to resume enrolling subjects at one clinical trial site.

The initiation of additional clinical trial sites will be determined on an ongoing basis as the COVID-19 pandemic evolves.

If the COVID-19 coronavirus continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and prospects.

The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines, social distancing requirements, business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

The global outbreak of COVID-19 continues to rapidly evolve.

We have implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for our employees, intended to protect the health and safety of our employees while enabling us to continue to develop our pipeline of drug candidates and provide contract research services to our clients.

We are focused on ensuring the continuity of our operations.

In March 2020, we

initiated a Phase 2a clinical trial of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis.

Due to the COVID-19 pandemic, we temporarily paused enrollment.

We resumed enrolling subjects, and the first subject was dosed, in May 2020.

At this time, we are actively recruiting for this trial.

Given the continuing evolution of the COVID-19 pandemic, we now anticipate reporting data from this trial in the first half of 2021.

If COVID-19 continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and prospects, including the timing of our clinical trials and development programs.

The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines, stay-at-home orders, social distancing requirements, business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

Accordingly, we do not yet know the full extent of the potential impacts on our business, our preclinical and clinical development and regulatory activities.

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Contract Research

We earn revenue from the provision of laboratory services to clients through Confluence Discovery Technologies, Inc., or Confluence, our wholly-owned subsidiary.

We earn revenue from the provision of laboratory services to clients through Confluence Life Sciences, Inc.

(now known as Aclaris Life Sciences, Inc.), or Confluence, our wholly-owned subsidiary.

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

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Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

We expect to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis and other immuno-inflammatory diseases, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We expect to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We expense research and development costs as incurred.

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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 drug candidates.

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:

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Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our drug candidates, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights.

We may obtain unexpected results from our clinical trials.

We may elect to discontinue, delay or modify clinical trials of some drug candidates or focus on others.

We may obtain unexpected results from our clinical trials or other development activities.

We may elect to discontinue, delay or modify the development, including clinical trials, of some 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.

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General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance, investor relations and legal functions, including stock-based compensation, travel expenses and recruiting expenses.

General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, insurance costs, as well as marketing expenses related to our contract research service offerings.

General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, and insurance costs.

We anticipate that we will incur increased director and officer insurance premiums and legal expenses associated with defending the current lawsuits described in this report.

Other Income, Net

Other income, net consists of interest earned on our cash, cash equivalents and marketable securities, interest expense incurred on our debt obligations, and gains and losses on transactions denominated in foreign currencies.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest earned on our cash, cash equivalents and marketable securities, interest expense related to our debt obligations and finance leases, and gains and losses on transactions denominated in foreign currencies.

Critical Accounting Policies and Significant Judgments and Estimates

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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.

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.

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Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

Indefinite-lived intangible assets are tested for impairment at least annually, which we perform during the fourth quarter, or when indicators of an impairment are present.

Indefinite-lived intangible assets are tested for impairment at least

annually, which we perform during the fourth quarter, or when indicators of an impairment are present.

We recognize impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.

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Contingent Consideration

resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition.

We initially recorded a contingent consideration liability related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition.

The ultimate amount of future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones.

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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.

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.

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Results of Operations

Comparison of Three Months Ended March 31, 2020 and 2019

Three Months Ended March 31,

Comparison of Three Months Ended June 30, 2020 and 2019

Three Months Ended June 30,

(In thousands)

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General and administrative

Goodwill impairment

Total costs and expenses

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Loss from discontinued operations

Contract research revenue was $1.2 million and $1.3 million for the three months ended March 31, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Contract research revenue was $1.9 million and $0.9 million for the three months ended June 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Other revenue consisted of $0.2 million of royalties earned on net sales of RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, pursuant to the asset purchase agreement with EPI Health, LLC, or EPI Health.

Cost of Revenue

Cost of revenue was $1.3 million and $1.2 million for the three months ended March 31, 2020 and 2019, respectively, was consistent year over year, and related to providing laboratory services to our clients through Confluence.

Cost of revenue was $1.4 million and $1.0 million for the three months ended June 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

Research and Development Expenses

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Total research and development expenses

Research and development expenses for ATI-450 primarily consisted of preclinical development activities during the three months ended March 31, 2019, and clinical development activities related to a Phase 1 clinical trial that was completed in January 2020 and initial activities for a Phase 2a clinical trial during the three months ended March 31, 2020.

Expenses for ATI-1777 were lower primarily due to the completion of preclinical development activities.

Expenses for ATI-2138 were lower as we completed early stage development work on candidate selection in 2019 and began preclinical development activities in the three months ended March 31, 2020.

Expenses related to our other JAK inhibitors decreased primarily as a result of several Phase 2 clinical trials of ATI-501 and ATI-502 which were completed during 2019.

Expenses related to A-101 45% Topical Solution decreased primarily due to our Phase 3 clinical trials, which were active during the three months ended March 31, 2019 and were completed by the end of 2019.

Personnel expenses decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019 and completed during the three months ended March 31, 2020.

The decrease in stock-based compensation was primarily driven by a reduction in headcount.

The increase in contingent consideration during the three months ended March 31, 2020 was the result of updates to our assumptions as a result of the completion of a successful Phase 1 clinical trial for ATI-450.

Research and development expenses for ATI-450 primarily consisted of preclinical development activities during the three months ended June 30, 2019 and initial activities for a Phase 2a clinical trial during the three months ended June 30, 2020.

Expenses for ATI-1777 were higher during the three months ended June 30, 2020 primarily due to initial activities related to a Phase 1/2a clinical trial which we expect to initiate in the second half of 2020.

Expenses for ATI-2138 were higher primarily due to preclinical development activities during the three months ended June 30, 2020.

Expenses related to our other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019.

Expenses related to A-101 45% Topical Solution decreased primarily due to the completion of our Phase 3 clinical trials during 2019.

Other research and development expenses, which primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the three months ended June 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502.

Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019.

The change in contingent consideration during the three months ended June 30, 2019 was the result of updates to our assumptions as a result of the filing of an IND for ATI-450.

General and Administrative Expenses

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Personnel and stock-based compensation expenses decreased primarily due to lower headcount.

Professional and legal fees were consistent year-over-year, and included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents.

Facility and support services included general office expenses, information technology costs and other expenses, and have decreased primarily due to lower information technology costs.

Other general and administrative expenses were consistent year-over-year, and primarily included travel, insurance and marketing costs.

Professional and legal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and current lawsuits described in this report, and were lower year-over-year primarily as a result of lower legal fees.

Facility and support services included general office expenses, information technology costs and other expenses, and have decreased primarily due to lower information technology costs resulting from lower headcount.

Other general and

administrative expenses included travel, insurance and marketing costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Goodwill Impairment

During the three months ended June 30, 2019, we performed an interim impairment analysis due to a decline in our stock price.

Our impairment analysis noted that our stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value.

As a result, we recorded a goodwill impairment charge of $18.5 million writing off the full balance of goodwill.

Other Income (Expense), net

Other income for the three months ended March 31, 2020 was $0.2 million and included interest income earned on our cash and investments, partially offset by interest expense related to finance leases and premium finance arrangements.

Other expense for the three months ended March 31, 2019 was $0.2 million and primarily included interest expense incurred on our debt with Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Other expense, net for the three months ended June 30, 2020 was $0.2 million and primarily included interest expense related to our term loan facility with Silicon Valley Bank, or SVB, which we borrowed in March 2020, as well as interest on our finance leases, partially offset by interest income earned on our cash and investments.

Other expense, net for the three months ended June 30, 2019 was $0.1 million and primarily included interest expense incurred on our debt with Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Loss from Discontinued Operations

In September 2019, we announced the completion of a strategic review and our decisions to refocus on our immuno-inflammatory development programs and to actively seek partners for our commercial products.

The condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to our commercial products as discontinued operations (see Note 15 to the condensed consolidated financial statements included in this report for more information).

In September 2019, we announced the completion of a strategic review and our decision to refocus on our immuno-inflammatory development programs and to actively seek partners for our commercial products.

Comparison of Six Months Ended June 30, 2020 and 2019

Six Months Ended June 30,

(In thousands)

Contract research

Other revenue

Total revenue

Costs and expenses:

Cost of revenue

Research and development

General and administrative

Goodwill impairment

Total costs and expenses

Loss from operations

Other income (expense), net

Loss from continuing operations

Loss from discontinued operations

Contract research revenue was $3.0 million and $2.1 million for the six months ended June 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Other revenue consisted of $0.4 million of royalties earned on net sales of RHOFADE pursuant to the asset purchase agreement with EPI Health.

Cost of Revenue

Cost of revenue was $2.7 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

Research and Development Expenses

The following table summarizes our research and development expenses:

Six Months Ended

(In thousands)

Other JAK inhibitors

A-101 45% Topical Solution

Other research and development expenses

Personnel expenses

Stock-based compensation

Change in contingent consideration

Total research and development expenses

Research and development expenses for ATI-450 during the six months ended June 30, 2019 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January 2020.

Research and development expenses for ATI-450 during the six months ended June 30, 2020 primarily consisted of initial activities for a Phase 2a clinical trial.

Expenses for ATI-1777 were lower primarily due to the completion of preclinical development activities.

Expenses for ATI-2138 were comparable period over period as we completed early stage development work on candidate selection in 2019 and began preclinical development activities during the six months ended June 30, 2020.

Expenses related to our other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019.

Expenses related to A-101 45% Topical Solution decreased primarily due to the completion of our Phase 3 clinical trials during 2019.

Other research and development expenses, which primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the six months ended June 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502.

Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019.

The change in contingent consideration during the six months ended June 30, 2020 was the result of updates to our assumptions as a result of the completion of a successful Phase 1 clinical trial for ATI-450, while the change in contingent consideration during the six months ended June 30, 2019 was the result of updates to our assumptions as a result of the filing of an IND for ATI-450.

General and Administrative Expenses

The following table summarizes our general and administrative expenses:

Six Months Ended

(In thousands)

Personnel expenses

Professional and legal fees

Facility and support services

Other general and administrative expenses

Stock-based compensation

Total general and administrative expenses

Personnel and stock-based compensation expenses decreased primarily due to lower headcount.

Other general and administrative expenses included travel, insurance and marketing costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Goodwill Impairment

During the six months ended June 30, 2019, we performed an interim impairment analysis due to a decline in our stock price.

Our impairment analysis noted that our stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value.

As a result, we recorded a goodwill impairment charge of $18.5 million writing off the full balance of goodwill.

Other Income (Expense), net

Other expense, net for the six months ended June 30, 2020 was $11,000 and primarily included interest expense related to our term loan facility with SVB which we borrowed in March 2020, as well as interest on our finance leases, substantially offset by interest income earned on our cash and investments.

Other expense, net for the six months ended June 30, 2019 was $0.3 million and primarily included interest expense incurred on our debt with Oxford Finance LLC,

which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Loss from Discontinued Operations

Liquidity and Capital Resources

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In March 2020, we entered into the Loan and Security Agreement with SVB.

As of March 31, 2020, we had cash, cash equivalents and restricted cash and marketable securities of $79.0 million.

As of June 30, 2020, we had cash, cash equivalents and restricted cash and marketable securities of $68.1 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 term loan facility, lease obligations, and contingent obligations under acquisition and intellectual property licensing agreements, which are summarized below under “Contractual Obligations and Commitments .”

We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, other than our term loan facility, lease obligations, and contingent obligations under acquisition and intellectual property licensing agreements, which are summarized below under “Contractual Obligations and Commitments .”

Loan and Security Agreement with Silicon Valley Bank

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All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.

The Loan and Security Agreement

provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%.

The Loan and Security Agreement provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 2% and (ii) 6.75%.

The Loan and Security Agreement includes a final payment fee equal to 5% of the original principal amount borrowed.

We have the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for any prepayment on or prior to the first anniversary of March 30, 2020, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.

The Loan and Security Agreement contains a customary covenant that limits our ability, subject to specified exceptions, to incur additional indebtedness without the prior consent of SVB.

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

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

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Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

During the three months ended March 31, 2020, operating activities used $6.8 million of cash primarily resulting from our net loss of $15.6 million, partially offset by non-cash adjustments of $5.6 million.

Net cash provided by changes in our operating assets and liabilities during the three months ended March 31, 2020 consisted of a $4.7 million decrease in accounts receivable and a $0.3 million decrease in prepaid expenses and other assets, which were partially offset by a $2.1 million net decrease in accounts payable and accrued expenses.

During the six months ended June 30, 2020, operating activities used $17.6 million of cash primarily resulting from our net loss of $27.2 million, partially offset by non-cash adjustments of $9.7 million.

Net cash used by changes in our operating assets and liabilities during the six months ended June 30, 2020 consisted of a $5.9 million net decrease in accounts payable and accrued expenses, which were partially offset by a $4.9 million decrease in accounts receivable and a $0.9 million decrease in prepaid expenses and other assets.

