What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-07 · 125 added, 84 removed, 286 unchanged (42% of the section changed)

19 unchanged sentences

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

We expect topline data in the fourth quarter of 2023.

We expect topline data in November 2023.

Moderate to Severe Psoriatic Arthritis

13 unchanged sentences

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.

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.

This trial consists of a 4-week treatment period and a 2-week follow-up period and has completed enrollment of 250 patients, including adults and children as young as 12 years old, across the United States.

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

We expect topline data in the second half of 2023.

We expect topline data around the end of 2023.

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

1 unchanged sentence

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 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 two-week 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).

We completed enrollment for this trial of healthy volunteers in the United States.

Based on a preliminary analysis of the pharmacokinetics, pharmacodynamics and safety, we believe the data support the progression of ATI-2138 into Phase 2 clinical development in ulcerative colitis.

We expect to report the data in September 2023.

The study enrolled 60 healthy subjects across 6 dosing cohorts ranging from 10 to 80 mg of total daily doses, with eight active and two placebo controlled per arm.

Preliminary data from the trial demonstrated that ATI-2138 was generally well tolerated at all doses tested in the trial and had dose proportional pharmacokinetics.

Additionally, ATI-2138 demonstrated a dose-dependent inhibition of both ITK and JAK3 exploratory pharmacodynamic biomarkers, with near maximal inhibition achieved at the 30 mg total daily dose.

No serious adverse events were reported.

Based on the positive results of this study, we will progress this program into a Phase 2a proof of concept study in patients with ulcerative colitis.

We anticipate initiation of this Phase 2a trial in early 2024.

We are also exploring the potential of conducting a second proof of concept trial of ATI-2138 in an additional T cell-mediated autoimmune disease.

ATI-2231, an Investigational Oral MK2 Inhibitor

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 are also currently exploring options to use ATI-2231 as a potential treatment for

immuno-inflammatory diseases.

We are supporting Washington University in a first-in-human investigator-initiated Phase 1a trial of ATI-2231 in patients with advanced solid tumor malignancies.

1 unchanged sentence

Discovery Programs

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

We conduct small molecule drug discovery and preclinical development research, including through KINect®, our proprietary drug discovery platform.

We leverage our early research and development capabilities and KINect to identify potential drug candidates that we may develop independently or in collaboration with third parties.

Intellectual Property

Our success depends in large part upon our ability to obtain and maintain proprietary protection for our drug candidates and to operate without infringing the proprietary rights of others.

We seek to avoid the latter by monitoring patents and publications that may affect our business, and to the extent we identify such developments, evaluating and taking appropriate courses of action.

Our policy is to protect our proprietary position by, among other methods, filing patent applications on inventions that are important to the development and conduct of our business with the U.S.

Patent and Trademark Office, or USPTO, and its foreign counterparts.

With respect to our MK2 signaling pathway inhibitor development program, we own numerous issued patents and pending applications to novel MK2 pathway inhibitors, including our lead candidate zunsemetinib, and various methods of use that expire, or would expire, between 2031 and 2041, subject to any applicable patent term adjustment or extension that may be available in a particular country.

For example, we own two issued U.S.

patents and issued patents and pending applications in the European Union and other foreign countries directed to zunsemetinib and analogs thereof and certain methods of using the same.

patents expire in 2034 and any claims that may issue from the pending applications expire in 2034, subject to any applicable adjustment or extension.

We own one allowed U.S.

application and numerous pending patent applications in the European Union and other foreign countries directed to methods of treating inflammatory conditions, such as rheumatoid arthritis and psoriatic arthritis, by orally administering zunsemetinib, which, if issued, would each expire in 2041, subject to any applicable adjustment or extension.

Further, we own one U.S.

patent and numerous pending patent applications in the U.S., European Union and other foreign countries directed to certain methods of manufacturing zunsemetinib and crystal forms of zunsemetinib, which, if issued, would each expire in 2041, subject to any applicable adjustment or extension.

We also own pending patent applications in the U.S., European Union and other foreign countries directed to ATI-2231, and methods of use, which, if issued, would expire in 2040, subject to any applicable adjustment or extension.

