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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 217 added, 375 removed, 220 unchanged (73% 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, 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 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.

MK2 is a key regulator of pro-inflammatory mediators including TNFα, IL1β, IL6, IL8, IL17 and other essential pathogenic signals in chronic immuno-inflammatory diseases, as well as in oncology.

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 10 mg, 30 mg, 50 mg and 100 mg doses) and multiple ascending (at 10 mg, 30 mg and 50 mg 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 80 mg and 120 mg 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 safety follow-up phase 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, 19 subjects were randomized in a 3:1 ratio (seventeen subjects [15 in the treatment arm and two in the placebo arm] completed treatment) and received either ATI-450 at 50 mg twice daily or placebo, in combination with methotrexate, for 12 weeks.

Preliminary topline data from this trial showed 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), showed 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.

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

Two subjects withdrew from the trial, 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 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 an elevated creatine phosphokinase, or CPK, level, which was determined by the site investigator to be treatment-related;

this subject also had palpitations and ventricular extrasystoles, which were unrelated to the trial medication.

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

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

An interim analysis (11 treatment, two placebo) 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 dosing period.

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 four-week safety 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.

Cryopyrin-associated Periodic Syndrome

In November 2020, we initiated a Phase 2a multicenter, 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 (ATI-450-CAPS-201).

Due to the COVID-19 pandemic, subject enrollment in this trial was paused.

As a result of the ongoing pandemic and given the positive preliminary topline data from the ATI-450-RA-201 trial, we have decided to focus our efforts and resources on other immuno-inflammatory diseases.

In December 2021, we initiated study activities in a Phase 2b randomized, multicenter, double-blind, parallel group, placebo-controlled, dose ranging trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of multiple doses (20 mg and 50 mg twice daily) of zunsemetinib in combination with methotrexate in subjects with moderate to severe rheumatoid arthritis (ATI-450-RA-202).

This trial will consist of a 12-week treatment period and a 30-day follow-up period, and currently seeks to enroll approximately 195 subjects in the United States and in multiple countries in Europe.

The primary endpoint is the proportion of subjects achieving ACR20 at week 12.

We anticipate increasing the size of the patient population to approximately 240 subjects and expect topline data in 2023.

Moderate to Severe Hidradenitis Suppurativa

In December 2021, we initiated study activities in a Phase 2a, randomized, multicenter, double-blind, placebo-controlled trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of zunsemetinib (50 mg twice daily) in subjects with moderate to severe hidradenitis suppurativa (ATI-450-HS-201).

This trial will consist of a 12-week treatment period and a 30-day follow-up period, and will seek to enroll approximately 70 subjects in the United States.

The primary endpoint is the change in inflammatory nodule and abscess count at week 12.

We expect topline data in the first half of 2023.

Moderate to Severe Psoriatic Arthritis

We plan to progress zunsemetinib (50 mg twice daily) into a Phase 2a trial in subjects with moderate to severe psoriatic arthritis in the first half of 2022, with topline data expected in the first half of 2023 (ATI-450-PsA-201).

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

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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 subjects with moderate to severe atopic dermatitis (ATI-1777-AD-201).

We expect data to be available mid-year 2021.

ATI-2138, an Investigational ITJ Inhibitor

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.

In the trial, which consisted of a 4-week treatment period and a 2-week follow-up period during which no treatment was given, 50 subjects with moderate to severe atopic dermatitis were randomized in a 1:1 ratio into one of two arms:

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

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.

In addition, the FAS analysis also showed positive trends in favor of ATI-1777 in percent of mEASI-75 responders (65.2% for ATI-1777 compared to 24.0% for vehicle) and mEASI-90 responders (30.4% for ATI-1777 compared to 20.0% for vehicle).

These secondary efficacy endpoints were not powered for statistical significance.

Based on an analysis of pharmacokinetic plasma samples in the ATI-1777 arm at multiple timepoints, minimal systemic exposure was observed which supports a “soft” topical JAK inhibitor approach.

ATI-1777 was generally well tolerated.

No serious adverse events were reported.

The most common adverse events (reported in at least 2 subjects in the trial) were increased blood CPK levels and headache in subjects in the ATI-1777 arm and urinary tract infection (one in each of the ATI-1777 and the vehicle arm);

none of these adverse events in the ATI-1777 arm were determined by the clinical trial investigators to be related to ATI-1777.

One treatment-related adverse event, application site pruritus, was reported in one subject in the ATI-1777 arm.

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, in patients 12 years and older.

We expect topline data in the first half of 2023.

ATI-2138, an Investigational Oral ITJ Inhibitor

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

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

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

We submitted an IND for ATI-2138 for the treatment of psoriasis in October 2021, which was allowed by the FDA in November 2021.

In December 2021, we initiated a Phase 1 randomized, observer-blind, placebo-controlled, single ascending dose trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-2138 in healthy subjects (ATI-2138-PKPD-101).

We expect topline data in 2022.

If the Phase 1 SAD trial is successful, we currently plan to initiate a two-week Phase 1 multiple ascending dose trial of ATI-2138 in subjects with psoriasis in 2022, with topline data expected in the first half of 2023.

We are also currently exploring alternative indications to the planned indication that are relevant to the mechanism of action which may impact the trial design and require the submission of additional INDs to different reviewing divisions of the FDA.

Preclinical Programs

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 pancreatic cancer and metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer.

IND-enabling studies are currently underway.

We expect to submit an IND for ATI-2231 by the end of 2022.

If allowed, we expect to progress ATI-2231 into the clinic in 2023.

We are currently evaluating the clinical development program for this asset, which may include a collaboration with a third party.

Discovery Programs

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

In addition, we are engaged in research to identify brain penetrant kinase inhibitor candidates as potential treatments for neurodegenerative diseases.

Financial Overview

Since our inception, we have incurred significant operating losses.

Since our inception, we have incurred significant net losses.

Our net loss was $90.9 million for the year ended December 31, 2021 and $51.0 million for the year ended December 31, 2020.

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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

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.

We also expect to add additional personnel to support our operational plans and strategic direction.

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

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

Recent Developments

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 $0.3 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 $103.5 million.

Impact of COVID-19 on Our Business

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 have implemented a virtual operations strategy, including teleworking, staggered work schedules for lab personnel 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.

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

For example, due to the COVID-19 pandemic subject enrollment in our ATI-450-CAPS-201 trial was paused as a result of which, among other reasons, we have 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.

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, including the administration of vaccines.

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 other immuno-inflammatory diseases 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 introduction of new variants, the duration of the pandemic, travel restrictions, quarantines, stay-at-home orders, social distancing requirements, business closures, staffing shortages, 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.

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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.

Under the Confluence Agreement, we 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.

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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.

Pursuant to the asset purchase agreement, EPI Health paid us closing consideration of $35.2 million.

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.

Asset Purchase Agreement with Allergan

In November 2018, we acquired RHOFADE, which included an exclusive license to certain intellectual property for RHOFADE, as well as additional intellectual property, from Allergan Sales, LLC, or Allergan, pursuant to an asset purchase agreement.

At the closing of the acquisition, we paid total cash consideration of $66.1 million.

Components of Our Results of Operations

Product Sales, net

We sold RHOFADE in the United States during the years ended December 31, 2019 and 2018.

We relied on Allergan to distribute RHOFADE on our behalf pursuant to the terms of a transition services agreement.

We sold RHOFADE to wholesalers in the United States, which, in turn, distributed it to pharmacies that ultimately filled patient prescriptions.

We also entered into, or were subject to, arrangements with third-party payors, including pharmacy benefit managers and government agencies, as well as group purchasing organizations, or GPOs, which provided for government mandated or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of RHOFADE.

We never sold RHOFADE outside of the United States.

We sold the worldwide rights to RHOFADE to EPI Health in October 2019.

During the years ended December 31, 2019 and 2018, we sold ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product, to one wholesaler, McKesson Specialty Care Distribution, or McKesson, which in turn resold ESKATA to health care providers.

We also entered into agreements with two GPOs that provided for administrative fees and discounted pricing in the form of volume-based rebates and chargebacks.

We never sold ESKATA outside of the United States.

We discontinued sales of ESKATA in the United States in August 2019.

Product sales, net is presented in discontinued operations for all periods presented.

Contract Research

We earn revenue from the provision of laboratory services to clients through 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.

We have also received revenue from grants under the Small Business Innovation Research program of the National Institutes of Health, or NIH.

During the year ended December 31, 2018, we had two active grants from NIH related to early-stage research.

There are no remaining funds available to us under the grants.

Other Revenue

Other revenue primarily 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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● 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 moderate to severe rheumatoid arthritis and potentially 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, ATI-1777 as a potential treatment for moderate to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, 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.

We do not allocate personnel costs, facilities or other indirect expenses, to specific research and development programs.

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 or other indirect expenses to specific research and development programs.

The successful development of our drug candidates is highly uncertain.

We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates.

This uncertainty is due to the numerous

risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

● the number of clinical sites included in the trials;

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● the results of our clinical trials.

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

Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our drug candidates.

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

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

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, insurance costs, travel expenses, as well as a milestone payment under a third party agreement.

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

Revaluation of Contingent Consideration

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

Other Expense, Net

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

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.

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While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

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.

We only recognize revenue when collection of the consideration we are entitled to under a contract with a customer is probable.

Product Sales, net

We recognized revenue from product sales at the point the customer obtained control, which generally occurred upon delivery.

We also included estimates of variable consideration in the same period revenue was recognized.

Components of variable consideration included trade discounts and allowances, product returns, government rebates, discounts and rebates, other incentives such as patient co-pay assistance, and other fee for service amounts.

Variable consideration was recorded on the consolidated balance sheet as either a reduction of accounts receivable, if payable to a customer, or as a current liability, if payable to a third-party other than a customer.

We considered all relevant information when estimating variable consideration such as contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.

The amount of net revenue that can be recognized is constrained by estimates of variable consideration which are included in the transaction price.

Payment terms with customers did not exceed one year and, therefore, we did not account for a financing component in our arrangements.

We expensed incremental costs of obtaining a contract with a customer, including sales commissions, when incurred as the period of benefit was less than one year.

Trade Discounts and Allowances - We provided customers with trade discounts, rebates, allowances and/or other incentives.

We recorded estimates for these items as a reduction of revenue in the same period the revenue was recognized.

Government and Payor Rebates – We contracted with, or were subject to arrangements with, certain third-party payors, including pharmacy benefit managers and government agencies, for the payment of rebates with respect to utilization of our commercial products.

We also entered into agreements with GPOs that provided for administrative fees and discounted pricing in the form of volume-based rebates.

We were also subject to discount and rebate obligations under state Medicaid programs and Medicare.

We recorded estimates for these discounts and rebates as a reduction of revenue in the same period the revenue was recognized.

Other Incentives – We maintained a co-pay assistance program which was intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by third-party payors.

We estimated and recorded accruals for these incentives as a reduction of revenue in the period the revenue was recognized.

Our estimated amounts for co-pay assistance were based upon the number of claims and the cost per claim that we expected to receive associated with product that had been sold to customers but remained in the distribution channel at the end of each reporting period.

Product Returns - Consistent with industry practice, we have a product returns policy for RHOFADE which may provide customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date.

The right of return lapses upon shipment of the product to a patient.

We recorded an estimate for the amount of product which may be returned as a reduction of revenue in the period the related revenue was recognized.

Our estimates for product returns were based upon available industry data and our own sales information, including visibility into the inventory remaining in the distribution channel.

There is no return liability associated with sales of ESKATA as we had a no returns policy for ESKATA.

Product sales, net is presented in discontinued operations for all periods presented.

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.

We recognize revenue related to grants as amounts become reimbursable under each grant, which is generally when research is performed, and the related costs are incurred.

Other Revenue

Licenses of Intellectual Property – We recognize revenue received from non-refundable, upfront fees related to the licensing of intellectual property when the intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the customer is able to use and benefit from the license.

Milestone Payments – At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the amount allocated to the license of intellectual property.

Milestone payments that are not within our control or the control of the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

Intangible Assets

Our intangible assets include both definite-lived and indefinite-lived assets.

Our definite-lived intangible assets consist of a drug discovery platform acquired through the acquisition of Confluence, and prior to the disposition in 2019, also included the intellectual property rights related to RHOFADE.

Our definite-lived intangible assets consist of a drug discovery 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.

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

During the year ended December 31, 2019, we performed an impairment analysis of the RHOFADE intangible asset due to our decision to discontinue commercial operations and actively seek a commercialization partner for RHOFADE.

Our impairment analysis, which primarily utilized a third-party indication of fair value, resulted in a fair value for the RHOFADE intangible asset which was less than its carrying value.

As a result, we recorded an impairment charge of $27.6 million to adjust the carrying value of the RHOFADE intangible asset to its net realizable value.

Goodwill is not amortized, but rather is subject to testing for impairment at least annually, which we perform either during the fourth quarter or when indicators of an impairment are present.

We consider each of our operating segments, therapeutics and contract research, to be a reporting unit since this is the lowest level for which discrete financial information is available.

The impairment test is a qualitative assessment based upon the then current facts and circumstances related to operations of the reporting unit.

If our qualitative assessment indicates an impairment may be present, we would perform the required quantitative analysis and an impairment charge would be recognized to the extent that the estimated fair value of the reporting unit is less than its carrying amount.

However, any loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.

During the year ended December 31, 2019, we performed an impairment analysis due to a decline in our stock price, which was considered a triggering event to evaluate goodwill for impairment.

Our impairment analysis, which utilized a market approach, 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 an impairment charge of $18.5 million.

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 consolidated balance sheet.

Right-of-use assets are included in other assets and property and equipment, net on our 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 consolidated balance sheet for both operating and finance leases.

The fair value of an intangible asset is dependent on significant unobservable inputs including the estimated future cash flows of the asset.

There were no impairment losses recorded during the years ended December 31, 2021 and 2020.

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 credit-risk-adjusted interest rate.

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 risk-adjusted rate of return.

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 quarterly 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 consolidated statement of operations.

During the year ended December 31, 2020, we updated our assumptions for contingent consideration related to the acquisition of Confluence as a result of the successful completion of a Phase 1 clinical trial for ATI-450 and the submission and allowance of an IND for ATI-1777 , which resulted in a charge of $2.4 million.

During the year ended December 31, 2019, we updated our assumptions for contingent consideration related to the acquisition of Confluence as a result of the submission and allowance of an IND for ATI-450, which resulted in a charge of $0.7 million.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our research and development expenses.

This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs.

The majority of our preclinical development activities and clinical trials are performed pursuant to quotes and contracts with multiple vendors, including research institutions and CROs, that conduct and manage such activities on our behalf.

Many of the contracts with our vendors require advance payments;

while others invoice us in arrears for services performed, or on a pre-determined schedule, or upon the successful enrollment of subjects, or when contractual milestones are met.

We record expenses for preclinical development activities and clinical trials based upon estimates of the total cost of the services to be provided by the vendor and the time period over which the vendor is to perform those services.

Estimates of research and development expenses included in our consolidated financial statements are based on facts and circumstances known to us at that time.

The financial terms of our agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows.

There may be times when payments made to a vendor exceed the level of services provided, resulting in a prepayment for work to be performed.

We may confirm the accuracy of our estimates with the service providers, or make adjustments to our estimates based upon new or updated facts and circumstances, as necessary.

For example, if the timing and/or cost of services to be performed is materially different from our previous estimates, we would make a prospective adjustment for the change in our estimates in the period in which we become aware of the new cost and/or timing.

Although we do not expect our estimates to be materially different from actual amounts incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.

To date, we have not made any material adjustments to our estimates of research and development expenses.

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 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 consolidated statement of operations.

Any such changes 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 10% and 40% at December 31, 2021 compared to between 4% and 15% at December 31, 2020.

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 6.3% and 8.0% depending on the year of each potential payment.

During the year ended December 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 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 moderate to severe psoriatic arthritis and moderate to severe hidradenitis suppurativa, which are additional planned indications for zunsemetinib.

These updates resulted in a charge of $24.3 million during the year ended December 31, 2021.

During the year ended December 31, 2020, we updated assumptions for probability of success which resulted in a charge of $2.4 million.

Stock-Based Compensation

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Results of Operations

For discussion on financial condition and results of operations pertaining to the year ended December 31, 2020 compared to the year ended December 31, 2019, see our Annual Report on Form 10-K for the year ended December 31, 2020, Item 7.

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

Comparison of Years Ended December 31, 2021 and 2020

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General and administrative

Goodwill impairment

Revaluation of contingent consideration

Total costs and expenses

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Loss from continuing operations

Income (loss) from discontinued operations, net of tax

Contract research revenue was $5.8 million and $4.2 million for the years ended December 31, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to our clients through Confluence.

Other revenue for the year ended December 31, 2020 consisted of $0.7 million of royalties earned on net sales of RHOFADE pursuant to the asset purchase agreement with EPI Health.

Income from discontinued operations

Contract research revenue was $5.8 million for each of the years ended December 31, 2021 and 2020, and was comprised of fees earned from the provision of laboratory services to our clients.

Other revenue for the years ended December 31, 2021 and 2020 primarily consisted of $0.8 million and $0.7 million of royalties earned on net sales of RHOFADE, respectively.

Cost of Revenue

Cost of revenue was $5.1 million and $4.1 million for the years ended December 31, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

The increase in cost of revenue was driven primarily by increased personnel and lab supply costs as well as an increase in overhead expenses.

Cost of revenue was $4.7 million and $5.1 million for the years ended December 31, 2021 and 2020, respectively, and in each case related to providing laboratory services to our clients.

The decrease in cost of revenue during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily the result of the utilization of COVID-19 employee-retention tax credits.

Research and Development Expenses

The following table summarizes our research and development expenses:

The following table summarizes our research and development expenses by drug candidate or, for unallocated expenses, by type:

(In thousands)

Other JAK inhibitors

A-101 45% Topical Solution

Other research and development

Stock-based compensation

Milestones and licensing

Contingent consideration

Total research and development expenses

Research and development expenses for ATI-450 during the year ended December 31, 2020 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with moderate to severe rheumatoid arthritis.

ATI-450 expenses during the year ended December 31, 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 increased during the year ended December 31, 2020 due to an increase in costs associated with various ongoing clinical trials, partially offset by lower preclinical development activities.

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

Expenses for ATI-2138 were higher during the year ended December 31, 2020 primarily due to preclinical development activities and IND-enabling studies.

Other JAK inhibitors

The decrease in expenses related to other JAK inhibitors primarily resulted from lower expenses in the year ended December 31, 2020 following the completion of multiple Phase 2 clinical trials of our legacy JAK inhibitors, ATI-501 and ATI-502, in 2019.

A-101 45% Topical Solution

Expenses related to A-101 45% Topical Solution decreased primarily due to lower expenses in the year ended December 31, 2020 following the completion of our Phase 3 clinical trials in 2019.

The increase in expenses for zunsemetinib during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to costs associated with drug candidate manufacturing and clinical development activities for a Phase 2b trial in subjects with moderate to severe rheumatoid arthritis and a Phase 2a trial in subjects with moderate to severe hidradenitis suppurativa, as well as other development activities including toxicology studies.

The decrease in expenses for ATI-1777 during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to a decrease in development costs, including toxicology studies, as well as a decrease in costs associated with a Phase 2a clinical trial in subjects with moderate to severe atopic dermatitis, which commenced in 2020 and concluded in 2021.

These decreases were partially offset by startup activities associated with a Phase 2b clinical trial in subjects with moderate to severe atopic dermatitis.

Expenses for ATI-2138 were higher during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to preclinical development activities and IND-enabling studies as we progressed towards our IND submission in October 2021.

Clinical development expenses associated with a Phase 1 trial of ATI-2138 in healthy subjects which initiated in December 2021 also contributed to the increase.

Expenses for ATI-2231 were higher during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to preclinical development activities and IND-enabling studies .

Discovery and other research and development

Research and development expenses related to discovery decreased during the year ended December 31, 2020 as our discovery-stage assets matured to clinical-stage assets.

As a result of this transition, we focused fewer resources on our discovery-stage assets in 2020 compared to 2019.

Other research and development expenses, which primarily included expenses for medical affairs activities, were lower primarily due to a decrease in activities for our A-101 45% Topical

Solution, ATI-501 and ATI-502 clinical trials that were completed in 2019.

Additionally, travel expenses were lower during the year ended December 31, 2020 due to the COVID-19 pandemic.

Expenses related to discovery increased during the year ended December 31, 2021 compared to the year ended December 31, 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 year ended December 31, 2021 compared to the year ended December 31, 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

Personnel expenses and stock-based compensation decreased due to lower headcount primarily resulting from the restructuring announced in September 2019.

Milestones and licensing and contingent consideration

In 2019, we recorded $5.5 million of expenses for payments under a license agreement upon the achievement of a development milestone and a fee related to a contract amendment.

The change in contingent consideration during the year ended December 31, 2020 was the result of updates to our assumptions as a result of the completion of a successful Phase 1 clinical trial for ATI-450 and the submission and allowance of an IND for ATI-1777, while the change in contingent consideration during the year ended December 31, 2019 was the result of updates to our assumptions as a result of the submission and allowance of an IND for ATI-450.

Compensation related expenses increased during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to an increase in stock-based compensation expense associated with new equity awards granted in 2021 and personnel expenses as a result of higher average headcount, partially offset by lower payroll taxes resulting from the utilization of COVID-19 employee-retention tax credits.

General and Administrative Expenses

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Total general and administrative expenses

Personnel and stock-based compensation expenses decreased due to lower headcount primarily resulting from the restructuring announced in September 2019.

Professional and legal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and current lawsuits described in this report.

Professional and legal fees were lower year-over-year primarily due to lower corporate legal fees.

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

Other general and administrative expenses was lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Goodwill Impairment

During the year ended December 31, 2019, we performed an impairment analysis due to a decline in our stock price.

Our impairment analysis noted that the fair value for the therapeutics reporting unit was less than its carrying value.

As a result, we recorded an impairment charge of $18.5 million.

Other Expense, net

The $2.1 million decrease in other expense, net was primarily due to lower interest expense and fees associated with outstanding debt balances.

Loss from Discontinued Operations

The decrease in loss from discontinued operations was due to the divestiture of RHOFADE (see Note 3 to the consolidated financial statements included in this report for additional information).

We recorded income from discontinued operations of $0.1 million during the year ended December 31, 2020 which consisted of $0.4 million of RHOFADE product sales due to a reversal of previously accrued product sales-related reserves, partially offset by $0.3 million of expenses.

Comparison of Years Ended December 31, 2019 and 2018

Year Ended December 31,

(In thousands)

Contract research

Other revenue

Total revenue

Costs and expenses:

Cost of revenue

Research and development

General and administrative

Goodwill impairment

Total costs and expenses

Loss from operations

Other income (expense), net

Loss from continuing operations before income taxes

Income tax benefit

Loss from continuing operations

Loss from discontinued operations, net of tax

Contract research revenue was $4.2 million and $4.7 million for the years ended December 31, 2019 and 2018, respectively, and was comprised primarily of fees earned from the provision of laboratory services to our clients through Confluence.

Other revenue for the year ended December 31, 2018 related to payments associated with a license agreement and consisted of an upfront payment of $1.0 million and $0.5 million earned upon the achievement of a specified regulatory milestone.

Cost of Revenue

Cost of revenue was $4.1 million and $4.3 million for the years ended December 31, 2019 and 2018, 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:

(In thousands)

Other JAK inhibitors

A-101 45% Topical Solution

Other research and development

Stock-based compensation

Milestones and licensing

Contingent consideration

Total research and development expenses

The increase in expenses for ATI-450 resulted primarily from preclinical development activities as well as a Phase 1 clinical trial, which was initiated and near completion during the year ended December 31, 2019.

Expenses related to ATI-1777 increased during the year ended December 31, 2019 due to higher preclinical activities and IND-enabling preclinical studies.

Expenses for ATI-2138 were higher during the year ended December 31, 2019 primarily due to preclinical development activities.

Other JAK inhibitors

Development expenses related to other JAK inhibitors decreased primarily due to lower expenses in the year ended December 31, 2019 following the completion of multiple Phase 2 clinical trials of ATI-501 and ATI-502 in 2019.

A-101 45% Topical Solution

Expenses related to A-101 45% Topical Solution increased primarily due to higher expenses associated with our two pivotal Phase 3 clinical trials, which were initiated during 2018 and were completed in 2019.

Discovery and other research and development

Discovery expenses were consistent year-over-year and reflected our efforts to progress various programs to candidate selection and clinical-stage.

The decrease in other research and development expenses was primarily due to lower costs related to legacy dermatology assets and lower travel expenses.

Personnel and stock-based compensation

The increase in personnel expenses, which includes restructuring expenses, was primarily the result of increased headcount prior to our restructuring in 2019.

Restructuring expenses primarily included the cost of termination benefits

given to employees that were involuntarily terminated during the year ended December 31, 2019.

The decrease in stock-based compensation expense was primarily the result of forfeitures by certain employees during 2019.

Milestones and licensing and contingent consideration

In 2019, we recorded $5.5 million of expenses for payments under a license agreement upon the achievement of a development milestone and a fee related to a contract amendment.

The change in contingent consideration during the year ended December 31, 2019 was the result of updates to our assumptions as a result of the submission and allowance of an IND for ATI-450.

The change in contingent consideration during the year ended December 31, 2018 was the result of updates to our assumptions related to ATI-1777 that reflected the achievement of a specified development milestone in November 2018 under the Confluence Agreement.

General and Administrative Expenses

The following table summarizes our general and administrative expenses:

(In thousands)

Compensation related expenses increased during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to an increase in stock-based compensation expense associated with new equity awards granted in 2021, partially offset by a decrease in personnel expenses as a result of lower average headcount.

Compensation related expenses during the year ended December 31, 2021 also included $1.7 million of expenses related to severance resulting from the retirement of our former Chief Legal Officer.

Professional and legal fees

Facility and support services

Other general and administrative

Stock-based compensation

Total general and administrative expenses

Personnel expenses, which includes restructuring expenses, and stock-based compensation expenses increased due to higher headcount prior to our restructuring.

Restructuring expenses primarily include the costs of termination benefits given to employees that were involuntarily terminated during the year ended December 31, 2019.

Professional and legal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and business development.

The decrease in professional and legal fees was primarily related to lower corporate communications costs as well as lower legal costs incurred related to patents.

Facility and support services included general office expenses and information technology costs, which increased due to our new office and laboratory facility in St.

Louis, which we moved into in 2019, as well as higher headcount prior to our restructuring.

Other general and administrative expenses included insurance, travel costs, depreciation and other miscellaneous expenses.

Goodwill Impairment

During the year ended December 31, 2019, we performed an impairment analysis due to a decline in our stock price.

Our impairment analysis noted that the fair value for the therapeutics reporting unit was less than its carrying value.

As a result, we recorded an impairment charge of $18.5 million.

Other Income (Expense), net

The $5.2 million decrease in other income (expense), net was primarily due to higher interest expense incurred on outstanding debt balances.

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 decrease in loss from discontinued operations was driven by higher product sales, net partially offset by higher expenses (see Note 18 to the consolidated financial statements included in this report for additional information ).

Professional and legal fees, including accounting, investor relations and corporate communication costs, were higher during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily as a result of increased costs associated with Sarbanes-Oxley compliance and other professional fees .

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 year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to an increase in information technology costs and infrastructure technology improvements.

Other general and administrative expenses increased during the year ended December 31, 2021 compared to the year ended December 31, 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 year ended December 31, 2021 compared to the year ended December 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 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 moderate to severe 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 increased during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to interest and fees associated with a payoff of the Loan and Security Agreement with Silicon Valley Bank, or SVB , as well as lower interest income .

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, as well as debt financings.

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

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.

We may receive royalties and milestone payments from EPI Health in connection with the sale of RHOFADE.

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 December 31, 2021, we had cash, cash equivalents and marketable securities of $225.7 million.

Subsequent to December 31, 2020, we raised net proceeds of $103.5 million through a public offering of common stock.

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

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 contingent obligations under the Confluence Agreement, which is summarized above under “Overview—Acquisition and License Agreements,” and our lease obligations.

Equity Financing

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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 we also incurred expenses of $0.3 million in connection with the offering.

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.

June 2021 Public Offering

In June 2021, we closed a public offering in which we sold 8,098,592 shares of common stock at a price to the public of $17.75 per share, for aggregate gross proceeds of $143.8 million.

We paid underwriting discounts and commissions of $8.6 million, and also incurred expenses of $0.3 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 $134.9 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.

The Purchase Agreement 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.

Upon 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.

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 did not sell any additional shares prior to terminating the Purchase Agreement in January 2021 in connection with the public offering of common stock described above.

October 2018 Public Offering

In October 2018, we closed a public offering in which we sold 9,941,750 shares of common stock at a price to the public of $10.75 per share, for aggregate gross proceeds of $106.9 million.

We paid underwriting discounts and commissions of $6.4 million to the underwriters, and we incurred expenses of $0.3 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 $100.2 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 prior to terminating the Purchase Agreement.

Debt Financing

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

The Loan and Security Agreement provides for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020.

The Loan and Security Agreement is secured by substantially all of our assets other than intellectual property.

The term loan repayment schedule provides for interest only payments beginning April 1, 2020 and continuing through March 1, 2022, followed by 24 consecutive equal monthly installments of principal, plus monthly payments of accrued interest, starting on April 1, 2022 and continuing through the maturity date of March 1, 2024.

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

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

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

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

The Loan and Security Agreement provided for $11.0 million in term loans, of which we borrowed the entire amount on March 30, 2020.

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.

Loan and Security Agreement with Oxford Finance LLC

In October 2018, we entered into a Loan and Security Agreement with Oxford.

In October 2018, we entered into a Loan and Security Agreement with Oxford Finance LLC.

The Loan and Security Agreement provided for up to $65.0 million in term loans, of we borrowed $30.0 million in October 2018.

In October 2019, we repaid in full the $30.0 million that was outstanding under the Loan and Security Agreement, together with all accrued and unpaid interest and fees.

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

Year Ended December 31,

In October 2019, we repaid in full the $30.0 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 $32.4 million.

Cash and cash equivalents were $27.3 million as of December 31, 2021 compared to $22.1 million as of December 31, 2020.

We also had $198.3 million in short- and long-term marketable securities as of December 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:

(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 increase (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 year ended December 31, 2020, operating activities used $38.6 million of cash primarily resulting from our net loss of $51.0 million and changes in our operating assets and liabilities of $2.4 million, partially offset by non-cash adjustments of $14.7 million.

Net cash used by changes in our operating assets and liabilities during the year ended December 31, 2020 consisted of a $8.9 million decrease in accounts payable and accrued expenses, partially offset by a $4.9 million decrease in accounts receivable and a $1.7 million decrease in prepaid expenses and other assets.

The net decrease in accounts payable and accrued expenses was primarily driven by lower overall operating expenses as well as expenses incurred, but not yet paid, as of December 31, 2020 compared to the year ended December 31, 2019.

The decrease in accounts receivable was primarily the result of cash received from 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, partially offset by prepayment of policies for 2021.

Non-cash expenses of $14.7 million were primarily composed of stock-based compensation expense of $11.2 million, a charge of $2.4 million related to the change in the fair value of contingent consideration and depreciation and amortization expense of $1.3 million.

During the year ended December 31, 2019, operating activities used $96.4 million of cash primarily resulting from our net loss of $161.4 million and changes in our operating assets and liabilities of $2.7 million, partially offset by non-cash adjustments of $67.6 million.

Net cash used by changes in our operating assets and liabilities during the year ended December 31, 2019 consisted of a $5.1 million decrease in accounts payable and accrued expenses and a $0.8 million increase in accounts receivable, which were partially offset by a $3.2 million decrease in prepaid expenses and

other assets.

The decrease in accounts payable and accrued expenses was primarily driven by lower levels of expenses, including sales discounts and allowances, as the result of the disposition of RHOFADE, and lower research and development expenses as a result of the completion of our two pivotal Phase 3 clinical trials for A-101 45% Topical Solution, as well as the timing of vendor invoicing and payments.

The increase in accounts receivable was primarily the result of the timing of cash receipts from our contract research customers.

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 legacy JAK inhibitors, which concluded during the year ended December 31, 2019, and the elimination of sales and marketing activities as a result of the disposition of RHOFADE in October 2019.

Non-cash expenses of $67.6 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 $16.2 million, a charge of $0.7 million related to the change in the fair value of contingent consideration and depreciation and amortization expense of $6.4 million, partially offset by a gain of $1.9 million recognized on the disposition of RHOFADE.

During the year ended December 31, 2018, operating activities used $100.8 million of cash primarily resulting from our net loss of $132.7 million, partially offset by changes in our operating assets and liabilities of $9.4 million, and non-cash adjustments of $22.5 million.

Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2018 consisted of a $13.8 million increase in accounts payable and accrued expenses, which was partially offset by a $4.4 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 December 31, 2018, as well as the timing of vendor invoicing and payments.

Expenses incurred, but not yet paid, as of December 31, 2018 primarily included sales and marketing expenses related to the commercial launch of ESKATA in the United States in May 2018, amounts payable for copay assistance and commercial rebates related to sales of RHOFADE which we began selling in December 2018, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical Solution and our Phase 2 clinical trials for our legacy JAK inhibitors.

The increase in accounts receivable was the result of the commercial launch of ESKATA in May 2018 and sales of RHOFADE which we acquired in November 2018.

Non-cash expenses of $22.5 million were primarily composed of stock-based compensation expense.

Cash flow related to operating activities was the result of:

(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 year ended December 31, 2021 compared to the year ended December 31, 2020 primarily as a result of higher net losses after adjusting for revaluation of contingent consideration and other 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 candidate manufacturing, clinical trial and preclinical development activities for zunsemetinib, ATI-1777 and ATI-2138.

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

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

Investing Activities

During the year ended December 31, 2020, investing activities provided $6.4 million of cash consisting of proceeds from sales and maturities of marketable securities of $54.6 million, offset by purchases of marketable securities of $47.7 million and purchases of equipment and leasehold improvements of $0.5 million.

During the year ended December 31, 2019, investing activities provided $105.7 million of cash consisting of proceeds from sales and maturities of marketable securities of $210.5 million and $34.2 million from the disposition of RHOFADE, offset by purchases of marketable securities of $137.4 million and purchases of equipment of $1.6 million.

During the year ended December 31, 2018, investing activities provided $9.4 million of cash consisting of proceeds from sales and maturities of marketable securities of $239.4 million, offset by purchases of marketable securities of $161.6 million, $67.1 million for the acquisition of RHOFADE, and purchases of equipment of $1.4 million.

Cash flow related to investing activities was the result of:

(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

The change in net cash used in investing activities for the year ended December 31, 2021 compared to net cash provided by investing activities for the year ended December 31, 2020 primarily resulted from purchases of marketable securities following our January 2021 and June 2021 public offerings.

Financing Activities

During the year ended December 31, 2020, financing activities provided $18.4 million of cash consisting of $10.9 million of net borrowings pursuant to the Loan and Security Agreement with SVB and $7.7 million of proceeds from the issuance of common stock in connection with the Purchase Agreement with Lincoln Park, partially offset by $0.1 million of finance lease payments and $0.2 million of deferred issuance costs.

During the year ended December 31, 2019, financing activities used $30.3 million of cash consisting of $30.0 million for the repayment of our term loan with Oxford and $0.5 million related to finance lease payments, offset by $0.2 million of cash received from the exercise of employee stock options.

During the year ended December 31, 2018, financing activities provided $128.3 million of cash consisting of net proceeds of $100.2 million received from our public offering of common stock in October 2018, $29.9 million of net borrowings pursuant to the Loan and Security Agreement with Oxford and $0.6 million of cash received from the exercise of employee stock options, offset by $1.8 million paid to the former Confluence equity holders as a result of the achievement of a development milestone and $0.6 million of finance lease payments.

Cash flow related to financing activities was the result of:

(In thousands)

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

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 year ended December 31, 2021 compared to December 31, 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 potentially 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, ATI-1777 as a potential treatment for moderate to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, 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.

Our primary uses of capital are, and we expect will continue in the near term to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs.

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs.

We expect to add additional personnel to support our operational plans and strategic direction.

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 consolidated financial statements that appear in Item 8 of this Annual Report on Form 10-K 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, ATI-1777 and ATI-2138, 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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● the impact on the timing of our preclinical studies, the recruitment, enrollment, conduct and timing of our clinical trials and our business due to the COVID-19 pandemic;

● our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, and earn revenue from such arrangements;

● the revenue earned from our commercial products as a result of licenses to, or partnerships with, third parties.

● our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates;

● our ability to earn revenue as a result of licenses to, or partnerships or other arrangements with, third parties.

See “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

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 concurrent with the original sublease agreement.

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.

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.

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.

Our aggregate remaining lease payment obligations for these two spaces was $3.8 million as of December 31, 2021.

Agreement and Plan of Merger – Confluence

In August 2017, we entered into the Confluence Agreement, pursuant to which we acquired Confluence.

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.

R&D Obligations

We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other service providers 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.

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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 to clients through Confluence, our wholly-owned subsidiary.

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.

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

Recently Issued Accounting Pronouncements

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We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.

In June 2018, the FASB, issued ASU 2018-07, Compensation—Stock Compensation (Topic 718).

The amendments in this ASU expand the scope of Topic 718 to include stock-based compensation arrangements with non-employees except for specific guidance on option pricing model inputs and cost attribution.

We adopted this standard as of January 1, 2019, the impact of which on our consolidated financial statements was not significant.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Targeted Improvements, both of which included a number of technical corrections and improvements, including additional options for transition.

The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The amendments in ASU 2016-02 must be applied to all leases existing at the date a company initially applies the standard.

We adopted the new standard as of January 1, 2019, using the effective date as the date of initial application, and we used the modified retrospective approach.

In addition, we elected the practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease identification and classification.

We also elected the practical expedient to not separate lease and non-lease components, as well as the short-term lease exemption which allowed us to not capitalize leases with terms less than 12 months that do not contain a reasonably certain purchase option.

Our consolidated financial statements have not been updated, and disclosures required by the new standard have not been provided, for periods before January 1, 2019.

The adoption of ASU 2016-02 resulted in us recording additional assets and liabilities of $2.1 million and $2.3 million, respectively, upon adoption on January 1, 2019.

The adoption of ASU 2016-02 did not have a material impact on our consolidated statement of operations or cash flows.

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-K

Item 7. Management’s Discussion and Analysis