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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-04 · 199 added, 289 removed, 149 unchanged (77% of the section changed)

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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.

The words “may,” “might,” “can,” “will,” “to be,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “likely,” “continue,” “ongoing” or similar expressions, or the negative of such words, 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.

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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.

In addition to developing our novel drug candidates, 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 novel drug candidates.

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.

Food and Drug Administration, or 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 oncology.

As an oral drug candidate, we are developing ATI-450 as a potential alternative to injectable anti-TNF/IL1/IL6 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases.

We initiated a Phase 1 single (at 10mg, 30mg, 50mg and 100mg doses) and multiple ascending (at 10mg, 30mg and 50mg doses) dose clinical trial evaluating ATI-450 in 77 healthy subjects in August 2019 (ATI-450-PKPD-101).

Final data from this trial demonstrated that ATI-450 resulted in marked inhibition of TNFα, IL1β, IL8 and IL6.

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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.

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.

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

ATI-450 was also evaluated at 80mg and 120mg doses twice daily in a second Phase 1 clinical trial in healthy subjects (ATI-450-PKPD-102).

Preliminary topline data from this trial showed that no dose-limiting toxicity was observed.

Ex vivo analysis of blood samples from this Phase 1 trial showed that increased cytokine inhibition was achieved with these higher doses of ATI-450 relative to doses tested in the first Phase 1 trial.

No serious adverse events were reported and all adverse events were mild to moderate.

The most common adverse events (reported by 2 or more subjects who received ATI-450) were headache, dizziness, nausea, parasthesia and, in the post-dosing follow-up period of the trial, dry skin.

These adverse events were all mild in severity.

A final analysis of this trial is underway.

Moderate to Severe Rheumatoid Arthritis

Following the completion of the first Phase 1 clinical trial, in March 2020 we initiated a 12-week, Phase 2a, multicenter, randomized, investigator and patient-blind, sponsor-unblinded, parallel group, placebo-controlled clinical trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-450 in subjects with moderate to severe rheumatoid arthritis (ATI-450-RA-201).

In the trial, which consisted of a 12-week treatment period and a 4-week follow-up period, 19 subjects were randomized in a 3:1 ratio and received either ATI-450 at 50 mg twice daily or placebo, in combination with methotrexate, for 12 weeks.

The final per-protocol analysis, which consisted of the 17 subjects who completed the treatment period (15 in the treatment arm and two in the placebo arm), confirmed that ATI-450 demonstrated durable clinical activity, as defined by a marked and sustained reduction in DAS28-CRP and improvement of ACR20/50/70 responses over 12 weeks.

ATI-450 was generally well tolerated.

All adverse events were mild to moderate.

The most common adverse events (each reported in 2 subjects) were urinary tract infection, or UTI, and ventricular extrasystoles, all of which were determined to be unrelated to treatment except for one UTI.

Two subjects withdrew from the trial during the treatment period, one in the treatment arm and one in the placebo arm.

The subject in the treatment arm withdrew due to palpitations, which were unrelated to the trial medication, and an elevated creatine phosphokinase, or CPK, which was determined by the site investigator to be treatment-related.

The subject in the placebo arm withdrew as a result of prohibited medication needed to treat muscle strain.

There was also one non-treatment-related serious adverse event (COVID-19) reported in the 4-week follow-up period of the trial in a subject who was no longer receiving treatment.

The subject withdrew during the 4-week follow-up period of the trial.

A final analysis, which consisted of the 17 subjects, of ex vivo stimulated cytokines from blood samples taken from the treatment arm showed a marked and durable inhibition of TNFα, IL1β, IL6, and IL8 over the 12-week treatment period.

Similarly, analysis of endogenous inflammation biomarkers also demonstrated a marked and sustained inhibition of median concentrations of hsCRP, TNFα, IL6, IL8 and MIP1β in the treatment arm over the 12-week period.

We plan to submit for publication a full analysis of the Phase 2a data in a peer-reviewed scientific journal which will include data from other secondary and exploratory endpoints evaluated in the trial, including the 4-week follow-up data and a full analysis of MRI, pharmacodynamic and pharmacokinetic data.

Based on the results observed in the Phase 2a trial, we intend to progress ATI-450 into a Phase 2b trial in moderate to severe rheumatoid arthritis in the second half of 2021.

Hidradenitis Suppurativa and Psoriatic Arthritis

As part of the planned expansion of our Phase 2 immuno-inflammatory clinical development programs, we also plan to progress ATI-450 into Phase 2 trials in hidradenitis suppurativa and psoriatic arthritis.

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.

In June 2020, we submitted an IND for ATI-1777, an investigational topical “soft” 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.

In October 2020, we initiated a Phase 2a, multicenter, randomized, double-blind, vehicle-controlled, parallel-group clinical trial to determine the efficacy, safety, tolerability and pharmacokinetics of ATI-1777 in 50 subjects with moderate to severe atopic dermatitis (ATI-1777-AD-201).

We completed enrollment in March 2021 and expect data to be available in the second quarter of 2021.

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.

We are also 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.

We expect to file an IND for ATI-2138 in the second half of 2021.

Our Other Drug Candidates

We continue to seek third-party partners for our dermatology investigational drug candidate A-101 45% Topical Solution as a potential treatment for common warts (verruca vulgaris).

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.

Our net loss was $28.8 million for the three months ended March 31, 2021 and $51.0 million for the year ended December 31, 2020.

As of March 31, 2021, we had an accumulated deficit of $533.3 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

operating as a public company, including legal, accounting, investor relations and other expenses.

Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses.

We also expect to add additional personnel to support our expanding and advancing development pipeline.

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

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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.

The impacts of the global COVID-19 pandemic continue to 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 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.

However, COVID-19 has caused disruptions to our business.

For example, due to the COVID-19 pandemic subject enrollment in our Phase 2a trial of ATI-450 in subjects with cryopyrin-associated periodic syndrome was paused as a result of which, among other reasons, we decided to focus our efforts and resources on other immuno-inflammatory diseases.

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 moderate to severe rheumatoid arthritis and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis and the supply of active pharmaceutical ingredients and drug product for our clinical trials.

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 pandemic, 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, including the administration of vaccines.

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

Acquisition and License Agreements

Agreement and Plan of Merger with Confluence

In August 2017, we entered into an Agreement and Plan of Merger, or the Confluence Agreement, with Confluence Life Sciences, Inc.

(now known as Aclaris Life Sciences, Inc.), or Confluence, Aclaris Life Sciences, Inc., our wholly-owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of the equity holders of Confluence.

Pursuant to the terms of the Confluence Agreement, the Merger Sub merged with and into Confluence, with Confluence surviving as our wholly-owned subsidiary.

We paid closing consideration of $10.3 million in cash and issued 349,527 shares of our common stock with a fair value of $9.7 million to the former Confluence equity holders.

In November 2018, a development milestone specified in the Confluence Agreement was achieved, as a result of which we paid the former Confluence equity holders $2.5 million in cash and issued 253,208 shares of our common stock with a fair value of $2.2 million.

Under the Confluence Agreement, we also agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $75.0 million based upon the achievement of specified regulatory and commercial milestones set forth in the Confluence Agreement.

In addition, we have agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product.

In addition to the payments described above, if we sell, license or transfer any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, we will be obligated to pay the former Confluence equity holders a portion of any consideration received from such sale, license or transfer in specified circumstances.

Asset Purchase Agreement with EPI Health

In October 2019, we entered into an asset purchase agreement with EPI Health, LLC, or EPI Health, pursuant to which we sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, which included the assignment of certain licenses for related intellectual property assets, or the Disposition.

Pursuant to the asset purchase agreement, EPI Health paid us an upfront payment of $35.0 million, $1.75 million of which was placed in escrow, and $0.2 million for inventory.

In addition, EPI Health has agreed to pay us (i) potential sales milestone payments of up to $20.0 million in the aggregate upon the achievement of specified levels of net sales of products covered by the agreement, (ii) a specified high single-digit royalty calculated as a percentage of net sales, on a product-by-product and country-by-country basis, until the date that the patent rights related to a particular product, such as RHOFADE, have expired, provided, that with respect to sales of RHOFADE in any territory outside of the United States, such royalty shall be paid on a country-by-country basis until the date that the RHOFADE patent rights in the particular country have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country and (iii) 25% of any upfront, license, milestone, maintenance or fixed payment received by EPI Health in connection with any license or sublicense of the assets transferred in the Disposition in any territory outside of the United States, subject to specified exceptions.

In addition, EPI Health has agreed to assume our obligation to pay specified royalties and milestone payments under certain agreements with third parties.

Components of Our Results of Operations

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.

We earn revenue from the provision of laboratory services.

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.

Other Revenue

Other revenue consists of royalties earned on net sales of RHOFADE pursuant to the asset purchase agreement with EPI Health described above.

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 consists of the costs incurred in connection with the provision of contract research services.

Cost of revenue primarily includes:

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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;

● expenses incurred under agreements with contract research organizations, or CROs, as well as clinical trial 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;

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● laboratory materials and supplies used to support our research activities.

● 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 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 moderate to severe 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 discover 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.

Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, clinical trial 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.

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A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate.

For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate,

or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

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.

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

Revaluation of Contingent Consideration

Revaluation of contingent consideration consists of changes in the fair value of our contingent consideration liability between reporting dates.

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 gains and losses on transactions denominated in foreign currencies.

Critical Accounting Policies and Significant Judgments and Estimates

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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

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 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.

Except as described below, 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, 2020 included in our Annual Report on Form 10-K filed with the SEC on February 25, 2021.

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

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.

We initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the

achievement of the development, regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments.

Significant judgement was involved in determining the appropriateness of these assumptions.

These assumptions are considered Level 3 inputs.

Revaluation of our contingent consideration liability can result from changes to one or more of these assumptions.

We evaluate the fair value estimate of our contingent consideration liability on a quarterly basis with changes, if any, recorded as income or expense in our condensed consolidated statement of operations and which could have a material impact on our financial results.

The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments.

Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data.

Probability of success assumptions ranged between 4% and 40%.

Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value.

The discount rate ranged between 5.9% and 8.1% depending on the year of each potential payment.

During the three months ended March 31, 2021, we updated assumptions for probability of success and estimated future sales levels as a result of the completion of a Phase 2a clinical trial of ATI-450 in subjects with moderate to severe rheumatoid arthritis.

We also included estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for ATI-450.

These updates resulted in a charge of $16.4 million.

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.

Results of Operations

Comparison of Three Months Ended September 30, 2020 and 2019

Three Months Ended September 30,

Comparison of Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31,

(In thousands)

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General and administrative

Revaluation of contingent consideration

Total costs and expenses

Loss from operations

Other expense, net

Other income (expense), net

Loss from continuing operations

Loss from discontinued operations

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.

Contract research revenue was $1.5 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively, and was comprised of fees earned from the provision of laboratory services.

The $0.3 million increase was primarily driven by higher average billing rates.

Other revenue for each of the three months ended March 31, 2021 and 2020 consisted of $0.2 million of royalties earned on net sales of RHOFADE.

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.

Cost of revenue was $1.2 million and $1.3 million for the three months ended March 31, 2021 and 2020, respectively, and related to providing laboratory services to our clients.

Research and Development Expenses

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Three Months Ended

September 30,

(In thousands)

Other JAK inhibitors

A-101 45% Topical Solution

Other research and development expenses

Personnel expenses

Other research and development

Stock-based compensation

Development milestone

Change in contingent consideration

Total research and development expenses

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.

Expenses for ATI-450 during the three months ended March 31, 2021 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with moderate to severe rheumatoid arthritis, drug product manufacturing expenses, and other development expenses.

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

Expenses for ATI-1777 were higher during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis which commenced in late 2020, partially offset by lower preclinical development activities.

Expenses for ATI-2138 were higher during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to preclinical development activities and IND-enabling studies.

Discovery and other research and development

Expenses related to discovery increased during the three months ended March 31, 2021 compared to March 31, 2020 due to increased investment in our discovery-stage programs.

Other research and development expenses, which primarily include expenses for our legacy dermatology assets and medical affairs activities, were lower during the three months ended March 31, 2021 compared to March 31, 2020 due to a decrease in costs for our legacy dermatology assets following the decision to discontinue investment in those programs.

Additionally, travel expenses were lower during the three months ended March 31, 2021 compared to March 31, 2020 due to the COVID-19 pandemic.

Personnel and stock-based compensation

Personnel expenses and stock-based compensation decreased during the three months ended March 31, 2021 compared to March 31, 2020 due to lower headcount.

General and Administrative Expenses

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Three Months Ended

September 30,

(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 primarily as a result of the restructuring we announced in September 2019.

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.

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).

Comparison of Nine Months Ended September 30, 2020 and 2019

Nine Months Ended September 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 expense, net

Loss from continuing operations

Loss from discontinued operations

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)

Other JAK inhibitors

A-101 45% Topical Solution

Other research and development expenses

Personnel expenses

Stock-based compensation

Development milestone

Change in contingent consideration

Total research and development expenses

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)

Personnel expenses

Professional and legal fees

Facility and support services

Other general and administrative expenses

Other general and administrative

Stock-based compensation

Total general and administrative expenses

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

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.

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

Personnel and stock-based compensation expenses decreased during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to lower headcount.

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 during the three months ended March 31, 2021 compared to March 31, 2020 primarily as a result of a non-cash write-off of previously capitalized expenses related to an equity line of credit which was terminated in January 2021.

Facility and support services included general office expenses, information technology costs and other expenses, and decreased during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to lower information technology costs resulting from lower headcount.

Other general and administrative expenses were

lower during the three months ended March 31, 2021 compared to March 31, 2020 primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Revaluation of Contingent Consideration

The increase in revaluation of contingent consideration during the three months ended March 31, 2021 compared to March 31, 2020 primarily resulted from updates to the probability of success and estimated future sales level assumptions as a result of the completion of a Phase 2a clinical trial of ATI-450 in subjects with moderate to severe rheumatoid arthritis and the inclusion of estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for ATI-450.

Other Income (Expense), net

The $0.4 million decrease in other income (expense), net during the three months ended March 31, 2021 compared to March 31, 2020 was primarily due to higher interest expense and fees associated with outstanding debt balances and lower interest income associated with marketable securities.

Liquidity and Capital Resources

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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.

We have financed our operations over the last several years primarily through sales of our equity securities and incurring indebtedness in the form of loans from commercial lenders.

We may engage in additional debt and equity financing transactions in order to raise funds.

In addition, to the extent we are able to consummate transactions with potential third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our liquidity.

As of March 31, 2021, we had cash, cash equivalents and marketable securities of $142.7 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 .”

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 the Confluence Agreement, which is summarized above under “Overview—Acquisition and License Agreements.

Equity Financing

January 2021 Public Offering

In January 2021, we closed a public offering in which we sold 6,306,271 shares of common stock at a price to the public of $17.50 per share, for aggregate gross proceeds of $110.4 million.

We paid underwriting discounts and commissions of $6.6 million, and also incurred expenses of $0.4 million in connection with the offering.

As a result, the net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $103.3 million.

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 Capital Fund, LLC, or Lincoln Park, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we could 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.

Through December 31, 2020, we sold 2,111,170 shares of our common stock to Lincoln Park under the Purchase Agreement for net proceeds of $7.7 million.

We terminated the Purchase Agreement in January 2021 in connection with the public offering of common stock described above.

We did not sell any additional shares during the three months ended March 31, 2021 prior to terminating the Purchase Agreement.

Debt Financing

Loan and Security Agreement with Silicon Valley Bank

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

In March 2020, we entered into a Loan and Security Agreement with Silicon Valley Bank, or 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.

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

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.

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 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.

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

Nine Months Ended September 30,

Liquidity and Cash Flows

Cash and cash equivalents were $35.3 million as of March 31, 2021 compared to $22.1 million as of December 31, 2020.

We also had $107.4 million in short- and long-term marketable securities as of March 31, 2021 compared to $32.1 million as of December 31, 2020.

The sources and uses of cash that contributed to the change in cash and cash equivalents were:

Three Months Ended March 31,

(In thousands)

Cash and cash equivalents beginning balance

Net cash used in operating activities

Net cash provided by investing activities

Net cash provided by (used in) financing activities

Net decrease in cash, cash equivalents and restricted cash

Net cash provided by (used in) investing activities

Net cash provided by financing activities

Cash and cash equivalents ending balance

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

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.

Operating activities use of cash was the result of:

Three Months Ended March 31,

(In thousands)

Non-cash adjustments to reconcile net loss to net cash used in operating activities

Change in accounts payable and accrued expenses

Change in accounts receivable

Change in prepaid expenses and other assets

Net cash used in operating activities

Net cash used in operating activities increased for the three months ended March 31, 2021 compared to March 31, 2020 primarily as a result of larger charges related to revaluation of contingent consideration during the three months ended March 31, 2021.

The revaluation of contingent consideration was due to updates to assumptions including the probability of success and estimated future sales level assumptions as a result of the completion of a Phase 2a clinical trial of ATI-450 in subjects with moderate to severe rheumatoid arthritis and the inclusion of estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for ATI-450.

The increase was partially offset by lower stock-based compensation and depreciation and amortization expenses during the three months ended March 31, 2021 compared to March 31, 2020.

The change in changes in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of March 31, 2021 compared to March 31, 2020.

The change in changes in accounts receivable was primarily the result of cash received during the quarter ended March 31, 2020 from Allergan Sales, LLC related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health.

The change in changes in prepaid expenses and other assets was primarily due to prepaid balances for drug product manufacturing agreements and other preclinical development contracts.

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.

Cash flow from investing activities was the result of:

Three Months Ended March 31,

(In thousands)

Purchases of property and equipment

Purchases of marketable securities

Proceeds from sales and maturities of marketable securities

Net cash provided by (used in) investing activities

Net cash used in investing activities for the three months ended March 31, 2021 resulted from purchases of marketable securities following our January 2021 public offering compared to net cash provided by investing activities for the three months ended March 31, 2020 which resulted from maturities of marketable securities used primarily to fund operations.

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.

Financing activities use of cash was the result of:

Three Months Ended March 31,

(In thousands)

Proceeds from issuance of common stock in connection with public offering, net of issuance costs

Proceeds from debt financing (including warrants), net of issuance costs

Restricted stock unit employee tax withholdings

Finance lease payments

Proceeds from exercise of employee stock options and the issuance of stock

Net cash provided by financing activities

Cash provided by financing activities increased for the three months ended March 31, 2021 compared to March 31, 2020 primarily due to our January 2021 public offering.

The increase was partially offset by an increase in cash used for tax withholdings in connection with the vesting of restricted stock units.

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 anticipate we will incur net losses in the near term as we continue the clinical development of ATI-450 as a potential treatment for moderate to severe 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 discover 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 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.

As a publicly traded company, we incur and will continue to incur significant legal, accounting and other similar 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 that could increase our compliance costs.

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

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.

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.

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.

If we are unable to raise sufficient additional capital or generate revenue from transactions with potential 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.

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We occupy space for our headquarters in Wayne, Pennsylvania under a sublease agreement which has a term through October 2023.

In December 2020, we entered into a sub-sublease agreement under which we sub-subleased 8,115 square feet.

The sub-sublease term runs concurrently with the original sublease agreement.

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

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.

We enter into contracts in the normal course of business with CROs and contract manufacturing organizations for clinical trials, preclinical 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.

Segment Information

We have two reportable segments, therapeutics and contract research.

The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases.

The contract research segment earns revenue from the provision of laboratory services.

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.

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