With respect to our “soft” JAK inhibitor development program, we own numerous issued patents and pending applications in the U.S.

and foreign countries to novel “soft” JAK inhibitors and various methods of use that expire, or would expire, between 2038 and 2042, subject to any applicable patent term adjustment or extension that may be available in a particular country.

For example, we own issued patents in the U.S.

and other foreign countries, as well as pending applications in the U.S.

and foreign countries directed to various novel inhibitors of JAK1 and/or JAK3, including ATI-1777, and methods of using the same, which, if issued, would expire in 2038, subject to any applicable adjustment or extension.

We also own pending applications in the U.S.

and foreign countries directed to crystal forms of ATI-1777 and directed to methods of using ATI-1777 and topical formulations, which, if issued, would expire in 2041 and 2042, respectively, subject to any applicable adjustment or extension.

With respect to our ITK inhibitor development program, we own numerous issued U.S.

patents and pending applications in the U.S.

and foreign countries directed to novel inhibitors of ITK and methods of use that expire, or would expire, between 2035 and 2039, subject to any applicable patent term adjustment or extension that may be available in a particular country.

For example, we own one U.S.

patent and pending U.S., European Union and other foreign country applications directed to ATI-2138 and analogs thereof and methods of using the same, which, if issued, would expire in 2039, subject to any applicable adjustment or extension.

Financial Overview

Since our inception, we have incurred significant net losses.

Our net loss was $57.7 million for the six months ended June 30, 2023 and $86.9 million for the year ended December 31, 2022.

As of June 30, 2023, we had an accumulated deficit of $740.0 million.

Our net loss was $87.0 million for the nine months ended September 30, 2023 and $86.9 million for the year ended December 31, 2022.

As of September 30, 2023, we had an accumulated deficit of $769.3 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.

21 unchanged sentences

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.

Asset Purchase Agreement with EPI Health

1 unchanged sentence

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.

During the three months ended June 30, 2023 and June 30, 2022, we recorded royalty income of $0.1 million and $0.3 million, respectively, and during the six months ended June 30, 2023 and June 30, 2022, we recorded royalty income of $0.3 million and $0.5 million, respectively.

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

On July 17, 2023, EPI Health filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.

As a result of the bankruptcy filing, we recorded an allowance for doubtful accounts related to amounts due from EPI Health resulting in $1.0 million of bad debt expense for the three and six months ended June 30, 2023.

Through the bankruptcy process, EPI Health and its parent company, Novan, Inc., sold the RHOFADE assets to a third party.

Under the sale agreement, our asset purchase agreement with EPI Health was not assumed by the buyer, and as a result, the buyer is not obligated to continue to pay us royalties or milestones on future sales of RHOFADE, nor is the buyer obligated to cure the outstanding amounts in default by EPI Health.

The sale was approved by the bankruptcy court on September 12, 2023.

As a result of the bankruptcy proceedings, we recorded an allowance for doubtful accounts resulting in $0.3 million of bad debt expense for the three months ended September 30, 2023, and $1.3 million of bad debt expense for the nine months ended September 30, 2023, representing all amounts that were due and outstanding by EPI Health.

License Agreement with Eli Lilly and Company

4 unchanged sentences

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.

Upon execution of the agreement, we received $17.6 million, 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.

During the three and six months ended June 30, 2023, we received $0.9 million and $2.3 million in royalties, respectively, from Lilly, a portion of which was paid to third parties.

During the three and nine months ended September 30, 2023, we recorded $8.3 million and $10.7 million in royalties, commercial milestones and anniversary milestones, respectively, from Lilly, a portion of which is payable to third parties.

During each of the three and nine months ended September 30, 2022, we recorded $17.6 million in upfront payment and regulatory milestones, respectively, from Lilly, a portion of which was payable to third parties.

License Agreement with Pediatrix Therapeutics, Inc.

2 unchanged sentences

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.

We did not record revenue under this agreement during the three and six months ended June 30, 2023.

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

70 unchanged sentences

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 June 30, 2023.

Probability of success assumptions ranged between 17% and 41% on September 30, 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 9.3% and 10.4% depending on the year of each potential payment.

During the six months ended June 30, 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 $2.3 million.

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 nine months ended September 30, 2023, we removed estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication.

As a result of this, as well as due to higher discount rates resulting from higher risk-free rates and changes in credit spreads being applied to potential payments relative to prior periods, we recorded an overall decrease in contingent consideration of $0.6 million.

This decrease was partially offset by an increase in the probability of success of ATI-2138, as well as the passage of time.

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.

This decrease was partially offset by increases as a result of the impact of the passage of time.

Results of Operations

Comparison of Three and Six Months Ended June 30, 2023 and 2022

Three Months Ended June 30,

Six Months Ended June 30,

Comparison of Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

10 unchanged sentences

Contract research

Contract research revenue was $0.9 million and $1.2 million for the three months ended June 30, 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.

Contract research revenue was $1.8 million and $2.4 million for the six months ended June 30, 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 $1.0 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively.

The increase was driven by $0.9 million of royalties under the Lilly license agreement during the three months ended June 30, 2023 offset by a decrease of royalties under the EPI Health agreement between periods.

Licensing revenue was $2.6 million and $0.5 million for the six months ended June 30, 2023 and 2022, respectively.

The increase was driven by $2.3 million of royalties under the Lilly license agreement during the six months ended June 30, 2023 offset by a decrease of royalties under the EPI Health agreement between periods.

Other revenue was $30 thousand for the three months ended June 30, 2022, and $61 thousand for the six months ended June 30, 2022, which was comprised of rent received from the sub-sublease of our office space.

Contract research revenue was $0.7 million and $1.1 million for the three months ended September 30, 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 and a lower average billing rate.

Contract research revenue was $2.5 million and $3.5 million for the nine months ended September 30, 2023 and 2022, respectively, and was comprised of fees earned from the provision of laboratory services.

The decrease was primarily driven by lower overall hours billed.

Licensing revenue was $8.6 million and $17.9 million for the three months ended September 30, 2023 and 2022, respectively.

The decrease was primarily driven by a one-time upfront payment under the Lilly license agreement during the three months ended September 30, 2022.

Licensing revenue was $11.2 million and $18.4 million for the nine months ended September 30, 2023 and 2022, respectively.

The decrease was primarily driven by a one-time upfront payment under the Lilly license agreement during the nine months ended September 30, 2022.

Other revenue was $30 thousand for the three months ended September 30, 2022, and $92 thousand for the nine months ended September 30, 2022, which was comprised of rent received from the sub-sublease of our office space.

The sub-sublease was terminated in December 2022.

1 unchanged sentence

Cost of Revenue

Cost of revenue was $1.0 million and $1.1 million for the three months ended June 30, 2023 and 2022, respectively, and in each case, related to providing laboratory services.

Cost of revenue was $0.8 million and $0.9 million for the three months ended September 30, 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 months ended June 30, 2023 compared to the corresponding prior year period due to lower variable costs resulting from a decrease in hours billed.

Cost of revenue was $1.9 million and $2.2 million for the six months ended June 30, 2023 and 2022, respectively, and in each case, related to providing laboratory services.

Cost of revenue decreased in the three months ended September 30, 2023 compared to the corresponding prior year period due to lower variable costs resulting from a decrease in hours billed.

Cost of revenue was $2.7 million and $3.1 million for the nine months ended September 30, 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 six months ended June 30, 2023 compared to the corresponding prior year period due to lower variable costs resulting from a decrease in hours billed.

Cost of revenue decreased in the nine months ended September 30, 2023 compared to the corresponding prior year period due to lower variable costs resulting from a decrease in hours billed.

Research and Development

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

2 unchanged sentences

Total research and development expenses

The increase in expenses for zunsemetinib during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 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 decrease in expenses for zunsemetinib during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to 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 zunsemetinib during the nine months ended September 30, 2023 compared to the nine months ended September 30, 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 decrease in expenses for ATI-1777 during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily due to lower costs associated with drug candidate manufacturing and other preclinical development activities.

The decrease in expenses for ATI-1777 during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to lower costs associated with drug candidate manufacturing and other preclinical development activities.

The decrease was partially offset by an increase in costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis.

The increase in expenses for ATI-2138 during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily due to an increase in clinical development expenses associated with a Phase 1 MAD trial, as well as an increase in preclinical development activities.

The decrease in expenses for ATI-2231 during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily due to preclinical development activities and IND-enabling studies in the prior period as we progressed the program toward IND submission in 2023.

The increase in expenses related to discovery during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was 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, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to an increase in clinical development expenses associated with a Phase 1 MAD trial, as well as an increase in preclinical development activities and ancillary studies.

The decrease in expenses for ATI-2231 during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to preclinical development activities, IND-enabling studies and drug manufacturing in the prior period as we progressed the program toward IND submission in 2023.

The increase in expenses related to discovery during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was due to continued investment in our discovery-stage programs as we progressed programs toward candidate selection.

Personnel and stock-based compensation

The increase in personnel and stock-based compensation expenses in the aggregate during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily due to an increase in costs associated with higher average headcount, compensation adjustments and equity awards granted in 2023, and lower costs during the three and six months ended June 30, 2022 due to forfeiture credits.

The increase in personnel and stock-based compensation expenses in the aggregate during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to an increase in costs associated with higher average headcount and equity awards granted in 2023.

The increase in personnel and stock-based compensation expenses in the aggregate during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to an increase in costs associated with higher average headcount, compensation adjustments and equity awards granted in 2023, and lower costs during the nine months ended September 30, 2022 due to forfeiture credits.

General and Administrative

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

Personnel and stock-based compensation

Personnel and stock-based compensation expenses in the aggregate increased during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 primarily due to higher average headcoun t, compensation adjustments, and equity awards granted in 2023.

Personnel and stock-based compensation expenses in the aggregate increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 primarily due to higher average headcoun t, compensation adjustments, and equity awards granted in 2023.

Professional and legal fees

Professional and legal fees, including accounting, investor relations and corporate communication costs, increased during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022.

The increase during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily driven by an increase in accounting related expenses.

The increase during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily driven by an increase in patent expenses.

Professional and legal fees, including accounting, investor relations and corporate communication costs, increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022.

The increase during the three months ended September 30, 2023 compared to the three months ended

September 30, 2022 was primarily driven by an increase in accounting related expenses.

The increase during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by an increase in patent and accounting related expenses.

Facility and support services

Facility and support services, including general office expenses, information technology costs and other expenses, increased during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 primarily as a result of an increase in rent expense due to leasing additional office and laboratory space and an increase in information technology costs during the three and six months ended June 30, 2023.

Bad debt expenses were related to our determination that amounts due to us as of June 30, 2023 pursuant to the asset purchase agreement with EPI Health are uncertain as a result of the bankruptcy filing by EPI Health in July 2023.

There was no bad debt expense during the three and six months ended June 30, 2022.

Licensing expenses during the three and six months ended June 30, 2023 were related to amounts paid to third parties pertaining to the Lilly agreement.

There were no licensing expenses during the three and six months ended June 30, 2022.

Facility and support services, including general office expenses, information technology costs and other expenses, increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 primarily as a result of an increase in rent expense due to leasing additional office and laboratory space and an increase in information technology costs during the three and nine months ended September 30, 2023.

Bad debt expenses were related to our determination that amounts due to us as of September 30, 2023 pursuant to the asset purchase agreement with EPI Health are uncertain as a result of the bankruptcy filing by EPI Health, which was initiated in July 2023.

Licensing expenses during the three and nine months ended September 30, 2023 and 2022 were related to amounts payable to third parties pertaining to the Lilly agreement.

Revaluation of Contingent Consideration

The gain on revaluation of contingent consideration decreased during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 and was driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments and an increase in the probability of success of zunsemetinib in psoriatic arthritis, partially offset by adjustments to other assumptions for certain clinical programs.

The gain on revaluation of contingent consideration decreased during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 and was driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments, partially offset by adjustments to other assumptions for certain clinical programs, including the removal of estimated future sales levels of zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing this indication.

The loss on revaluation of contingent consideration decreased during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and was mainly due to the modification of a valuation model assumption during the three months ended September 30, 2022.

The gain on revaluation of contingent consideration decreased during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 and was mainly driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments, as well as an increase in the probability of success of ATI-2138 during the nine months ended September 30, 2023.

This decrease was partially offset by the removal of estimated future sales levels of zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing this indication during the nine months ended September 30, 2023.

Other Income, net

Other income, net increased during the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, primarily due to higher interest income on investment portfolio balances.

Other income, net increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, primarily due to higher interest income on investment portfolio balances.

Liquidity and Capital Resources

5 unchanged sentences

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, 2023, we had cash, cash equivalents and marketable securities of $210.8 million.

As of September 30, 2023, we had cash, cash equivalents and marketable securities of $187.0 million.

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

6 unchanged sentences

We paid selling commissions and other fees of $2.3 million in connection with the sale.

Cash and cash equivalents were $31.2 million as of June 30, 2023 compared to $45.3 million as of December 31, 2022.

We also had $179.6 million in short- and long-term marketable securities as of June 30, 2023 compared to $184.5 million as of December 31, 2022.

Cash and cash equivalents were $39.0 million as of September 30, 2023 compared to $45.3 million as of December 31, 2022.

We also had $148.0 million in short- and long-term marketable securities as of September 30, 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:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

6 unchanged sentences

Cash flow related to operating activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

4 unchanged sentences

Net cash used in operating activities

Net cash used in operating activities increased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily as a result of higher net losses after adjusting for non-cash items.

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 six months ended June 30, 2023 compared to the six months ended June 30, 2022 due to higher employee headcount and equity awards granted in 2023, as well as forfeiture credits recognized during the six months ended June 30, 2022.

This increase was partially offset by a decrease in the gain on revaluation of contingent consideration during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments, partially offset by adjustments to other assumptions for certain clinical programs, including the removal of estimated future

sales levels of zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing this indication.

Net cash used in operating activities increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of higher net losses after adjusting for non-cash items.

The increase in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly driven by an increase in stock-based compensation expense during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due to higher employee headcount and equity awards granted in 2023, as well as forfeiture credits recognized during the nine months ended September 30, 2022, and licensing expenses pertaining to the Lilly agreement payable to third parties.

This increase was partially offset by a decrease in the gain on revaluation of contingent consideration during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 mainly driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments, as well as an increase in the probability of success of ATI-2138 during the nine months ended September 30, 2023.

Investing Activities

Cash flow related to investing activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

3 unchanged sentences

Net cash provided by investing activities

The decrease in net cash provided by investing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 resulted primarily from higher purchases of marketable securities during the six months ended June 30, 2023, partially offset by higher sales and maturities of marketable securities during the six months ended June 30, 2023, which were used to fund our operations.

The increase in net cash provided by investing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 resulted primarily from higher sales and maturities of marketable securities during the nine months ended September 30, 2023, which were used to fund our operations, partially offset by higher purchases of marketable securities during the nine months ended September 30, 2023.

Financing Activities

Cash flow related to financing activities was the result of:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

4 unchanged sentences

Net cash provided by financing activities

Net cash provided by financing activities decreased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to larger proceeds in 2022 from our sales under our at-the-market sales agreement.

Net cash provided by financing activities decreased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to larger proceeds in 2022 from sales under our at-the-market sales agreement.

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 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.

or at all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.

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

20 unchanged sentences

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

We occupy space for our headquarters in Wayne, Pennsylvania under a sublease agreement which has a term that runs through October 2023.

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

The sub-sublease was terminated in December 2022.

We occupied space for our headquarters in Wayne, Pennsylvania under a sublease agreement, which expired as of October 31, 2023.

We also occupy office and laboratory space in St.

2 unchanged sentences

Louis, Missouri.

Our aggregate remaining lease payment obligations for these two spaces was $3.1 million as of June 30, 2023.

In May 2023, we executed a new lease agreement pursuant to which we will lease 11,564 square feet of office space for new headquarters in Wayne, Pennsylvania.

This lease is expected to commence in November 2023 and has a term of 64 months.

Our aggregate remaining lease payment obligations for these two spaces was $2.8 million as of September 30, 2023.

As of November 1, 2023, we occupy 11,564 square feet of office space for our headquarters in Wayne, Pennsylvania under a lease agreement which has a term that runs through March 2029.

Total lease payment obligations for the life of the lease are $2.0 million.

11 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