Item 2. Management’s Discussion and Analysis
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. 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. 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 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.
Overview
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. Food and Drug Administration, or FDA, that we are not currently distributing, marketing or selling. In September 2019, we announced the completion of a strategic review of our business, as a result of which we refocused our resources on our immuno-inflammatory development programs. We are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product.
ATI-450, an Investigational Oral MK2 Inhibitor
We submitted an Investigational New Drug Application, or IND, in April 2019 for ATI-450, an investigational oral, novel, small molecule selective mitogen-activated protein kinase-activated protein kinase 2, or MK2, inhibitor compound, for the treatment of rheumatoid arthritis, which was allowed by the FDA in May 2019. MK2 is a key regulator of pro-inflammatory mediators including TNFα, IL1β, IL6, IL8 and other essential pathogenic signals in chronic immuno-inflammatory diseases, as well as in cancer. As an oral drug candidate, we are developing ATI-450 as a potential alternative to injectable anti-TNF/IL1/IL6 biologics for treating certain immuno-inflammatory diseases.
We initiated a Phase 1 single and multiple ascending dose clinical trial in 77 healthy subjects in August 2019. Final data from this trial demonstrated that ATI-450 resulted in marked inhibition of TNFα, IL1β, IL8 and IL6. We also observed that ATI-450 had dose-proportional pharmacokinetics with a terminal half-life of 9-12 hours in the multiple ascending dose cohort, and had no meaningful food effect or drug-drug interaction with methotrexate. ATI-450 was generally well-tolerated at all doses tested in the trial. 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.
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. Our planned enrollment for this trial is up to 25 subjects. Due to the COVID-19 pandemic, we temporarily paused enrollment. We resumed enrolling subjects, and the first subject was dosed, in May 2020. Given the
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continuing evolution of the COVID-19 pandemic, we modified our anticipated timing for reporting data from this trial to the first half of 2021.
In November 2020, we initiated a Phase 2a open-label, single-arm clinical trial to investigate the safety, tolerability, efficacy and pharmacodynamics of ATI-450 for the maintenance of remission in subjects with cryopyrin-associated periodic syndrome, or CAPS, previously managed with anti-IL1 therapy. Our planned enrollment for this trial is up to 10 subjects. In November 2020, we filed for orphan drug designation for this indication.
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 approximately 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.
ATI-1777, an Investigational Topical “Soft” JAK 1/3 Inhibitor
In June 2020, we submitted an IND for ATI-1777, an investigational topical “soft” Janus kinase, or JAK, 1/3 inhibitor compound, for the treatment of 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.
In October 2020, we initiated a Phase 2a multicenter, randomized, double-blind, vehicle-controlled, parallel-group clinical trial to investigate the efficacy, safety, tolerability and pharmacokinetics of ATI-1777 in subjects with moderate or severe atopic dermatitis. Our planned enrollment for this trial is approximately 42 subjects. The first subject was dosed in October 2020.
ATI-2138, an Investigational ITJ Inhibitor
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 2021.
Other Drug Candidates and Non-Marketed FDA-Approved Product
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.
Financial Overview
Since our inception, we have incurred significant operating losses. Our net loss was $37.8 million for the nine months ended September 30, 2020 and $161.4 million for the year ended December 31, 2019. As of September 30, 2020, we had an accumulated deficit of $491.4 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. In addition, our drug candidates, even if they are approved by regulatory agencies for marketing, may not achieve commercial success. We may also not be successful in pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates or ESKATA. Furthermore, we have incurred and expect to continue to incur significant costs associated with
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operating as a public company, including legal, accounting, investor relations and other expenses. As a result, we will need substantial additional funding to support our continuing operations.
We have historically financed our operations primarily with sales of equity securities and incurring indebtedness in the form of loans from commercial lenders. In the near term, we expect to finance our operations through these and other capital sources, including potential partnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development of one or more of our drug candidates.
Impact of COVID-19 on Our Business
The global outbreak of COVID-19 continues to rapidly evolve. We have implemented a virtual operations strategy, including teleworking 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. Given the continuing evolution of the COVID-19 pandemic, we modified our anticipated timing for reporting data from this trial to 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 development programs and our clinical trials, including our trials of ATI-450 as a potential treatment for rheumatoid arthritis and CAPS and our trial of ATI-1777 as a potential treatment for moderate to severe atopic dermatitis. 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.
Components of Our Results of Operations
Revenue
Contract Research
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.
Cost of Revenue
Cost of revenue consists of the costs incurred in connection with the provision of contract research services to our clients through Confluence. Cost of revenue primarily includes:
● employee-related expenses, which include salaries, benefits and stock-based compensation;
● outsourced professional scientific services;
● depreciation of laboratory equipment;
● facility-related costs; and
● laboratory materials and supplies used to support the services provided.
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Research and Development Expenses
Research and development expenses consist of expenses incurred in connection with the discovery and development of our drug candidates. These expenses primarily include:
● expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our clinical trials and preclinical studies, and investigator-initiated trials;
● manufacturing scale-up expenses and the cost of acquiring and manufacturing active pharmaceutical ingredients and preclinical and clinical trial materials;
● outsourced professional scientific development services;
● medical affairs expenses related to our drug candidates;
● employee-related expenses, which include salaries, benefits and stock-based compensation;
● depreciation of manufacturing equipment;
● payments made under agreements with third parties under which we have acquired or licensed intellectual property;
● expenses relating to regulatory activities, including filing fees paid to regulatory agencies;
● laboratory materials and supplies used to support our research activities; and
● non-cash charges related to the revaluation of contingent consideration.
Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect 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, CAPS 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. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, investigator sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials, and are tracked on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses, to specific research and development programs.
The successful development of our drug candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:
● the number of clinical sites included in the trials;
● the length of time required to enroll suitable subjects;
● the number of subjects that ultimately participate in the trials;
● the number of doses subjects receive;
● the impact on the recruitment, enrollment, conduct and timing of our clinical trials due to the COVID-19 pandemic;
● the duration of subject follow-up; and
● the results of our clinical trials.
Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our 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 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. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate,
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or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance and legal functions, including stock-based compensation and travel expenses. General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, investor relations costs 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 Expense, Net
Other 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
This 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 generally accepted accounting principles in the United States. 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. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and judgments on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Except as described below, we believe there have been no material changes to our significant accounting policies and use of estimates as disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the SEC on February 25, 2020.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
To determine revenue recognition in accordance with ASC Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied. We recognize revenue when collection of the consideration we are entitled to under a contract with a customer is probable. At contract inception, we assess the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct. We recognize revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied.
Contract Research
Revenue related to laboratory services is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts. Under ASC Topic 606, we elected to apply the “right to invoice” practical
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expedient when recognizing contract research revenue and as such, recognize revenue in the amount which we have the right to invoice. ASC Topic 606 also provides an optional exemption, which we have elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.
Intangible Assets
Our intangible assets include both definite-lived and indefinite-lived assets. Our definite-lived intangible assets consist of a drug discovery technology platform acquired through the acquisition of Confluence. Definite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Our indefinite-lived intangible assets consist of an in-process research and development, or IPR&D, drug candidate also acquired through the acquisition of Confluence. IPR&D assets are considered indefinite-lived until the completion or abandonment of the associated research and development efforts. The cost of IPR&D assets is either amortized over their estimated useful life beginning when the underlying drug candidate is approved and launched commercially or expensed immediately if development of the drug candidate is abandoned.
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. We recognize impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.
Leases
Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets. We evaluate leases at their inception to determine if they are an operating lease or a finance lease. A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term. Leases that do not meet the finance lease criteria are accounted for as an operating lease.
We recognize assets and liabilities for leases at their inception based upon the present value of all payments due under the lease. We use an implicit interest rate to determine the present value of finance leases, and our incremental borrowing rate to determine the present value of operating leases. We determine incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease. We recognize expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method. We include estimates for any residual value guarantee obligations under our leases in lease liabilities recorded on our condensed consolidated balance sheet.
Right-of-use assets are included in other assets and property and equipment, net on our condensed consolidated balance sheet for operating and finance leases, respectively. Obligations for lease payments are included in current portion of lease liabilities and other liabilities on our condensed consolidated balance sheet for both operating and finance leases.
Contingent Consideration
We initially recorded a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, at its estimated fair value on the date of acquisition. The ultimate amount of
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future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones. We estimate the fair value of the contingent consideration liability related to the achievement of regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. Significant assumptions used in our estimates include the probability of success of both achieving regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development and ranged between 4% and 15%. We evaluate fair value estimates of contingent consideration liabilities on a periodic basis. Any change in fair value reflects new information about the likelihood of the payment of the contingent consideration and the passage of time. For example, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug candidate, differ from our assumptions, then the fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent consideration, if any, will be recorded as income or expense in our condensed consolidated statement of operations.
Recently Issued Accounting Pronouncements
In November 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification, or ASC, 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements. We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.
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Results of Operations
Comparison of Three Months Ended September 30, 2020 and 2019
Three Months Ended September 30,
(In thousands)
2020
2019
Change
Revenues:
Contract research
$
1,331
$
983
$
348
Other revenue
118
—
118
Total revenue
1,449
983
466
Costs and expenses:
Cost of revenue
1,189
826
363
Research and development
6,866
16,183
(9,317)
General and administrative
3,859
6,838
(2,979)
Total costs and expenses
11,914
23,847
(11,933)
Loss from operations
(10,465)
(22,864)
12,399
Other expense, net
(194)
(274)
80
Loss from continuing operations
(10,659)
(23,138)
12,479
Loss from discontinued operations
—
(32,181)
32,181
Net loss
$
(10,659)
$
(55,319)
$
44,660
Revenue
Contract research revenue was $1.3 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence. Other revenue for the three months ended September 30, 2020 consisted of $0.1 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 $1.2 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.
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Research and Development Expenses
The following table summarizes our research and development expenses:
Three Months Ended
September 30,
(In thousands)
2020
2019
Change
ATI-450
$
2,216
$
2,199
$
17
ATI-1777
694
362
332
ATI-2138
599
330
269
Other JAK inhibitors
—
1,881
(1,881)
A-101 45% Topical Solution
27
2,353
(2,326)
Other research and development expenses
826
1,009
(183)
Personnel expenses
1,441
2,631
(1,190)
Stock-based compensation
437
1,418
(981)
Development milestone
—
4,000
(4,000)
Change in contingent consideration
626
—
626
Total research and development expenses
$
6,866
$
16,183
$
(9,317)
Research and development expenses for ATI-450 during the three months ended September 30, 2019 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January 2020. ATI-450 expenses during the three months ended September 30, 2020 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with rheumatoid arthritis. Expenses for ATI-1777 were higher during the three months ended September 30, 2020 due to initial activities related to a Phase 2a clinical trial which began enrollment in October 2020. Expenses for ATI-2138 were higher during the three months ended September 30, 2020 primarily due to preclinical development activities to support an IND submission. Expenses related to 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. Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019. In September 2019, we made a milestone payment of $4.0 million to Rigel Pharmaceuticals, Inc., or Rigel, upon the achievement of a development milestone. The change in contingent consideration during the three months ended September 30, 2020 was the result of updates to our assumptions as a result of the submission and allowance of an IND for ATI-1777.
General and Administrative Expenses
The following table summarizes our general and administrative expenses:
Three Months Ended
September 30,
(In thousands)
2020
2019
Change
Personnel expenses
$
861
$
2,397
$
(1,536)
Professional and legal fees
907
565
342
Facility and support services
362
735
(373)
Other general and administrative expenses
441
560
(119)
Stock-based compensation
1,288
2,581
(1,293)
Total general and administrative expenses
$
3,859
$
6,838
$
(2,979)
Personnel and stock-based compensation expenses decreased primarily due to lower headcount primarily as a result of the restructuring we announced in September 2019. 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 higher primarily as a result of higher legal and accounting 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
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travel and insurance costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.
Other Expense, net
Other expense, net for the three months ended September 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 September 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
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. 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 additional information).
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Comparison of Nine Months Ended September 30, 2020 and 2019
Nine Months Ended September 30,
(In thousands)
2020
2019
Change
Revenues:
Contract research
$
4,373
$
3,132
$
1,241
Other revenue
529
—
529
Total revenue
4,902
3,132
1,770
Costs and expenses:
Cost of revenue
3,847
3,028
819
Research and development
22,775
53,334
(30,559)
General and administrative
15,632
21,771
(6,139)
Goodwill impairment
—
18,504
(18,504)
Total costs and expenses
42,254
96,637
(54,383)
Loss from operations
(37,352)
(93,505)
56,153
Other expense, net
(205)
(589)
384
Loss from continuing operations
(37,557)
(94,094)
56,537
Loss from discontinued operations
(285)
(48,666)
48,381
Net loss
$
(37,842)
$
(142,760)
$
104,918
Revenue
Contract research revenue was $4.4 million and $3.1 million for the nine months ended September 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence. Other revenue during the nine months ended September 30, 2020 consisted of $0.5 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 $3.8 million and $3.0 million for the nine months ended September 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:
Nine Months Ended
September 30,
(In thousands)
2020
2019
Change
ATI-450
$
4,950
$
5,617
$
(667)
ATI-1777
2,553
2,733
(180)
ATI-2138
1,753
456
1,297
Other JAK inhibitors
629
10,573
(9,944)
A-101 45% Topical Solution
559
12,216
(11,657)
Other research and development expenses
2,555
4,382
(1,827)
Personnel expenses
5,191
7,890
(2,699)
Stock-based compensation
2,192
4,733
(2,541)
Development milestone
—
4,000
(4,000)
Change in contingent consideration
2,393
734
1,659
Total research and development expenses
$
22,775
$
53,334
$
(30,559)
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Research and development expenses for ATI-450 during the nine months ended September 30, 2019 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January 2020. ATI-450 expenses during the nine months ended September 30, 2020 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with rheumatoid arthritis. ATI-450 expenses decreased during the nine months ended September 30, 2020 due to lower preclinical development activities, partially offset by an increase in costs associated with various ongoing clinical trials. Expenses for ATI-1777 were lower during the nine months ended September 30, 2020 primarily due to the completion of preclinical development activities, partially offset by costs associated with initial activities related to a Phase 2a clinical trial which began enrollment in October 2020. Expenses for ATI-2138 were higher during the nine months ended September 30, 2020 primarily due to preclinical development activities to support an IND submission. Expenses related to 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 nine months ended September 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. In September 2019, we made a milestone payment of $4.0 million to Rigel upon the achievement of a development milestone. The change in contingent consideration during the nine months ended September 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 and the submission of an IND for ATI-1777, while the change in contingent consideration during the nine months ended September 30, 2019 was the result of updates to our assumptions as a result of the submission and allowance of an IND for ATI-450.
General and Administrative Expenses
The following table summarizes our general and administrative expenses:
Nine Months Ended
September 30,
(In thousands)
2020
2019
Change
Personnel expenses
$
4,130
$
6,987
$
(2,857)
Professional and legal fees
2,857
2,982
(125)
Facility and support services
1,294
2,091
(797)
Other general and administrative expenses
1,568
2,004
(436)
Stock-based compensation
5,783
7,707
(1,924)
Total general and administrative expenses
$
15,632
$
21,771
$
(6,139)
Personnel and stock-based compensation expenses decreased primarily due to lower headcount primarily as a result of the restructuring we announced in September 2019. 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 and insurance costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.
Goodwill Impairment
During the nine months ended September 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.
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Other Expense, net
Other expense, net for the nine months ended September 30, 2020 was $0.2 million 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, partially offset by interest income earned on our cash and investments. Other expense, net for the nine months ended September 30, 2019 was $0.6 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 decision 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 additional information).
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our acquisition of Confluence in August 2017, we did not generate any revenue. We have financed our operations over the last several years primarily through sales of our equity securities in public offerings and a private placement transaction. In March 2020, we entered into the Loan and Security Agreement with SVB. In August 2020, we entered into an equity purchase agreement with Lincoln Park Capital Fund, LLC, or Lincoln Park .
As of September 30, 2020, we had cash, cash equivalents, restricted cash and marketable securities of $55.2 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.
We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, other than our 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
In March 2020 we entered into a Loan and Security Agreement with SVB. The Loan and Security Agreement provides for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020. The Loan and Security Agreement is secured by substantially all of our assets other than intellectual property.
The term loan repayment schedule provides for interest only payments beginning April 1, 2020 and continuing through March 1, 2022, followed by 24 consecutive equal monthly installments of principal, plus monthly payments of accrued interest, starting on April 1, 2022 and continuing through the maturity date of March 1, 2024. 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 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
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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 written consent of SVB.
Equity Purchase Agreement with Lincoln Park Capital Fund, LLC
In August 2020, we entered into a purchase agreement, or the Purchase Agreement, with Lincoln Park which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park, at our discretion, up to $15.0 million of shares of our common stock over the 36-month term of the Purchase Agreement. U pon execution of the Purchase Agreement, we issued 121,584 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement. The commitment shares were valued using the closing price of our common stock on the effective date of the Purchase Agreement resulting in an aggregate fair value of $0.3 million. As of September 30, 2020, we had not sold any shares of our common stock to Lincoln Park under the Purchase Agreement.
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Nine Months Ended September 30,
(In thousands)
2020
2019
Net cash used in operating activities
$
(29,776)
$
(76,055)
Net cash provided by investing activities
8,692
49,241
Net cash provided by (used in) financing activities
10,543
(307)
Net decrease in cash, cash equivalents and restricted cash
$
(10,541)
$
(27,121)
Operating Activities
During the nine months ended September 30, 2020, operating activities used $29.8 million of cash primarily resulting from our net loss of $37.8 million, partially offset by non-cash adjustments of $12.9 million. Net cash used by changes in our operating assets and liabilities during the nine months ended September 30, 2020 consisted of a $10.9 million net decrease in accounts payable and accrued expenses, which were partially offset by a $4.8 million decrease in accounts receivable and a $1.3 million decrease in prepaid expenses and other assets. The net decrease in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of December 31, 2019. 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. Expenses incurred as of December 31, 2019 and paid during the nine months ended September 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 $12.9 million were composed of stock-based compensation expense of $8.7 million, a charge of $2.4 million related to the change in contingent consideration and depreciation and amortization expense of $1.8 million.
During the nine months ended September 30, 2019, operating activities used $76.1 million of cash primarily resulting from our net loss of $142.8 million, partially offset by non-cash adjustments of $66.0 million. Net cash provided by changes in our operating assets and liabilities during the nine months ended September 30, 2019 consisted of a $9.9 million increase in accounts payable and accrued expenses and a $3.9 million decrease in prepaid expenses and other assets, which were partially offset by a $13.0 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 September 30, 2019, as well as the timing of vendor invoicing and payments. Expenses incurred, but not yet paid, as of September 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
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and Phase 1 clinical trial 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 nine months ended September 30, 2019, and reduced sales and marketing activities related to our decision to no longer use a sales force to promote RHOFADE in September 2019. In addition, because the annual renewal of our corporate insurance policies occurred in October 2019, the balance of prepaid insurance was minimal as of September 30, 2019. The increase in accounts receivable was primarily the result of sales of RHOFADE during the nine months ended September 2019. Non-cash expenses of $66.0 million were composed of an intangible asset impairment charge of $27.6 million, a goodwill impairment charge of $18.5 million, stock-based compensation expense of $13.0 million, a charge of $0.7 million related to the change in contingent consideration and depreciation and amortization expense of $6.1 million.
Investing Activities
During the nine months ended September 30, 2020, investing activities provided $8.7 million of cash, consisting of proceeds from sales and maturities of marketable securities of $49.0 million, offset by purchases of marketable securities of $39.9 million and purchases of equipment of $0.4 million.
During the nine months ended September 30, 2019, investing activities provided $49.2 million of cash, consisting of proceeds from sales and maturities of marketable securities of $171.9 million, offset by purchases of marketable securities of $121.3 million and purchases of equipment of $1.3 million.
Financing Activities
During the nine months ended September 30, 2020, financing activities provided $10.5 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 and $0.2 million of deferred issuance costs.
During the nine months ended September 30, 2019, financing activities used $0.3 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, CAPS 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 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.
Our primary uses of capital are, and we expect will continue in the near term to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support the development of our drug candidates.
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 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
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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. If we are unable to raise sufficient additional capital or generate revenue from transactions with third-party partners for the development and/or commercialization of our drug candidates, we may need to substantially curtail our planned operations.
We may raise additional capital through the sale of equity or debt securities. In such an event, our stockholders’ ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a holder of our common stock.
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. Our funding requirements in the near term will depend on many factors, including:
● the number and development requirements of the drug candidates that we may pursue;
● the scope, progress, results and costs of preclinical development, laboratory testing and conducting preclinical and clinical trials for our drug candidates;
● the costs, timing and outcome of regulatory review of our drug candidates;
● the extent to which we in-license or acquire additional drug candidates and technologies;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
● the impact on the timing of our preclinical studies, the recruitment, enrollment, conduct and timing of our clinical trials and our business due to the COVID-19 pandemic;
● our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, and earn revenue from such arrangements; and
● the revenue earned from our commercial products as a result of licenses to, or partnerships with, third parties.
Contractual Obligations and Commitments
We occupy space for our headquarters in Wayne, Pennsylvania under a sublease agreement which has a term through October 2023. We occupy office and laboratory space in St. Louis, Missouri under a sublease agreement which has a term through June 2029.
We lease laboratory equipment used in our laboratory space in St. Louis, Missouri under two capital lease financing arrangements which have terms through October 2020 and December 2020.
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. Under the related finder’s services agreement with KPT Consulting, LLC, we have agreed to make a remaining payment of $3.0 million upon the achievement of a specified commercial milestone. In addition, we have agreed to pay royalties on sales of ESKATA and related products at a low single-digit percentage of net sales, as defined in the agreement. In August 2019, we voluntarily discontinued the commercialization of ESKATA in the United States and withdrew the marketing authorizations we had previously received for the product in all countries outside of the United States.
Under a license agreement with Rigel Pharmaceuticals, Inc., or Rigel, we have agreed to make remaining aggregate payments of up to $76.0 million upon the achievement of specified development milestones, such as clinical trials and regulatory approvals. 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
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in October 2019, we paid Rigel an amendment fee of $1.5 million in three installments of $0.5 million 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. 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. 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.
Under a license agreement with The Trustees of Columbia University in the City of New York, or Columbia, we are obligated to pay an annual license fee of $10,000, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under the license agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how, subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired pursuant to the agreement, we will be obligated to pay Columbia a portion of any consideration we receive from such sublicense 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 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 and contract manufacturing organizations for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Emerging Growth Company Status
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies. We will cease to be an emerging growth company as of December 31, 2020.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.