The decrease in accounts receivable was primarily the result of cash received from Allergan Sales, LLC, or Allergan, related to sales of RHOFADE made during the year ended December 31, 2019.

The decrease in prepaid expenses and other assets was primarily due to amortization of the premiums for our corporate insurance policies, which we expense equally over the policy term.

The net decrease in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of December 31, 2019, which were partially offset by cash received from Allergan of $5.2 million which related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health.

Accordingly, the $5.2 million is payable to EPI Health, and is included in accrued expenses on our condensed consolidated balance sheet as of March 31, 2020.

Expenses incurred, as of December 31, 2019, and paid during the three months ended March 31, 2020, primarily included employee annual merit bonuses, as well as expenses related to preclinical development and Phase 1 clinical trial activities for ATI-450, and preclinical development activities for ATI-1777 and ATI-2138.

The net decrease in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of December 31, 2019, which were partially offset by cash received from Allergan which related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health.

Accordingly, we had $4.9 million payable to EPI Health as of June 30, 2020, which is included in accrued expenses on our condensed consolidated balance sheet.

Expenses incurred, as of December 31, 2019, and paid during the six months ended June 30, 2020, primarily included employee annual merit bonuses, as well as expenses related to preclinical development and Phase 1 clinical trial activities for ATI-450, and preclinical development activities for ATI-1777 and ATI-2138.

Non-cash expenses of $9.7 million were composed of stock-based compensation expense of $6.8 million, a charge of $1.7 million related to the change in contingent consideration and depreciation and amortization expense of $1.2 million.

During the three months ended March 31, 2019, operating activities used $31.3 million of cash primarily resulting from our net loss of $37.6 million, partially offset by non-cash adjustments of $7.1 million.

Net cash provided by changes in our operating assets and liabilities during the three months ended March 31, 2019 consisted of an $8.3 million increase in accounts payable and accrued expenses and a $1.9 million decrease in prepaid expenses and other assets, which were offset by an $11.0 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 March 31, 2019, as well as the timing of vendor invoicing and payments.

Expenses incurred, but not yet paid, as of March 31, 2019 primarily included sales and marketing expenses related to the re-launch of RHOFADE, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical

Solution, our Phase 2 clinical trials for ATI-501 and ATI-502 and pre-clinical development activities for ATI-450.

The decrease in prepaid expenses and other assets was due to research and development activities primarily related to pre-clinical development activities for ATI-450 which concluded during the three months ended March 31, 2019 and sales and marketing expenses related to our national sales meeting which was held during the three months ended March 31, 2019.

During the six months ended June 30, 2019, operating activities used $52.7 million of cash primarily resulting from our net loss of $87.4 million, partially offset by non-cash adjustments of $33.4 million.

Net cash provided by changes in our operating assets and liabilities during the six months ended June 30, 2019 consisted of a $13.3 million increase in accounts payable and accrued expenses and a $2.9 million decrease in prepaid expenses and other assets, which were partially offset by a $14.5 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 June 30, 2019, as well as the timing of vendor invoicing and payments.

Expenses incurred, but not yet paid, as of June 30, 2019 primarily included sales discounts and allowances related to sales of RHOFADE, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical Solution, our Phase 2 clinical trials for ATI-501 and ATI-502 and preclinical development activities for ATI-450.

The decrease in prepaid expenses and other assets was due to research and development activities primarily related to preclinical development activities for ATI-450 and ATI-502 which concluded during the six months ended June 30, 2019 and sales and marketing expenses related to our national sales meeting which was held during the six months ended June 30, 2019.

The increase in accounts receivable was primarily the result of sales of RHOFADE.

Non-cash expenses of $7.1 million were composed of $4.9 million of stock-based compensation expense and $2.2 million of depreciation and amortization expense.

Non-cash expenses of $33.4 million were composed of a goodwill impairment charge of $18.5 million, stock-based compensation expense of $9.7 million, a charge of $0.7 million related to the change in contingent consideration and depreciation and amortization expense of $4.5 million.

Investing Activities

During the three months ended March 31, 2020, investing activities provided $13.9 million of cash, consisting of proceeds from sales and maturities of marketable securities of $22.9 million, partially offset by purchases of marketable securities of $8.9 million, and purchases of equipment of $0.1 million.

During the three months ended March 31, 2019, investing activities provided $8.6 million of cash, consisting of proceeds from sales and maturities of marketable securities of $82.0 million, partially offset by purchases of marketable securities of $73.1 million, and purchases of equipment of $0.3 million.

During the six months ended June 30, 2020, investing activities provided $3.5 million of cash, consisting of proceeds from sales and maturities of marketable securities of $30.7 million, partially offset by purchases of marketable securities of $27.1 million, and purchases of equipment of $0.1 million.

During the six months ended June 30, 2019, investing activities provided $27.6 million of cash, consisting of proceeds from sales and maturities of marketable securities of $117.5 million, partially offset by purchases of marketable securities of $89.4 million, and purchases of equipment of $0.5 million.

Financing Activities

During the three months ended March 31, 2020, financing activities provided $10.9 million of cash and primarily included $10.9 million of net borrowings pursuant to the Loan and Security Agreement with SVB.

During the three months ended March 31, 2019, financing activities used $0.1 million of cash related to finance lease payments.

During the six months ended June 30, 2020, financing activities provided $10.8 million of cash and consisted of $10.9 million of net borrowings pursuant to the Loan and Security Agreement with SVB offset by $0.1 million of finance lease payments.

During the six months ended June 30, 2019, financing activities used $0.2 million of cash primarily related to finance lease payments.

Funding Requirements

We anticipate we will incur net losses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis and other immuno-inflammatory diseases, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We anticipate we will incur net losses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis, other immuno-inflammatory diseases and COVID-19 and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We may not be able to generate revenue from these programs if, among other things, our clinical trials are not successful, the FDA does not approve our drug candidates currently in clinical trials when we expect, or at all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.

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Our future funding requirements will be heavily determined by the resources needed to support 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.

As a publicly traded company, we incur and will continue to incur significant legal, accounting and other expenses.

In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the Nasdaq Stock Market LLC, requires public companies to implement specified corporate governance practices.

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 condensed consolidated financial statements that appear in Item 1 of this Quarterly Report on Form 10-Q based on our current operating assumptions.

We expect that we will require additional capital to complete the clinical development of ATI-450, to develop our preclinical compounds, and to support our discovery efforts.

Additional funds may not be available

on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy.

We will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop our preclinical compounds, and to support our discovery efforts.

Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy.

Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

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We may raise additional capital through the sale of equity or 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.

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

Because of the numerous risks and uncertainties associated with research and development of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements.

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Louis, Missouri under two capital lease financing arrangements which have terms through October 2020 and December 2020.

In March 2020, we borrowed $11.0 million under the Loan and Security Agreement with SVB.

Amounts borrowed under the Loan and Security Agreement are subject to interest only through March 2022, after which we will be required to make principal and interest payments through the maturity date of March 2024.

Under the assignment agreement with the Estate of Mickey Miller pursuant to which we acquired intellectual property, we have agreed to pay royalties on sales of ESKATA and related products at rates ranging in low single-digit percentages of net sales, as defined in the agreement.

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Further, we have agreed to pay up to an additional $10.5 million to Rigel upon the achievement of a second set of development milestones.

In addition, in connection with the amendment of the agreement in October 2019, we agreed to pay Rigel an amendment fee of $1.5 million in three installments of $500,000 in January 2020, April 2020 and July 2020.

In addition, in connection with the amendment of the agreement in October 2019, we paid Rigel an amendment fee of $1.5 million in three installments of $500,000 in each of January 2020, April 2020 and July 2020.

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 developed using the licensed JAK inhibitors at a high single digit percentage of annual net sales, subject to specified reductions.

Under a stock purchase agreement with the selling stockholders of one of our former subsidiaries, 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 acquired 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 acquired 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 agreement.

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 agreement.

With respect to any covered products that we commercialize under the agreement, 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.

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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 agreement, we will be obligated to pay Columbia a portion of any consideration we receive from such sublicenses in specified circumstances.

Under a merger agreement with Confluence, 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 agreement, we will be obligated to pay a portion of any consideration we receive from such sublicenses in specified circumstances.

If we sell, license or transfer any of the intellectual property acquired pursuant to the agreement, we will be obligated to pay a portion of any consideration we receive from such sale, license or transfer in specified circumstances.

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.

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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.

We will cease to be an emerging growth company as of December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis