What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-03 · 123 added, 88 removed, 310 unchanged (40% of the section changed)

44 unchanged sentences

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

We expect topline data in 2023.

We expect topline data in the second half of 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.

This trial consists of a 12-week treatment period and a 30-day follow-up period.

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.

The trial has completed enrollment with 95 subjects randomized in the United States.

We expect topline data in mid-first half of 2023.

Moderate to Severe Psoriatic Arthritis

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

We expect topline data in the first half of 2023.

We expect topline data in the second half of 2023.

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

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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.

ATI-2138, an Investigational Oral Covalent ITJ Inhibitor

We are developing ATI-2138, an investigational oral covalent 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 Investigational New Drug application, or IND, for ATI-2138 for the treatment of psoriasis in October 2021, which was allowed by the U.S.

In October 2021, we submitted an Investigational New Drug application, or IND, for ATI-2138 for the treatment of psoriasis.

The IND was allowed by the U.S.

Food and Drug Administration, or FDA, in November 2021.

In December 2021, we initiated a Phase 1 randomized, observer-blind, placebo-controlled, single ascending dose (SAD) 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 Phase 1 multiple ascending dose (MAD) 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 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 before we can conduct further clinical trials.

In this trial, 64 male and female healthy

volunteer subjects were randomized in a 3:1 ratio into seven doses in eight cohorts.

Each cohort consisted of eight randomized subjects, with six receiving ATI-2138 and two receiving placebo.

Single dose levels were 1 mg, 3 mg, 5 mg, 15 mg, 25 mg, 50 mg and 80 mg.

Preliminary data from this trial showed that ATI-2138 was generally well tolerated at all doses tested in the trial.

No serious adverse events or severe adverse events were reported.

The most common adverse events in subjects treated with ATI-2138, headache (four subjects) and lightheadedness (two subjects), were mild and transient.

ATI-2138 demonstrated linear pharmacokinetic data and absorption with a favorable pharmacokinetic profile up to the 80 mg single dose.

The terminal half-life ranged from 1.5 to 2.5 hours.

In addition, no significant food effect at the 15 mg dose (fasted versus fed) was observed, and similar pharmacokinetic data was observed with the capsule versus tablet formulation at the 25 mg dose.

We also observed dose-dependent inhibition of both ITK and JAK3 exploratory pharmacodynamic biomarkers, and near complete inhibition of the dual ITK and JAK3-stimulated interferon production at the 15 mg through 80 mg doses.

We have selected ulcerative colitis as the intended first clinical development target for ATI-2138.

We are also exploring additional indications that are relevant to the mechanism of action.

In October 2022, we submitted a new IND for ATI-2138 for the treatment of ulcerative colitis.

If the IND is allowed, we plan to initiate a Phase 1 multiple ascending dose (MAD) trial of ATI-2138 in healthy subjects by the end of 2022, with topline data expected in the first half of 2023.

Preclinical Programs

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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.

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

Discovery Programs

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Since our inception, we have incurred significant net losses.

Our net loss was $39.3 million for the six months ended June 30, 2022 and $90.9 million for the year ended December 31, 2021.

As of June 30, 2022, we had an accumulated deficit of $634.7 million.

Our net loss was $59.3 million for the nine months ended September 30, 2022 and $90.9 million for the year ended December 31, 2021.

As of September 30, 2022, we had an accumulated deficit of $654.7 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.

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

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 have implemented a hybrid work model of remote and in-person operations for our employees that enables 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 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.

If COVID-19 continues to spread, we may experience 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 and spread of new variants, 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.

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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.

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.

License Agreement with Eli Lilly and Company

In August 2022, we entered into a non-exclusive patent license agreement with Eli Lilly and Company, or Lilly.

Under the license agreement, we granted Lilly non-exclusive rights under certain patents and patent applications that we exclusively license from a third party.

The patents and patent applications relate to the use of baricitinib, Lilly’s JAK inhibitor, to treat alopecia areata.

Under the license agreement, Lilly has agreed to pay us an upfront payment, regulatory and commercial milestone payments, anniversary payments, and a low single-digit royalty calculated as a percentage of Lilly’s net sales of baricitinib for the treatment of alopecia areata.

We have separate contractual obligations under which we have agreed to pay to third parties an amount equal to any regulatory and commercial milestone payments we receive under the Lilly license agreement, as well as a portion of the upfront consideration and a portion of the royalties we may receive under the license agreement.

During the three months ended September 30, 2022, we received $17.6 million from Lilly, a portion of which represented payments for regulatory and commercial milestones that were deemed to have been achieved as of the execution of the license agreement.

We remain eligible to receive future milestone payments, all of which will be paid by us to third parties following receipt as described above.

We recorded amounts paid to third parties of $7.3 million during the three months ended September 30, 2022.

Components of Our Results of Operations

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Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered.

Other Revenue

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

Licensing revenue primarily consists of upfront consideration, royalties and milestone payments earned pursuant to the asset purchase agreement with EPI Health and the license agreement with Lilly described above.

Other revenue consists of amounts earned from the sub-sublease of our office space.

Cost and Expenses

Cost of Revenue

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● laboratory materials and supplies used to support the services provided.

Research and Development Expenses

Research and Development

Research and development expenses consist of expenses incurred in connection with the discovery and development of our drug candidates.

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● manufacturing scale-up expenses and the cost of acquiring and manufacturing active pharmaceutical ingredients and preclinical and clinical trial materials, including domestic technology transfer expenses;

● quality assurance and quality control costs;

● outsourced professional scientific development services;

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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.

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.

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

General and Administrative Expenses

General and Administrative

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 and travel expenses.

Licensing expenses consist of third party contractual obligations incurred related to the receipt of specified payments under the Lilly license agreement described above.

Revaluation of Contingent Consideration

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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.

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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 June 30, 2022 compared to between 4% and 40% at June 30, 2021.

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 September 30, 2022 compared to between 4% and 40% at September 30, 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 10.9% and 11.6% depending on the year of each potential payment.

During the six months ended June 30, 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 $4.6 million.

The overall decrease was partially offset by the increase in contingent consideration as a result of the impact of the passage of time.

During the six months ended June 30, 2021, we updated assumptions for probability of success and estimated future sales levels as a result of the completion of a Phase 2a clinical trial of 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.

During the nine months ended September 30, 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 an overall decrease in contingent consideration of $2.4 million.

The decreases resulting from the higher discount rates and wider credit spreads were partially offset by increases as a result of the impact of the passage of time.

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 hidradenitis suppurativa and psoriatic arthritis, which are additional planned indications for zunsemetinib.

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Results of Operations

Comparison of Three and Six Months Ended June 30, 2022 and 2021

Three Months Ended June 30,

Six Months Ended June 30,

Comparison of Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Contract research

Other revenue

Total revenue

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Other income (expense), net

Contract research revenue was $1.2 million and $1.6 million for the three months ended June 30, 2022 and 2021, respectively, and was comprised of fees earned from the provision of laboratory services.

The $0.4 million decrease was driven by lower overall hours billed, partially offset by a higher average billing rate.

Other revenue for the three months ended June 30, 2022 and 2021 primarily consisted of $0.3 million and $0.2 million of royalties earned on net sales of RHOFADE, respectively.

Contract research revenue was $2.4 million and $3.1 million for the six months ended June 30, 2022 and 2021, respectively, and was comprised of fees earned from the provision of laboratory services.

The $0.7 million decrease was driven by lower overall hours billed, partially offset by a higher average billing rate.

Other revenue for the six months ended June 30, 2022 and 2021 primarily consisted of $0.5 million and $0.4 million of royalties earned on net sales of RHOFADE, respectively.

Contract research

Contract research revenue was $1.1 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively, and was comprised of fees earned from the provision of laboratory services.

The decrease was driven by lower overall hours billed, partially offset by a higher average billing rate.

Contract research revenue was $3.5 million and $4.6 million for the nine months ended September 30, 2022 and 2021, respectively, and was comprised of fees earned from the provision of laboratory services.

The decrease was driven by lower overall hours billed, partially offset by a higher average billing rate.

Licensing revenue was $17.9 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively.

The increase was driven by $17.6 million of upfront and milestone payments received under the Lilly agreement.

Licensing revenue was $18.4 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.

The increase was driven by $17.6 million of upfront and milestone payments received under the Lilly agreement.

Costs and Expenses

Cost of Revenue

Cost of revenue was $1.1 million and $2.2 million for the three and six months ended June 30, 2022, respectively, and $1.3 million and $2.5 million for the three and six months ended June 30, 2021, respectively.

Cost of revenue was $0.9 million and $3.1 million for the three and nine months ended September 30, 2022, respectively, and $1.1 million and $3.6 million for the three and nine months ended September 30, 2021, respectively.

In each case, cost of revenue related to providing laboratory services.

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

Cost of revenue decreased in the three and six months ended June 30, 2022 due to lower variable costs resulting from the decrease in hours billed, partially offset by an increase in fixed overhead costs, including personnel-related costs.

Research and Development Expenses

Cost of revenue decreased in the three and nine months ended September 30, 2022 compared to the corresponding prior year periods due to lower variable costs resulting from the decrease in hours billed, partially offset by an increase in fixed overhead costs, including personnel-related costs.

Research and Development

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Total research and development expenses

The increase in expenses for zunsemetinib during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 was primarily due to costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021, a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021 and start-up activities for a Phase 2a trial in subjects with psoriatic arthritis, which initiated in June 2022.

The increase in expenses for ATI-1777 during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 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 in subjects with atopic dermatitis.

The increase in expenses for zunsemetinib during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021, a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021 , a Phase 2a trial in subjects with psoriatic arthritis, which initiated in June 2022, and several ancillary clinical trials.

The increase in expenses for ATI-1777 during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to higher costs associated with drug candidate

manufacturing and other preclinical development activities as well as costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis.

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

Expenses for ATI-2138 were relatively flat during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 due to a decrease in preclinical development activities and IND-enabling study expenses following our IND submission in October 2021, offset by clinical development expenses associated with a Phase 1 SAD trial, which initiated in December 2021.

Expenses for ATI-2231 were higher during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 primarily due to preclinical development activities and IND-enabling studies.

Expenses related to discovery increased during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 due to continued investment in our discovery-stage programs as we progressed programs toward candidate selection.

The increase in expenses for ATI-2138 during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to an increase in clinical development expenses associated with a Phase 1 SAD trial, which initiated in December 2021, offset by a decrease in preclinical development activities.

Expenses for ATI-2231 were higher during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily due to preclinical development activities and IND-enabling studies as we progressed the program toward IND submission.

Expenses related to discovery increased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 due to continued investment in our discovery-stage programs as we progressed programs toward candidate selection.

Personnel and stock-based compensation

Personnel and stock-based compensation expenses increased in the aggregate during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 primarily due to an increase in costs associated with higher average headcount.

For the six months ended June 30, 2022 the increase in costs associated with higher average headcount was partially offset by a decrease in stock-based compensation expense mainly attributable to forfeiture credits recorded between the period.

General and Administrative Expenses

Personnel and stock-based compensation expenses increased in the aggregate during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily due to an increase in costs associated with higher average headcount.

For the nine months ended September 30, 2022 the increase in costs associated with higher average headcount was partially offset by a decrease in stock-based compensation expense mainly attributable to forfeiture credits recorded during the period.

General and Administrative

The following table summarizes our general and administrative expenses:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Personnel and stock-based compensation

Personnel and stock-based compensation expenses in the aggregate increased during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 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.

Personnel and stock-based compensation expenses in the aggregate increased during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to higher average headcount .

Personnel and stock-based compensation expenses in the aggregate increased during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to 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, decreased during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 primarily as a result of lower legal fees, partially offset by higher Sarbanes-Oxley and other accounting compliance expenses.

Professional and legal fees, including accounting, investor relations and corporate communication costs, decreased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 primarily as a result of lower accounting and other professional expenses due to a reduction in temporary staffing costs.

Facility and support services

Facility and support services, including general office expenses, information technology costs and other expenses, was relatively flat during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Facility and support services, including general office expenses, information technology costs and other expenses, increased during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to an increase in overhead expenses including increases in tax and license fees and information technology support costs.

Facility and support services, including general office expenses, information technology costs and other expenses, increased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 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 decrease in the fair value of our contingent consideration liability during the three months ended June 30, 2022 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 in 2022.

Additionally, increases recorded during the three months ended June 30, 2021 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 atopic dermatitis contributed to the decrease.

The decrease in the fair value of our contingent consideration liability during the six months ended June 30, 2022 compared to the six months ended June 30, 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 in 2022.

Additionally, increases recorded during the six months ended June 30, 2021 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 rheumatoid arthritis, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with atopic dermatitis.

Additionally, the inclusion of estimated future sales of zunsemetinib as a potential treatment for hidradenitis suppurativa and psoriatic arthritis, which are additional planned indications for zunsemetinib, also contributed to the increase during the six months ended June 30, 2021.

The increase in the fair value of our contingent consideration liability during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was mainly due to the modification of a valuation model assumption, offset by higher discount rates being applied to potential payments.

The decrease in the fair value of our contingent consideration liability during the nine months ended September 30, 2022 compared to the nine months ended September 30, 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 the prior year period.

We recorded increases during the nine months ended September 30, 2021 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 rheumatoid arthritis, as well as the completion of a Phase 2a clinical trial of ATI-1777 in subjects with atopic dermatitis.

Other Income (Expense), net

Other income (expense), net increased during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 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.

Other income (expense), net increased during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 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

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

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

We may also receive royalties and milestone payments under existing license and acquisition agreements with third parties.

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

As of June 30, 2022, we had cash, cash equivalents and marketable securities of $255.8 million.

As of September 30, 2022, we had cash, cash equivalents and marketable securities of $248.1 million.

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

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Equity Financing

Sale of Common Stock Pursuant to At-the-Market Offering

Sale of Common Stock under 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.

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

Cash and cash equivalents were $68.3 million as of June 30, 2022 compared to $27.3 million as of December 31, 2021.

We also had $187.6 million in short- and long-term marketable securities as of June 30, 2022 compared to $198.3 million as of December 31, 2021.

Cash and cash equivalents were $61.7 million as of September 30, 2022 compared to $27.3 million as of December 31, 2021.

We also had $186.4 million in short-term marketable securities as of September 30, 2022 compared to $198.3 million in short- and long-term marketable securities as of December 31, 2021.

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

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Cash flow related to operating activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Net cash used in operating activities

Net cash used in operating activities increased for the six months ended June 30, 2022 compared to the six months ended June 30, 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 and other assets.

The decrease in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly the result of a decrease in revaluation of contingent consideration during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to higher discount rates, resulting from higher risk-free rates and wider credit spreads, being applied to potential payments relative to prior periods in 2022.

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 period.

The decrease in cash paid for prepaid expenses and other assets resulted from an increase in the prepaid research and development balance at June 30, 2021 relative to the balance at December 31, 2020, as compared to the prepaid research and development balance at June 30, 2022 which was flat relative to the balance at December 31, 2021.

Net cash used in operating activities increased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily as a result of higher net losses after adjusting for non-cash items and a decrease in cash paid for prepaid expenses and other assets.

The decrease in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly the result of a decrease in revaluation of contingent consideration during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due to higher discount rates, resulting from higher risk-free rates and wider credit spreads, being applied to potential payments relative to the prior period.

The decrease in cash paid for prepaid expenses and other assets resulted from a decrease in the prepaid research and development balance at September 30, 2022 relative to the balance at December 31, 2021, as compared to the prepaid research and development balance at September 30, 2021 relative to the balance at December 31, 2020.

Additionally, the decrease resulted from the realization of previously recorded assets during the nine months ended September 30, 2022.

Investing Activities

Cash flow related to investing activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Net cash provided by (used in) investing activities

Net cash provided by investing activities for the six months ended June 30, 2022 compared to net cash used in investing activities for the six months ended June 30, 2021 primarily resulted from sales and maturities of marketable securities during the six months ended June 30, 2022, which were used to fund our operations, and a reduction of purchases of marketable securities, which were higher during the six months ended June 30, 2021 following our January 2021 and June 2021 public offerings.

Net cash provided by investing activities for the nine months ended September 30, 2022 compared to net cash used in investing activities for the nine months ended September 30, 2021 primarily resulted from higher sales and maturities of marketable securities during the nine months ended September 30, 2022, which were used to fund our operations, and a reduction of purchases of marketable securities, which were higher during the nine months ended September 30, 2021 following our January 2021 and June 2021 public offerings.

Financing Activities

Cash flow related to financing activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

1 unchanged sentence

Proceeds from issuance of common stock under the at-the-market sales agreement, net of issuance costs

Repayment of debt

Payments of employee withholding taxes related to restricted stock unit award vesting

1 unchanged sentence

Net cash provided by financing activities

Net cash provided by financing activities decreased for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to our January 2021 and June 2021 public offerings, partially offset by our April 2022 sales under the at-the-market sales agreement.

Net cash provided by financing activities decreased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to our January 2021 and June 2021 public offerings, partially offset by the proceeds from our April 2022 sale under the at-the-market sales agreement.

Funding Requirements

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Louis, Missouri under a sublease agreement which has a term through June 2029.

Our aggregate remaining lease payment obligations for these two spaces was $3.3 million as of June 30, 2022.

Our aggregate remaining lease payment obligations for these two facilities was $3.1 million as of September 30, 2022.

Agreement and Plan of Merger – Confluence

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

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

In addition, we have agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified

reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product.

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

7 unchanged sentences

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