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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-08 · 123 added, 206 removed, 227 unchanged (59% of the section changed)

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Zunsemetinib, an Investigational Oral MK2 Inhibitor

We are developing zunsemetinib, an investigational oral, novel, small molecule selective MK2 inhibitor compound, as a potential treatment for rheumatoid arthritis and other immuno-inflammatory diseases.

We are developing zunsemetinib, an investigational oral, novel, small molecule selective MK2 inhibitor, as a potential treatment for rheumatoid arthritis and psoriatic arthritis.

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.

As an oral drug candidate, we are developing zunsemetinib as a potential alternative to injectable anti-TNF/IL1/IL6/IL17 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases.

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

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

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

We also observed that zunsemetinib had dose-proportional pharmacokinetics with a terminal half-life of 9-12 hours in the multiple ascending dose cohort, and had no meaningful food effect or drug-drug interaction with methotrexate.

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

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

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

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

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

No serious adverse events were reported and

all adverse events were mild.

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.

Moderate to Severe Rheumatoid Arthritis

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

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

The final per-protocol analysis, which consisted of the 17 subjects who completed the treatment period (15 in the treatment arm and two in the placebo arm), showed that zunsemetinib demonstrated durable clinical activity, as defined by a marked and sustained reduction in DAS28-CRP and improvement of American College of Rheumatology 20%/50%/70% (ACR20/50/70) responses over 12 weeks.

Zunsemetinib was generally well tolerated.

All adverse events were mild to moderate.

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

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

The subject in the treatment arm withdrew due to an elevated creatine phosphokinase, or CPK, level, which was determined by the site investigator to be treatment-related;

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

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

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

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

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

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

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).

In December 2021, we initiated 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 the second half of 2023.

We expect topline data in the fourth quarter 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.

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

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

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

In December 2021, we initiated 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).

In March 2023, we announced that the study did not meet its primary or secondary efficacy endpoints.

We do not plan to further pursue this indication.

Moderate to Severe Psoriatic Arthritis

In June 2022, 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 psoriatic arthritis (ATI-450-PsA-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

and in Poland.

In June 2022, we initiated 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 psoriatic arthritis (ATI-450-PsA-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 and in Poland.

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

We expect topline data in the second half of 2023.

We expect topline data in the first half of 2024.

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

We are developing ATI-1777, an investigational topical “soft” JAK 1/3 inhibitor compound, as a potential treatment for moderate to severe atopic dermatitis.

We are developing ATI-1777, an investigational topical “soft” JAK 1/3 inhibitor, as a potential treatment for mild to severe atopic dermatitis.

“Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure.

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

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

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

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

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

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

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

These secondary efficacy endpoints were not powered for statistical significance.

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

ATI-1777 was generally well tolerated.

No serious adverse events were reported.

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

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

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

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.

In May 2022, we initiated 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 April 2023, we expanded the patient population to include patients with mild disease.

In this trial, we are exploring 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 consists 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 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.

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), which we completed in November 2022.

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 expect topline data in the second half of 2023.

ATI-2138, an Investigational Oral Covalent ITK/JAK3 Inhibitor

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

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

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.

In October 2022, we submitted an IND for ATI-2138 for the treatment of ulcerative colitis, which was allowed by the FDA in November 2022.

In December 2022, we initiated a Phase 1 placebo-controlled, randomized, multiple ascending dose (MAD) trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-2138 in healthy volunteers (ATI-2138-PKPD-102).

This trial seeks to enroll approximately 60 healthy volunteers in the United States.

We expect topline data in the second half of 2023.

Preclinical Programs

ATI-2231, an Investigational Oral MK2 Inhibitor

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

IND-enabling studies are currently underway.

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

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

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

We are exploring the use of ATI-2231, an investigational oral MK2 inhibitor 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 expect clinical development activities to be initiated in 2023, which we expect to

advance as a collaboration with an academic third party.

Discovery Programs

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

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

Financial Overview

Since our inception, we have incurred significant net losses.

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.

Our net loss was $28.2 million for the three months ended March 31, 2023 and $86.9 million for the year ended December 31, 2022.

As of March 31, 2023, we had an accumulated deficit of $710.5 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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Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses.

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

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

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

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

Impacts of COVID-19 on Our Business

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

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.

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.

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

Recent Developments

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

In March 2023, we issued a placement notice to sell 3.4 million shares of our common stock for aggregate gross proceeds of $27.5 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023.

We paid selling commissions of $0.8 million in connection with the sale.

The transaction closed in April 2023.

Impact of Macroeconomic Conditions on Our Business

Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations.

For example, macroeconomic events, including rising inflation, the U.S.

Federal Reserve raising interest rates, the closure of financial institutions and the Russia-Ukraine war, have led to economic uncertainty globally.

The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods.

If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed.

Acquisition and License Agreements

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

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

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.

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

our wholly owned subsidiary.

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 regulatory and commercial milestones set forth in the Confluence Agreement.

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

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

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

by EPI Health in connection with any license or sublicense of the assets transferred in the Disposition in any territory outside of the United States, subject to specified exceptions.

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

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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.

Upon execution of the agreement, 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.

During the three months ended March 31, 2023, we received $1.4 million in royalties from Lilly, a portion of which was payable to third parties.

License Agreement with Pediatrix Therapeutics, Inc.

In November 2022, we entered into a license agreement with Pediatrix Therapeutics, Inc., or Pediatrix, under which we granted Pediatrix the exclusive rights to develop, manufacture and commercialize ATI-1777 in Greater China.

Pediatrix has agreed to pay us an upfront payment, development, regulatory and commercial milestone payments, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of ATI-1777 by Pediatrix in Greater China.

A portion of consideration received from Pediatrix is payable to the former Confluence equity holders as described above.

Upon execution of the agreement, we received an upfront payment of $5.0 million from Pediatrix, a portion of which was paid to the former Confluence equity holders as described above.

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.

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.

Licensing revenue primarily consists of upfront consideration, royalties and milestone payments earned pursuant to license and acquisition agreements with third parties, as described above.

Other revenue consists of amounts earned from the sub-sublease of our office space, which was terminated during the year ended December 31, 2022.

Cost and Expenses

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● employee-related expenses, which include salaries, benefits and stock-based compensation;

● payments made under agreements with third parties under which we have acquired or licensed intellectual property;

● expenses relating to regulatory activities, including filing fees paid to regulatory agencies;

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

We expect to continue to incur research and development expenses in the near term as we continue the clinical development of 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, and as we continue the development of our preclinical compounds and 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 moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for mild to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, and as we continue the development of our preclinical compounds and discover and develop additional drug candidates.

We expense research and development costs as incurred.

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● the number of doses subjects receive;

● the impact on the recruitment, enrollment, conduct and timing of our clinical trials due to the COVID-19 pandemic;

● the impact on the recruitment, enrollment, conduct and timing of our clinical trials due to macroeconomic conditions;

● the duration of subject follow-up;

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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, business development 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.

Licensing expenses consist of third-party contractual obligations incurred under license and acquisition agreements with third parties, as described above.

Revaluation of Contingent Consideration

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

Other Income (Expense), Net

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

Other Income, Net

Other income, net primarily consists of interest earned on our cash, cash equivalents and marketable securities.

Critical Accounting Estimates

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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.

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, 2022 included in our Annual Report on Form 10-K filed with the SEC on February 23, 2023.

Contingent Consideration

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

These assumptions are highly dependent on the outcome and timing of the development of our drug candidates.

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.

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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 September 30, 2022 compared to between 4% and 40% at September 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 41% on March 31, 2023.

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 9.0% and 9.8% depending on the year of each potential payment.

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.

These updates resulted in an increase in the fair value of the contingent consideration liability of $22.1 million.

During the three months ended March 31, 2023, we did not modify any significant assumptions other than the removal of estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication.

This impact was partially offset by lower discount rates resulting from lower risk-free rates

and changes in credit spreads being applied to potential payments relative to prior periods, as well as the passage of time, resulting in an overall decrease in contingent consideration of $0.8 million.

Results of Operations

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

Three Months Ended September 30,

Nine Months Ended September 30,

Comparison of Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31,

(In thousands)

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Loss from operations

Other income (expense), net

Other income, net

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.

Contract research revenue was $0.9 million and $1.2 million for the three months ended March 31, 2023 and 2022, 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.

Licensing revenue was $1.6 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.

The increase was driven by $1.4 million of royalty and milestone payments received under the Lilly license agreement.

Other revenue was $30 thousand for the three months ended March 31, 2022, and was comprised of revenue earned from the sub-sublease of our office space.

The sub-sublease was terminated in December 2022.

Costs and Expenses

Cost of Revenue

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.

Cost of revenue was $0.8 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively, and in each case, 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 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.

Cost of revenue decreased in the three months ended March 31, 2023 compared to the corresponding prior year period due to lower variable costs resulting from the decrease in hours billed.

Research and Development

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Three 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 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.

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.

The increase in expenses for zunsemetinib during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to higher costs associated with drug candidate manufacturing and costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021, and several ancillary clinical trials.

The increase was partially offset by a decrease in costs associated with clinical development activities for a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021 and was completed in early March 2023.

The increase in expenses for ATI-1777 during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 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.

The increase in expenses for ATI-2138 during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to an increase in clinical development expenses associated with a Phase 1 MAD trial during the three months ended March 31, 2023, as well as an increase in preclinical development activities.

The decrease in expenses for ATI-2231 during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to preclinical development activities and IND-enabling studies as we progressed the program toward IND submission during the three months ended March 31, 2022.

The increase in expenses related to discovery during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was 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 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.

The increase in personnel and stock-based compensation expenses in the aggregate during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to an increase in costs associated with higher average headcount during the three months ended March 31, 2023, and lower costs during the three months ended March 31, 2022 due to forfeiture credits.

General and Administrative

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Three 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 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.

Personnel and stock-based compensation expenses in the aggregate increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to higher average headcount and salary increases and new equity awards granted in 2023.

Professional and legal fees

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.

Professional and legal fees, including accounting, investor relations and corporate communication costs, increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily as a result of an increase in patent expenses.

Facility and support services

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.

Facility and support services, including general office expenses, information technology costs and other expenses, increased slightly during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily as a result of an increase in rent expense due to leasing additional office and laboratory space during the three months ended March 31, 2023.

Licensing expenses increased during the three months ended March 31, 2023 due to amounts due to third parties of $1.1 million pertaining to the Lilly agreement.

There were no licensing expenses during the three months ended March 31, 2022.

Revaluation of Contingent Consideration

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.

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 nine months ended September 30, 2021.

Other Income (Expense), net

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.

The decrease in the fair value of our contingent consideration liability during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was mainly due to the removal of estimated future sales levels of zunsemetinib (ATI-450) for moderate to severe hidradenitis suppurativa.

This decrease was partially offset by lower discount rates being applied to potential payments relative to prior periods and the passage of time.

Other Income, net

Other income, net increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to higher interest income on investment portfolio balances.

Liquidity and Capital Resources

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

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

As of March 31, 2023, we had cash, cash equivalents and marketable securities of $204.4 million.

Subsequent to March 31, 2023, we raised aggregate gross proceeds of $27.5 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.

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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.

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

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.

January 2021 Public Offering

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

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

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

Debt Financing

Loan and Security Agreement with Silicon Valley Bank

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.

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.

In March 2023, we issued a placement notice to sell 3.4 million shares of our common stock pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023, for aggregate gross proceeds of $27.5 million.

We paid selling commissions of $0.8 million in connection with the sale.

This transaction closed in April 2023.

Cash and cash equivalents were $44.7 million as of March 31, 2023 compared to $45.3 million as of December 31, 2022.

We also had $159.7 million in short- and long-term marketable securities as of March 31, 2023 compared to $184.5 million as of December 31, 2022.

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)

1 unchanged sentence

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Net cash provided by financing activities

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Cash flow related to operating activities was the result of:

Nine Months Ended

September 30,

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, 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.

Net cash used in operating activities increased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily as a result of higher net losses after adjusting for non-cash items and an increase in the accretion of interest on investments.

The increase in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly the result of an increase in stock-based compensation expense during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to higher employee headcount and new equity awards granted in 2023, as well as forfeiture credits recognized during the three months ended March 31, 2022.

This increase was partially offset by a decrease in the revaluation of contingent consideration during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to the removal of estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication.

This impact was partially offset by lower discount rates resulting from lower risk-free rates and changes in credit spreads being applied to potential payments relative to the prior period.

Investing Activities

Cash flow related to investing activities was the result of:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

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Proceeds from sales and maturities of marketable securities

Net cash provided by (used in) investing activities

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.

Net cash provided by investing activities

The change in net cash provided by investing activities for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily resulted from higher sales and maturities of marketable securities during the three months ended March 31, 2023, which were used to fund our operations, partially offset from higher purchases of marketable securities during the three months ended March 31, 2023.

Financing Activities

Cash flow related to financing activities was the result of:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

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

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

Restricted stock unit employee tax withholdings

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

Net cash provided by financing activities

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.

Net cash provided by financing activities decreased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to there being no proceeds from exercises of employee stock options and the issuance of stock or employee tax withholdings pertaining to restricted stock units during the three months ended March 31, 2023.

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, 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, as well as continue the development of our preclinical compounds and 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 moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for mild 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.

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Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy.

Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions.

Our ability to raise additional capital may be adversely impacted by potentially worsening global economic conditions caused by a variety of factors including geopolitical tensions, rising interest rates, the closure of financial institutions and inflationary pressures.

If we are unable to raise sufficient additional capital or generate revenue from transactions with potential third-party partners for the development and/or commercialization of our drug candidates, we may need to substantially curtail our planned operations.

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● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

● 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;

● the impact on the timing of our preclinical studies, the recruitment, enrollment, conduct and timing of our clinical trials and our business due to macroeconomic conditions, including the Russia-Ukraine war;

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

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We 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 to a third party.

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

We occupy office and laboratory space in St.

Following the expiration of this lease, we anticipate entering into a new lease agreement.

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

The sub-sublease was terminated in December 2022.

We also occupy office and laboratory space in St.

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

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

In February 2023, we added an additional 6,261 square feet of office and laboratory space in St.

Louis, Missouri.

Our aggregate remaining lease payment obligations for these two spaces was $3.4 million as of March 31, 2023.

Agreement and Plan of Merger – Confluence

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.

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 regulatory and commercial milestones set forth in the Confluence Agreement.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis