What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-05 · 105 added, 93 removed, 289 unchanged (41% of the section changed)

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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 U.S.

Clinical Programs

Zunsemetinib (ATI-450), an Investigational Oral MK2 Inhibitor

We submitted an Investigational New Drug Application, or IND, in April 2019 for zunsemetinib, 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 U.S.

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.

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) 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.

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

Zunsemetinib has been adopted as the nonproprietary name for ATI-450.

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 zunsemetinib in 77 healthy subjects in August 2019 (ATI-450-PKPD-101).

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

We also observed that zunsemetinib 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.

Zunsemetinib was generally well-tolerated at all doses tested in the trial.

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

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

Final 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 zunsemetinib 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.

The most common adverse events (reported by 2 or more subjects who received zunsemetinib) 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.

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 zunsemetinib 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 zunsemetinib 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 zunsemetinib 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.

Zunsemetinib was generally well tolerated.

All adverse events were mild to moderate.

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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 fourth quarter 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.

Based on the results observed in the Phase 2a trial, we intend to progress zunsemetinib into a Phase 2b trial in moderate to severe rheumatoid arthritis in the fourth quarter of 2021.

Psoriatic Arthritis and Moderate to Severe Hidradenitis Suppurativa

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

ATI-1777, an Investigational Topical “Soft” JAK 1/3 Inhibitor

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ATI-1777 topical solution 2.0% w/w or vehicle applied twice daily.

(p<0.001) (one-sided p-value), which corresponded to a 74.4% reduction in mEASI score from baseline at week 4 in subjects applying ATI-1777 compared to a 41.4% reduction in subjects applying vehicle.

The preliminary topline data was based on the full analysis set, or FAS, which was comprised of 48 subjects randomized and documented to have received at least one dose of trial medication.

In June 2021, we announced that the trial achieved its primary endpoint, which was the percent change from baseline in the modified Eczema Area and Severity Index, or mEASI, score at week 4, with a high degree of statistical significance (p<0.001) (one-sided p-value), which corresponded to a 74.4% reduction in mEASI score from baseline at week 4 in subjects applying ATI-1777 compared to a 41.4% reduction in subjects applying vehicle.

The final data was based on the full analysis set, or FAS, which was comprised of 48 subjects randomized and documented to have received at least one dose of trial medication.

Positive trends in favor of ATI-1777 were observed in key secondary efficacy endpoints, such as improvement in itch, percent of mEASI-50 responders, investigator’s global assessment responder analysis, and reduction in body surface area impacted by disease.

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We plan to submit the final trial results for publication in a peer-reviewed scientific journal.

Based on the results observed in the Phase 2a trial, we intend to progress ATI-1777 into a Phase 2b trial in moderate to severe atopic dermatitis.

Based on the results observed in the Phase 2a trial, we intend to progress ATI-1777 into a Phase 2b trial in moderate to severe atopic dermatitis in the first half of 2022.

In this trial, we plan to explore multiple concentrations of twice daily treatment with ATI-1777 and a single concentration of once daily treatment with ATI-1777.

Preclinical Programs

ATI-2138, an Investigational ITJ Inhibitor

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

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

We submitted an IND for ATI-2138 for the treatment of psoriasis in October 2021.

If allowed, we plan to progress to a first-in-human Phase 1 single ascending dose trial of ATI-2138 in healthy volunteers.

ATI-2231, an Investigational Oral MK2 Inhibitor

We are exploring the use of ATI-2231, an investigational oral MK2 inhibitor compound designed to have a long half-life, as a potential treatment for metastatic breast cancer and pancreatic cancer as well as use in preventing bone loss in this patient population.

We are exploring the use of ATI-2231, an investigational oral MK2 inhibitor compound designed to have a long half-life, as a potential treatment for pancreatic cancer and metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer.

We are currently conducting IND-enabling studies.

Discovery Assets

Discovery Programs

We are developing oral gut-restricted JAK inhibitors with limited systemic exposure as potential treatments for inflammatory bowel disease.

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Since our inception, we have incurred significant operating losses.

Our net loss was $46.9 million for the six months ended June 30, 2021 and $51.0 million for the year ended December 31, 2020.

As of June 30, 2021, we had an accumulated deficit of $551.5 million.

Our net loss was $68.1 million for the nine months ended September 30, 2021 and $51.0 million for the year ended December 31, 2020.

As of September 30, 2021, we had an accumulated deficit of $572.6 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.

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.

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.

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

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.

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 zunsemetinib 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 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.

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(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.

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.

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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.

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

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

We expect to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for 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 expect to continue to incur research and development expenses in the near term as we continue the clinical development of zunsemetinib 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.

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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

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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.

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.

Any such changes could have a material impact on our financial results.

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The discount rate ranged between 5.9% and 7.8% depending on the year of each potential payment.

During the six months ended June 30, 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 and as a result of the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

We also included estimated future sales of ATI-450 as a potential treatment for hidradenitis suppurativa and psoriatic arthritis, which are additional planned indications for ATI-450.

During the nine months ended September 30, 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 zunsemetinib in subjects with moderate to severe rheumatoid arthritis and as a result of the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

We also included estimated future sales of zunsemetinib as a potential treatment for psoriatic arthritis and moderate to severe hidradenitis suppurativa, which are additional planned indications for zunsemetinib.

These updates resulted in a charge of $22.1 million.

Results of Operations

Comparison of Three and Six Months Ended June 30, 2021 and 2020

Three Months Ended June 30,

Six Months Ended June 30,

Comparison of Three and Nine Months Ended September 30, 2021 and 2020

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

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Loss from discontinued operations

Contract research revenue was $1.6 million and $1.9 million for the three months ended June 30, 2021 and 2020, respectively, and was comprised of fees earned from the provision of laboratory services.

The $0.3 million decrease was primarily driven by a reduction in overall hours billed partially offset by higher average billing rates.

Other revenue for each of the three months ended June 30, 2021 and 2020 primarily consisted of $0.2 million of royalties earned on net sales of RHOFADE.

Contract research revenue was $3.1 million and $3.0 million for the six months ended June 30, 2021 and 2020, respectively, and was comprised of fees earned from the provision of laboratory services.

Other revenue for the six months ended June 30, 2021 and 2020 primarily consisted of $0.5 million and $0.4 million of royalties earned on net sales of RHOFADE, respectively.

Contract research revenue was $1.4 million and $1.3 million for the three months ended September 30, 2021 and 2020, respectively, and was comprised of fees earned from the provision of laboratory services.

The $0.1 million increase was driven by a higher average bill rate offset by a reduction in overall hours billed.

Other revenue for the three months ended September 30, 2021 and 2020 primarily consisted of $0.2 million and $0.1 million of royalties earned on net sales of RHOFADE, respectively.

Contract research revenue was $4.6 million and $4.4 million for the nine months ended September 30, 2021 and 2020, respectively, and was comprised of fees earned from the provision of laboratory services.

The $0.2 million increase was driven by a higher average bill rate.

Other revenue for the nine months ended September 30, 2021 and 2020 primarily consisted of $0.6 million and $0.5 million of royalties earned on net sales of RHOFADE, respectively.

Cost of Revenue

Cost of revenue was $1.3 million and $2.5 million for the three and six months ended June 30, 2021, respectively, and $1.4 million and $2.7 million for the three and six months ended June 30, 2020, respectively, and in each case related to providing laboratory services to our customers.

Cost of revenue was $1.1 million and $3.6 million for the three and nine months ended September 30, 2021, respectively, and $1.2 million and $3.8 million for the three and nine months ended September 30, 2020, respectively, and in each case related to providing laboratory services to our customers.

The decrease in cost of revenue in the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 was primarily the result of COVID-19 employee-retention tax credits.

Changes in cost of revenue generally correlate to changes in contract research revenue.

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Nine Months Ended

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Total research and development expenses

The increase in expenses for ATI-450 during the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to additional costs associated with multiple clinical trials, including preparation activities for a Phase 2b trial in subjects with moderate to severe rheumatoid arthritis.

Additional costs associated with drug product manufacturing expenses and other development expenses also contributed to the increase.

The increase in expenses for ATI-450 during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to additional development costs, including drug product manufacturing expenses and toxicology studies.

Costs associated with preparation activities for a Phase 2b trial in subjects with moderate to severe rheumatoid arthritis also contributed to the increase.

The decrease in expenses for ATI-1777 during the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to lower costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis as well as other development costs.

The decrease in expenses for ATI-1777 during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to a decrease in development costs, including toxicology studies, partially offset by an increase in costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis.

Expenses for ATI-2138 were higher during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 primarily due to preclinical development activities and IND-enabling studies.

The increase in expenses for zunsemetinib during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 was primarily due to costs associated with drug product manufacturing and clinical development activities for a Phase 2b trial in subjects with moderate to severe rheumatoid arthritis and a Phase 2 trial in subjects with moderate to severe hidradenitis suppurativa .

The decrease in expenses for ATI-1777 during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to lower costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis, which concluded in the second quarter 2021.

The decrease in expenses for ATI-1777 during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a decrease in development costs, including toxicology studies, partially offset by an increase in costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis, which began in the third quarter of 2020 and concluded in the second quarter of 2021.

Expenses for ATI-2138 were higher during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily due to preclinical development activities and IND-enabling studies as we progressed towards an IND submission.

Expenses for ATI-2231 were higher during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 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 and six months ended June 30, 2021 compared to the three and six months ended June 30, 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 and six months ended June 30, 2021 compared to June 30, 2020 due to a decrease in costs for our legacy dermatology assets following the decision to discontinue investment in those programs.

Expenses related to discovery increased during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 due to continued 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 nine months ended September 30, 2021 compared to September 30, 2020 due to a decrease in costs for our legacy dermatology assets following the decision to discontinue investment in those programs.

Personnel and stock-based compensation

Compensation related expenses increased during the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to an increase in stock-based compensation expense associated with new equity awards granted in 2021.

Compensation related expenses decreased during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to lower headcount and payroll taxes primarily resulting from employee-retention tax credits taken during the six months ended June 30, 2021, partially offset by an increase in stock-based compensation expense associated with new equity awards granted in 2021.

Compensation related expenses increased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to an increase in stock-based compensation expense associated with new equity awards granted in 2021 as well as higher average headcount.

Compensation related expenses increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in stock-based compensation expense associated with new equity awards granted in 2021, partially offset by lower average headcount and lower payroll taxes resulting from COVID-19 employee-retention tax credits taken during the nine months ended September 30, 2021.

General and Administrative Expenses

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Total general and administrative expenses

Compensation related expenses decreased during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 primarily due to lower headcount and restructuring related expenses.

Professional and legal fees, including accounting, investor relations and corporate communication costs, were higher during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 primarily as a result of increased costs associated with Sarbanes-Oxley compliance and costs associated with patents and ongoing litigation.

Facility and support services, including general office expenses, information technology costs and other expenses, decreased during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 primarily due to lower information technology costs resulting from lower headcount.

Other general and administrative expenses increased during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 primarily due to an increase in insurance premiums resulting from additional coverage in 2021 as compared to the prior year.

Personnel and stock-based compensation

Compensation related expenses decreased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to lower average headcount partially offset by an increase in stock-based compensation expense associated with new equity awards granted in 2021.

Professional and legal fees

Professional and legal fees, including accounting, investor relations and corporate communication costs, were higher during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily as a result of increased costs associated with Sarbanes-Oxley compliance and other professional fees for temporary staffing.

Facility and support services and other general and administrative

Facility and support services, including general office expenses, information technology costs and other expenses, increased during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily due to an increase in information technology costs resulting from higher headcount and infrastructure technology improvements.

Other general and administrative expenses increased during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily due to an increase in insurance premiums resulting from additional coverage in 2021 as compared to the prior year.

Revaluation of Contingent Consideration

The increase in revaluation of contingent consideration during the three months ended June 30, 2021 compared to the three months ended June 30, 2020 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-1777 in subjects with moderate to severe atopic dermatitis.

The increase in revaluation of contingent consideration during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 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, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

Additionally, the inclusion of estimated future sales of ATI-450 as a potential treatment for hidradenitis suppurativa and psoriatic arthritis, which are additional planned indications for ATI-450, also contributed to the increase.

The increase in revaluation of contingent consideration during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 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-1777 in subjects with moderate to severe atopic dermatitis.

The increase in revaluation of contingent consideration during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 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 zunsemetinib in subjects with moderate to severe rheumatoid arthritis, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

Additionally, the inclusion of estimated future sales of zunsemetinib as a potential treatment for psoriatic arthritis and moderate to severe hidradenitis suppurativa, which are additional planned indications for zunsemetinib, also contributed to the increase.

Other Expense, net

Other expense, net during the three months ended June 30, 2021 was consistent compared to the three months ended June 30, 2020.

The increase in other expense, net during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to both higher interest expense associated with outstanding debt balances and lower interest income associated with marketable securities.

Other expense, net increased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to interest and fees associated with a payoff of the Silicon Valley Bank Loan and Security Agreement.

Other expense, net increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to interest and fees associated with a payoff of the Silicon Valley Bank Loan and Security Agreement and lower interest income.

Liquidity and Capital Resources

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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 June 30, 2021, we had cash, cash equivalents and marketable securities of $266.2 million.

As of September 30, 2021, we had cash, cash equivalents and marketable securities of $243.6 million.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.

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In July 2021, we repaid in full the $11.0 million that was outstanding under the Loan and Security Agreement, together with all accrued and unpaid interest and fees as of the payoff date, for a total payment of $11.7 million.

The term loan repayment schedule provided 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.

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

We had 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.

Liquidity and Cash Flows

Cash and cash equivalents were $113.4 million as of June 30, 2021 compared to $22.1 million as of December 31, 2020.

We also had $152.7 million in short- and long-term marketable securities as of June 30, 2021 compared to $32.1 million as of December 31, 2020.

Cash and cash equivalents were $53.6 million as of September 30, 2021 compared to $22.1 million as of December 31, 2020.

We also had $190.0 million in short- and long-term marketable securities as of September 30, 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:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Operating activities use of cash was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Net cash used in operating activities

Net cash used in operating activities increased for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily as a result of an increase in cash paid for prepaid expenses and other assets and a reduction of cash collected from outstanding accounts receivable during the six months ended June 30, 2021 compared to the prior year period.

The increase was partially offset by a decrease in cash paid to settle outstanding accounts payable balances during the six months ended June 30, 2021 compared to the prior year period.

The change in prepaid expenses and other assets was the result of higher prepaid research and development balances relative to the prior year period primarily associated with drug product manufacturing agreements and other preclinical development contracts, as well as an insurance recovery receivable associated with litigation settlements.

The change in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of June 30, 2021 compared to June 30, 2020.

The change in accounts receivable was primarily the result of cash received during the six months ended June 30, 2020 from Allergan Sales, LLC related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health.

Net cash used in operating activities increased for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily as a result of higher net losses after adjusting for non-cash items, an increase in cash paid for prepaid expenses, and a reduction of cash collected from outstanding accounts receivable .

The increase was partially offset by a decrease in cash paid to settle outstanding accounts payable balances.

The change in prepaid expenses and other assets was the result of higher prepaid research and development balances relative to the prior year period primarily associated with drug product manufacturing, clinical trials and other preclinical development activities.

The change in accounts payable and accrued expenses was primarily driven by the timing of receipt and payment of invoices around quarter-end relative to the prior-year period.

The change in accounts receivable was primarily the result of cash received during the nine months ended September 30, 2020 from Allergan Sales, LLC related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health.

Investing Activities

Cash flow from investing activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Net cash provided by (used in) investing activities

The change in net cash used in investing activities for the six months ended June 30, 2021 compared to net cash provided by investing activities for the six months ended June 30, 2020 primarily resulted from purchases of marketable securities following our January and June 2021 public offerings.

The change in net cash used in investing activities for the nine months ended September 30, 2021 compared to net cash provided by investing activities for the nine months ended September 30, 2020 primarily resulted from purchases of marketable securities following our January and June 2021 public offerings.

Financing Activities

Financing activities use of cash was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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

Repayment of debt

Restricted stock unit employee tax withholdings

Finance lease payments

Deferred issuance costs

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 six months ended June 30, 2021 compared to June 30, 2020 primarily due to our January 2021 and June 2021 public offerings.

The increase was partially offset by a decrease in proceeds from debt financing and an increase in cash used for tax withholdings in connection with the vesting of restricted stock units.

Cash provided by financing activities increased for the nine months ended September 30, 2021 compared to September 30, 2020 primarily due to our January 2021 and June 2021 public offerings.

The increase was partially offset by a decrease in proceeds from debt financing, an increase in debt repayments, and 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 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 anticipate we will incur net losses in the near term as we continue the clinical development of zunsemetinib 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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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.

We will require additional capital to complete the clinical development of zunsemetinib 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.

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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