What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-02 · 130 added, 142 removed, 252 unchanged (52% of the section changed)

10 unchanged sentences

Clinical Programs

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

We submitted an Investigational New Drug Application, or IND, in April 2019 for zunsemetinib, an investigational oral, novel, small molecule selective mitogen-activated protein kinase-activated protein kinase 2, or MK2, inhibitor compound, for the treatment of rheumatoid arthritis, which was allowed by the U.S.

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.

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.

8 unchanged sentences

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.

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 zunsemetinib) were headache, dizziness, nausea, parasthesia and, in the post-dosing follow-up period of the trial, dry skin.

3 unchanged sentences

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

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

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.

9 unchanged sentences

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

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

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

Psoriatic Arthritis and Moderate to Severe Hidradenitis Suppurativa

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

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 consists of a 12-week treatment period and a 30-day follow-up period, and seeks to enroll approximately 240 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 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 consists of a 12-week treatment period and a 30-day follow-up period, and seeks 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 second quarter 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

15 unchanged sentences

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

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

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

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

Preclinical Programs

ATI-2138, an Investigational ITJ Inhibitor

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

In May 2022, we activated multiple clinical sites in a Phase 2b, multicenter, randomized, double-blind, vehicle-controlled, parallel-group trial to determine the efficacy, safety, tolerability and pharmacokinetics of ATI-1777 in subjects with moderate to severe atopic dermatitis (ATI-1777-AD-202).

In this trial, we will 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.

This trial will consist of a 4-week treatment period and a 2-week follow-up period, and seeks to enroll approximately 240 subjects in the United States.

The primary endpoint is the percentage change from baseline in EASI score at week 4.

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

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

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.

We are currently conducting IND-enabling studies.

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-restricted JAK inhibitors with limited systemic exposure as potential treatments for inflammatory bowel disease.

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.

Our Other Drug Candidates

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

Financial Overview

Since our inception, we have incurred significant operating losses.

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

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

Since our inception, we have incurred significant net losses.

Our net loss was $18.8 million for the three months ended March 31, 2022 and $90.9 million for the year ended December 31, 2021.

As of March 31, 2022, we had an accumulated deficit of $614.2 million.

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

2 unchanged sentences

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

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

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.

3 unchanged sentences

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

Sales of Common Stock Pursuant to At-the-Market Facility

In April 2022, we sold 4,838,709 shares of our common stock at a weighted average price per share of $15.50, for aggregate gross proceeds of $75.0 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated May 20, 2021.

We paid selling commissions of $2.2 million in connection with the sale.

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.

If COVID-19 continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and prospects, including the timing of our development programs and our clinical trials, including our trials of zunsemetinib as a potential treatment for moderate to severe rheumatoid arthritis and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis and the supply of active pharmaceutical ingredients and drug product for our clinical trials.

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

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.

3 unchanged sentences

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

Pursuant to the terms of the Confluence Agreement, the Merger Sub merged with and into Confluence, with

Confluence surviving as our wholly-owned subsidiary.

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

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

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

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

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.

2 unchanged sentences

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.

28 unchanged sentences

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 zunsemetinib as a potential treatment for moderate to severe rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to discover and develop additional drug candidates.

We 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, clinical trial sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials, and are tracked on a program-by-program basis.

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

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.

8 unchanged sentences

● 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.

7 unchanged sentences

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 our debt obligations, and gains and losses on transactions denominated in foreign currencies.

Critical Accounting Policies and Significant Judgments and Estimates

Other Income (Expense), Net

Other income (expense), net primarily consists of interest earned on our cash, cash equivalents and marketable securities and interest expense related to our debt obligations.

Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements.

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements.

We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We evaluate our estimates and judgments on an ongoing basis.

Our actual results may differ from these estimates under different assumptions or conditions.

Our actual results may differ from

these estimates under different assumptions or conditions.

Except as described below, there have been no material changes to our significant accounting policies and use of estimates as disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the SEC on February 24, 2022.

4 unchanged sentences

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

We evaluate the fair value estimate of our contingent consideration liability on a quarterly basis with changes, if any, recorded as income or

expense in our condensed consolidated statement of operations.

We evaluate the fair value estimate of our contingent consideration liability on a quarterly basis with changes, if any, recorded as income or expense in our consolidated statement of operations.

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

1 unchanged sentence

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

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

Probability of success assumptions ranged between 10% and 40% at March 31, 2022 compared to between 4% and 40% at March 31, 2021.

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 7.7% and 9.0% depending on the year of each potential payment.

During the nine months ended September 30, 2021, we updated assumptions for probability of success and estimated future sales levels as a result of the completion of a Phase 2a clinical trial of zunsemetinib in subjects with moderate to severe rheumatoid arthritis and as a result of the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

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

During the three months ended March 31, 2022, we did not modify any significant assumptions;

however due to higher discount rates resulting from higher risk-free rates and wider credit spreads being applied to potential payments relative to prior periods, we recorded a decrease in contingent consideration of $1.2 million.

The overall decrease was partially offset by the impact of the passage of time.

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

we also included estimated future sales related to hidradenitis suppurativa and psoriatic arthritis which are additional planned indications for zunsemetinib.

These updates resulted in a charge of $16.4 million.

Results of Operations

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

Three Months Ended September 30,

Nine Months Ended September 30,

Comparison of Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

(In thousands)

9 unchanged sentences

Loss from operations

Other expense, net

Loss from continuing operations

Loss from discontinued operations

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

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

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

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

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

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

Other income (expense), net

Contract research revenue was $1.2 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively, and was comprised of fees earned from the provision of laboratory services to our clients.

The $0.3 million decrease was driven by lower overall hours billed, partially offset by a higher average bill rate.

Other revenue for each of the three months ended March 31, 2022 and 2021 primarily consisted of $0.2 million of royalties earned on net sales of RHOFADE.

Cost of Revenue

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

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

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

Cost of revenue was $1.2 million for each of the three months ended March 31, 2022 and 2021, and in each case related to providing laboratory services to our clients.

Cost of revenue was flat due to lower variable costs resulting from the decrease in hours billed offset by an increase in overhead costs, including personnel-related costs.

Research and Development Expenses

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

2 unchanged sentences

Total research and development expenses

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

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

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

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

Expenses for ATI-2231 were higher during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily due to preclinical development activities and IND-enabling studies.

Discovery and other research and development

Expenses related to discovery increased during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 due to continued investment in our discovery-stage programs.

Other research and development expenses, which primarily include expenses for our legacy dermatology assets and medical affairs activities, were lower during the nine months ended September 30, 2021 compared to September 30, 2020 due to a decrease in costs for our legacy dermatology assets following the decision to discontinue investment in those programs.

The increase in expenses for zunsemetinib during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis and a Phase 2a trial in subjects with hidradenitis suppurativa which were initiated in December 2021 .

Costs associated with start-up activities for a Phase 2a trial in subjects with psoriatic arthritis also contributed to the overall increase.

The increase in expenses for ATI-1777 during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to higher costs associated with drug candidate manufacturing and other preclinical development activities as well start-up costs associated with a Phase 2b clinical trial.

Lower costs associated with a Phase 2a clinical trial which commenced in 2020 and concluded in 2021 partially offset the overall increase in expenses.

Expenses for ATI-2138 were lower during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to a decrease in preclinical development activities and IND-enabling study expenses following our IND submission in October 2021.

Clinical development expenses associated with a Phase 1 SAD trial which initiated in December 2021 partially offset the overall decrease in expenses.

Expenses for ATI-2231 were higher during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to preclinical development activities and IND-enabling studies.

Expenses related to discovery increased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to continued investment in our discovery-stage programs as we progressed programs toward candidate selection.

Personnel and stock-based compensation

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

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

Personnel and stock-based compensation expenses increased in the aggregate during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to an increase in costs associated with higher average headcount, partially offset by a decrease in stock-based compensation expense mainly attributable to forfeiture credits recorded during the three months ended March 31, 2022.

General and Administrative Expenses

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

Personnel and stock-based compensation

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

Personnel and stock-based compensation expenses increased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to an increase in costs associated with higher average headcount and an increase in stock-based compensation expense associated with new equity awards granted in 2022.

Professional and legal fees

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

Facility and support services and other general and administrative

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

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

Professional and legal fees, including accounting, investor relations and corporate communication costs, were lower during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily as a result of lower legal fees partially offset by higher Sarbanes-Oxley and other accounting compliance expenses.

Facility and support services

Facility and support services, including general office expenses, information technology costs and other expenses, increased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to an increase in overhead expenses including increases in tax and license fees and information technology support costs.

Revaluation of Contingent Consideration

The increase in revaluation of contingent consideration during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 resulted from updates to the probability of success and estimated future sales level assumptions as a result of the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

The increase in revaluation of contingent consideration during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 resulted from updates to the probability of success and estimated future sales level assumptions as a result of the completion of a Phase 2a clinical trial of zunsemetinib in subjects with moderate to severe rheumatoid arthritis, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

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

Other Expense, net

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

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

The decrease in revaluation of contingent consideration during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was mainly due to higher discount rates, resulting from higher risk-free rates and wider credit spreads, being applied to potential payments relative to prior periods.

The overall decrease in revaluation of contingent consideration was partially offset by the impact of the passage of time.

Other Income (Expense), net

Other income (expense), net increased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to lower interest expense associated with the Loan and Security Agreement with Silicon Valley Bank, or SVB, which was repaid in July 2021, and higher interest income on investment portfolio balances.

Liquidity and Capital Resources

3 unchanged sentences

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

As of March 31, 2022, we had cash, cash equivalents and marketable securities of $203.6 million.

Subsequent to March 31, 2022, we raised aggregate gross proceeds of $75.0 million through our at-the-market equity facility.

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

1 unchanged sentence

Equity Financing

At-the-Market Offering

We paid selling commissions of $2.2 million in connection with the sale.

January 2021 Public Offering

2 unchanged sentences

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 Capital Fund, LLC, or Lincoln Park, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we could sell to Lincoln Park, at our discretion, up to $15.0 million of shares of our common stock over the 36-month term of the Purchase Agreement.

U pon execution of the Purchase Agreement, we issued 121,584 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement.

The commitment shares were valued using the closing price of our common stock on the effective date of the Purchase Agreement resulting in an aggregate fair value of $0.3 million.

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

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

We did not sell any additional shares prior to terminating the Purchase Agreement.

Debt Financing

Loan and Security Agreement with Silicon Valley Bank

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

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

Liquidity and Cash Flows

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

We also had $190.0 million in short- and long-term marketable securities as of September 30, 2021 compared to $32.1 million as of December 31, 2020.

Cash and cash equivalents were $36.3 million as of March 31, 2022 compared to $27.3 million as of December 31, 2021.

We also had $167.2 million in short- and long-term marketable securities as of March 31, 2022 compared to $198.3 million as of December 31, 2021.

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

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

5 unchanged sentences

Operating Activities

Operating activities use of cash was the result of:

Nine Months Ended

September 30,

Cash flow related to operating activities was the result of:

Three Months Ended

(In thousands)

4 unchanged sentences

Net cash used in operating activities

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

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

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

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

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

Net cash used in operating activities increased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily as a result of higher net losses after adjusting for non-cash items and an increase in cash paid for accounts payable and accrued expenses.

The increase was partially offset by a decrease in cash paid for prepaid expenses.

Cash paid for prepaid expenses and other assets was lower due to a smaller increase in prepaid research and development balances relative to the prior year-end period.

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

Investing Activities

Cash flow from investing activities was the result of:

Nine Months Ended

September 30,

Cash flow related to investing activities was the result of:

Three Months Ended

(In thousands)

3 unchanged sentences

Net cash provided by (used in) investing activities

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

The change in net cash provided by investing activities for the three months ended March 31, 2022 compared to net cash used in investing activities for the three months ended March 31, 2021 primarily resulted from sales and maturities of marketable securities during the three months ended March 31, 2022 which were used to fund company operations and a reduction of purchases of marketable securities which were higher during the three months ended March 31, 2021 following our January 2021 public offering.

Financing Activities

Financing activities use of cash was the result of:

Nine Months Ended

September 30,

Cash flow related to financing activities was the result of:

Three Months Ended

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

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

Cash provided by financing activities decreased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to our January 2021 public offering.

Funding Requirements

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

We 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.

2 unchanged sentences

We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of our condensed consolidated financial statements that appear in Item 1 of this Quarterly Report on Form 10-Q based on our current operating assumptions.

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

11 unchanged sentences

● 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.

Contractual Obligations and Commitments

● 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

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.

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

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

1 unchanged sentence

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.

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 $3.6 million as of March 31, 2022.

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.

3 unchanged sentences

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

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis