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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-23 · 149 added, 152 removed, 255 unchanged (54% of the section changed)

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We are a clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases.

In addition to developing our novel drug candidates, we are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our novel drug candidates.

Clinical Programs

Zunsemetinib, an Investigational Oral MK2 Inhibitor

We are developing zunsemetinib, an investigational oral, novel, small molecule selective MK2 inhibitor, as a potential for the treatment for rheumatoid arthritis, hidradenitis suppurativa 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/IL17 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases.

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

Moderate to Severe Rheumatoid Arthritis

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.

Moderate to Severe Hidradenitis Suppurativa

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).

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 March of 2023.

Moderate to Severe Psoriatic Arthritis

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 by the end of 2023.

Our proprietary KINect drug discovery platform combined with our preclinical development capabilities allows us to identify and advance potential drug candidates that we may develop independently or in collaboration with third parties.

In addition to identifying and developing our novel drug candidates, we are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our novel drug candidates.

We also provide contract research services to third parties enabled by our early-stage research and development expertise.

In January 2024, we announced that we are undertaking a strategic review of our business.

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

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

ATI-1777 is an investigational topical “soft” JAK 1/3 inhibitor for the potential treatment of atopic dermatitis and potentially other dermatologic conditions.

“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 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 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 mid-2023.

In January 2024, we announced positive top-line results from our Phase 2b study of ATI-1777 in patients with mild to severe atopic dermatitis (ATI-1777-AD-202).

ATI-1777-AD-202 was a Phase 2b, multicenter, randomized, double-blind, vehicle-controlled, parallel-group clinical trial to evaluate the efficacy, safety, tolerability and pharmacokinetics, or PK, of multiple concentrations (0.5%, 1% and 2%) of twice daily, or BID, treatment with ATI-1777 and a single concentration (2%) of once daily, or QD, treatment with ATI-1777.

The trial randomized 250 patients with mild, moderate or severe atopic dermatitis, including adults and children as young as 12 years old, across 30 clinical trial sites in the United States.

The study met the primary efficacy endpoint, the percent change from baseline in the Eczema Area and Severity Index, or EASI, score at week 4, with statistical significance for patients treated with ATI-1777 2% BID compared to patients treated with vehicle (69.7% versus 58.7% in the pooled vehicle group, p=0.035).

No meaningful safety findings were observed and ATI-1777 was well tolerated.

We intend to seek a development and commercialization partner for this program.

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.

ATI-2138 is an investigational oral covalent ITK/JAK3 inhibitor for the potential treatment of 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, 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 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.

In September 2023, we announced positive results from our Phase 1 multiple ascending dose, or MAD, trial of ATI-2138 (ATI-2138-PKPD-102).

ATI-2138-PKPD-201 was a two-week Phase 1 placebo-controlled, randomized, MAD trial to investigate the safety, tolerability, PK, and pharmacodynamics of ATI-2138 in healthy volunteers.

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.

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

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.

We are assessing the most effective development pathway, including the lead indication, for ATI-2138.

Zunsemetinib, an Investigational Oral MK2 Inhibitor

Zunsemetinib, or ATI-450, is an investigational oral, novel, small molecule selective MK2 inhibitor for the potential treatment of metastatic breast cancer and pancreatic ductal adenocarcinoma.

We plan to support Washington University in St.

Louis in its investigator-initiated Phase 1b/2 trials of zunsemetinib in patients with MBC and PDAC.

We expect these studies to be primarily funded by grants awarded to Washington University.

Discovery Programs and KINect Drug Discovery Platform

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

Our KINect platform enables us to identify potential drug candidates through a unique combination of our proprietary chemical library of kinase inhibitors, our novel approaches to inhibitor modalities, our expertise in SBDD, and our custom kinase assays.

Our focus has been on difficult to drug kinase targets that exhibit some level of clinical, genetic and/or pharmacological disease validation.

Our approach involves the following mechanisms:

(1) reversible and irreversible covalent inhibitors, (2) molecular glue/complex targeted inhibitors and (3) targeted protein degraders.

These novel approaches are currently being utilized to prosecute additional validated, difficult to drug kinase targets with the goal of demonstrating potential platform utility.

We are actively progressing several discovery programs focused on delivering the next wave of drug candidates from our KINect platform.

Our discovery efforts center on targeting kinases that play pivotal roles in various inflammatory, autoimmune, and oncology pathways.

We intend to evaluate both internal and external development options, including strategic partnerships, for these assets.

Discontinued Programs

We were previously developing zunsemetinib as a potential treatment for various immuno-inflammatory diseases, including hidradenitis suppurativa, psoriatic arthritis, and rheumatoid arthritis.

In March 2023, we announced that our Phase 2a study of zunsemetinib in patients with hidradenitis suppurativa did not meet its primary or second efficacy endpoints, and in November 2023, we announced that our Phase 2b study of zunsemetinib in patients with rheumatoid arthritis did not meet its primary or second efficacy endpoints.

Following the results of these trials, in 2023 we discontinued further development of our MK2 inhibitor programs in immuno-inflammatory diseases, including halting enrollment in our Phase 2a study of zunsemetinib in patients with psoriatic arthritis.

We were previously exploring the use of ATI-2231, our second MK2 inhibitor, as a potential treatment for oncology diseases, but decided to pursue this with zunsemetinib due to its more advanced clinical development package.

Financial Overview

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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.

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

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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 the COVID-19 pandemic, rising inflation, the U.S.

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

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

Federal Reserve raising interest rates and geopolitical conflicts, have led to economic uncertainty globally.

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

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Acquisition and License Agreements

License Agreement with Sun Pharmaceutical Industries, Inc.

In December 2023, we entered into an exclusive patent license agreement with Sun Pharmaceutical Industries, Inc., or Sun Pharma.

Under the license agreement, we granted Sun Pharma exclusive rights under certain patents that we exclusively license from a third party.

The patents relate to the use of deuruxolitinib, Sun Pharma’s JAK inhibitor, or other isotopic forms of ruxolitinib, to treat alopecia areata or androgenetic alopecia.

Under the license agreement, Sun Pharma has agreed to pay us an upfront payment, regulatory and commercial milestone payments, and a mid single-digit tiered royalty calculated as a percentage of Sun Pharma’s net sales.

We have separate contractual obligations under which we have agreed to pay to third parties a portion of the consideration we may receive under the license agreement.

Upon execution of the agreement, we received an upfront payment of $15.0 million from Sun Pharma, 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 below under the caption “—Agreement and Plan of Merger with Confluence.”

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

License Agreement with Eli Lilly and Company

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

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

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

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

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

During the years ended December 31, 2023 and 2022, respectively, we recorded licensing revenue under this agreement of $12.7 million and $17.8 million from Lilly, a portion of which was payable to third parties.

Asset Purchase Agreement with EPI Health, LLC

In October 2019, we sold RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, to EPI Health, LLC, or EPI Health, pursuant to an asset purchase agreement.

In July 2023, EPI Health filed a voluntary petition for relief

under Chapter 11 of the United States Bankruptcy Code.

Through the bankruptcy process, EPI Health and its parent company, Novan, Inc., sold the RHOFADE assets to a third party, which excluded our asset purchase agreement with EPI Health and the outstanding amounts due.

The sale was approved by the bankruptcy court in September 2023.

As a result of the bankruptcy proceedings, we recorded an allowance for doubtful accounts resulting in $1.3 million of bad debt expense for the year ended December 31, 2023, representing all amounts that were due and outstanding by EPI Health.

Agreement and Plan of Merger with Confluence

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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

In 2019, we entered into an asset purchase agreement with EPI Health, LLC, or EPI Health, pursuant to which we sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, which included the assignment of certain licenses for related intellectual property assets, or the Disposition.

Pursuant to the asset purchase agreement, EPI Health paid us 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.

License Agreement with Eli Lilly and Company

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

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

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

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 year ended December 31, 2022.

During the year ended December 31, 2022, we received $0.2 million in royalties from Lilly, a portion of which was payable to third parties.

License Agreement with Pediatrix Therapeutics, Inc.

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 payable to the former Confluence equity holders as described above.

Restructuring

In December 2023, our Board of Directors approved a reduction of our workforce by approximately 46%, which we expect to be substantially completed by June 2024.

This action was taken in order to streamline operations, reduce costs and preserve capital.

As a result, we terminated certain employees, or terminated employees, and gave notice to additional employees, or noticed employees, who were asked to provide transition services through termination dates ranging between one to thirteen months from the date notice was given.

The terminated employees were entitled to receive cash severance payments and other benefits.

The noticed employees are entitled to receive cash severance payments and other benefits, which are contingent upon providing additional services to us.

During the year ended December 31, 2023, we recorded a restructuring charge of $3.1 million which represents a one-time termination benefit for impacted employees with retention periods less than the sixty-day minimum retention period, which was triggered immediately upon either terminating or giving notice to the impacted employees.

An estimated charge between $1.9 million and $2.2 million is expected to be incurred for additional termination costs, including severance and other benefits, over the next 12 months.

Components of Our Results of Operations

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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, moderate to severe hidradenitis suppurativa and moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, ATI-2231 as a potential treatment for pancreatic cancer and metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer, 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 development of our drug candidates and pursue our discovery programs.

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 duration of subject follow-up;

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

Intangible Asset Impairment

Intangible asset impairment consists of changes to the fair value of our in-process research and development, or IPR&D, intangible asset.

Other Income (Expense), Net

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Our definite-lived intangible assets consist of a drug discovery platform acquired through the acquisition of Confluence.

Definite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise

Definite-lived intangible assets are

amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up.

If that pattern cannot be reliably determined, the straight-line method of amortization is used.

Our indefinite-lived intangible assets consist of an in-process research and development, or IPR&D, drug candidate also acquired through the acquisition of Confluence.

Our indefinite-lived intangible assets consisted of an IPR&D drug candidate also acquired through the acquisition of Confluence.

IPR&D assets are considered indefinite-lived until the completion or abandonment of the associated research and development efforts.

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

There were no impairment losses recorded during the years ended December 31, 2022 and 2021.

During the quarter ended December 31, 2023, we performed an impairment analysis on the IPR&D intangible asset due to our decision to discontinue further development of the drug candidate in immuno-inflammatory diseases.

Our impairment analysis resulted in a fair value of the IPR&D intangible asset which was less than the carrying value.

As a result, we recorded an impairment charge of $6.6 million, the full balance of the IPR&D intangible asset.

Contingent Consideration

We initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments.

Significant judgement was involved in determining the appropriateness of these assumptions.

We record a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments.

Significant judgement is involved in determining the appropriateness of these assumptions.

These assumptions are considered Level 3 inputs.

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

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

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

Probability of success assumptions ranged between 10% and 40% at December 31, 2022 and 2021.

The probability of success assumption was 35% at December 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 7.3% and 8.6% depending on the year of each potential payment.

During the year ended December 31, 2022, we updated future sales level assumptions for zunsemetinib.

These changes, and the impact from the passage of time, resulted in a net charge of $4.7 million during the year ended December 31, 2022.

During the year ended December 31, 2023, we removed estimated sales of zunsemetinib for moderate to severe rheumatoid arthritis, moderate to severe hidradenitis suppurativa and moderate to severe psoriatic arthritis, following our decision to discontinue further development of our MK2 inhibitor programs in immuno-inflammatory diseases.

These changes, partially offset by lower discount rates resulting from lower risk-free rates and changes in credit spreads, as well as the passage of time, resulted in an overall decrease of $26.9 million during the year ended December 31, 2023.

Stock-Based Compensation

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At each balance sheet date, we evaluate whether any performance conditions related to a performance-based award have changed.

The effect of any change in performance conditions would be recognized as a cumulative catch-up adjustment in the period such change occurs, and any remaining unrecognized compensation expense would be recognized on a straight-line basis over the remaining requisite service period.

on a straight-line basis over the remaining requisite service period.

The impact of forfeitures is recognized in the period in which they occur.

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The fair value of each RSU is measured using the closing price of our common stock on the date of grant.

Since our inception, we have not recorded U.S.

federal or state income tax benefits for the net operating losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items.

Results of Operations

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Revaluation of contingent consideration

Intangible asset impairment

Total costs and expenses

Loss from operations

Other income (expense), net

Other income, net

Loss before income taxes

Income tax benefit

Contract Research

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Licensing revenue was $28.2 million and $25.1 million for the years ended December 31, 2023 and 2022, respectively.

The increase was primarily driven by $17.6 million of upfront and milestone payments received under the Lilly agreement and the $5.0 million upfront payment received under the Pediatrix agreement.

The increase was primarily driven by the upfront payment received under the Sun Pharma agreement during the year ended December 31, 2023 and an increase in royalties.

This increase was partially offset by both the upfront payment received under the Lilly agreement and the upfront payment received under the Pediatrix agreement during the year ended December 31, 2022.

Cost and Expenses

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Total research and development expenses

The increase in expenses for zunsemetinib during the year ended December 31, 2022 compared to the year ended December 31, 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 year ended December 31, 2022 compared to the year ended December 31, 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.

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

Expenses for ATI-2138 were higher during the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due higher costs associated with preclinical development activities as well as costs associated with a Phase 1 SAD trial, which initiated in December 2021, and a Phase 1 MAD trial, which initiated in December 2022.

Expenses for ATI-2231 were higher during the year ended December 31, 2022 compared to the year ended December 31, 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 year ended December 31, 2022 compared to the year ended December 31, 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 year ended December 31, 2023 compared to the year ended December 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 was completed in November 2023.

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 March 2023.

ATI-1777 expenses were higher during the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis, which initiated in May 2022 and was completed in December 2023.

The increase was partially offset by lower costs associated with drug candidate manufacturing and other preclinical development activities.

The increase in expenses for ATI-2138 during the year ended December 31, 2023 compared to the year ended December 31, 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 year ended December 31, 2023 compared to the year ended December 31, 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 year ended December 31, 2023 compared to the year ended December 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 year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in costs associated with higher average headcount, which 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 during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to an increase in costs associated with higher average headcount, compensation adjustments, equity awards granted in 2023 and severance expenses that included the cost of termination benefits given to employees that were involuntarily terminated during the year ended December 31, 2023.

This increase was partially offset by higher forfeiture credits during the year ended December 31, 2023 as a result of our restructuring in 2023 compared to the year ended December 31, 2022.

General and Administrative

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Personnel and stock-based compensation

Personnel and stock-based compensation expenses increased during the year ended December 31, 2022 compared to December 31, 2021 primarily due to higher average headcount and an increase in stock-based compensation expense associated with new equity awards granted in 2022, partially offset by lower costs associated with the separation of executive officers.

The aggregate increase in personnel and stock-based compensation expenses during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to an increase in costs associated with higher average headcount prior to our restructuring, compensation adjustments, and equity awards granted in 2023.

Professional and legal fees

Professional and legal fees, including accounting, investor relations and corporate communication costs, were lower during the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily as a result of lower accounting and other professional expenses due to a reduction in temporary staffing costs.

The increase in professional and legal fees, including accounting, investor relations and corporate communication costs, during the year ended December 31, 2023 compared to the year ended December 31, 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 year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in overhead expenses, including increases in tax and license fees and information technology support costs.

We incurred licensing expense during the year ended December 31, 2022 due to amounts payable to third parties under third-party license and acquisition agreements.

We did not incur licensing expense during the year ended December 31, 2021.

The increase in facility and support services, including general office expenses, information technology costs and other expenses, during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily driven by an increase in rent expense due to leasing additional office and laboratory space during the year ended December 31, 2023, as well as an increase in information technology costs.

Bad debt expenses were related to our determination that amounts due to us as of December 31, 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.

The increase in licensing expenses during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily driven by amounts payable to third parties during the year ended December 31, 2023 in connection with amounts earned under the Sun Pharma agreement and an increase in amounts payable to third parties in connection with amounts earned under the Lilly agreement.

Revaluation of Contingent Consideration

The fair value of our contingent consideration liability decreased during the year ended December 31, 2023 mainly due to the removal of estimated sales of zunsemetinib for moderate to severe rheumatoid arthritis, moderate to severe hidradenitis suppurativa and moderate to severe psoriatic arthritis, following our decision to discontinue further development of our MK2 inhibitor programs in immuno-inflammatory diseases .

This decrease was partially offset by lower discount rates resulting from lower risk-free rates and changes in credit spreads, as well as the passage of time.

The fair value of our contingent consideration liability increased during the year ended December 31, 2022 mainly due to an increase in future sales level assumptions for zunsemetinib and the passage of time.

The fair value of our contingent consideration liability increased during the year ended December 31, 2021 primarily 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 year ended December 31, 2021.

Other Income (Expense), net

Other income (expense), net increased during the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to there being no 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.

Intangible Asset Impairment

Our impairment analysis resulted in a fair value of the IPR&D intangible asset which was less than the carrying value.

As a result, we recorded an impairment charge of $6.6 million, the full balance of the IPR&D intangible asset.

Other Income, net

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

Liquidity and Capital Resources

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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.

In April 2023, we sold 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.

In April 2022, we sold 4,838,709 shares of our common stock 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.

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

In August 2020, we entered into a purchase agreement, or the Purchase Agreement, with Lincoln Park Capital Fund, LLC, or Lincoln Park, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we could sell to Lincoln Park, at our discretion, up to $15.0 million of shares of our common stock over the 36-month term of the Purchase Agreement.

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

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

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

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

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

Debt Financing

Loan and Security Agreement with Silicon Valley Bank

In March 2020, we entered into a Loan and Security Agreement with 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 $39.9 million as of December 31, 2023 compared to $45.3 million as of December 31, 2022.

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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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Net cash used in operating activities

Net cash used in operating activities increased for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily as a result of higher net losses after adjusting for revaluation of contingent consideration and other non-cash items and an increase in cash paid for prepaid expenses and other assets.

This change was partially offset by a decrease in cash paid to settle outstanding accounts payable.

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 year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease in revaluation of contingent consideration during the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily the result of higher charges during the year ended December 31, 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.

Net cash used in operating activities increased for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily as a result of higher net loss after adjusting for revaluation of contingent consideration.

This change was partially offset by the impairment charge related to the IPR&D intangible asset during the year ended December 31, 2023, as well as an increase in licensing expense accruals between periods.

The decrease in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly the result of a gain in revaluation of contingent consideration during the year ended December 31, 2023 compared to a loss in revaluation of contingent consideration during the year ended December 31, 2022.

The gain was primarily due to the removal of estimated sales from zunsemetinib for moderate to severe rheumatoid arthritis, moderate to severe hidradenitis suppurativa and moderate to severe psoriatic arthritis following our decision to discontinue further development of our MK2 inhibitor programs in immuno-inflammatory diseases.

This was partially offset by lower discount rates resulting from lower risk-free rates and changes in credit spreads, as well as the passage of time.

Investing Activities

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Proceeds from sales and maturities of marketable securities

Net cash provided by (used in) investing activities

The change in net cash provided by investing activities for the year ended December 31, 2022 compared to net cash used in investing activities for the year ended December 31, 2021 primarily resulted from higher sales and maturities of marketable securities during the year ended December 31, 2022, which were used to fund our operations, and a reduction of purchases of marketable securities, which were higher during the year ended December 31, 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 year ended December 31, 2023 compared to the year ended December 31, 2022 primarily resulted from higher sales and maturities of marketable securities during the year ended December 31, 2023, and a reduction of purchases of marketable securities, which were higher during the year ended December 31, 2022.

Financing Activities

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(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

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

issuance costs

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

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Net cash provided by financing activities

Cash provided by financing activities decreased for the year ended December 31, 2022 compared to December 31, 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 year ended December 31, 2023 compared to December 31, 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, moderate to severe hidradenitis suppurativa and moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases and ATI-2231 as a potential treatment for pancreatic cancer and metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer, continue the development of our preclinical compounds, and continue to discover and develop additional drug candidates.

We anticipate we will incur net losses in the near term as we continue the development of our drug candidates and continue to discover and develop additional drug candidates.

We may not be able to generate revenue from these programs if, among other things, our clinical trials are not successful, the FDA does not approve our drug candidates currently in clinical trials when we expect, or at all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.

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

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

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

Our future funding requirements will be heavily determined by the resources needed to support the development of our drug candidates.

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We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of our consolidated financial statements that appear in Item 8 of this Annual Report on Form 10-K based on our current operating assumptions.

We will require additional capital to complete the clinical development of zunsemetinib, ATI-1777 and ATI-2138, to develop our preclinical compounds, and to support our discovery efforts.

We will require additional capital to develop our drug candidates and to support our discovery efforts.

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

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● the 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;

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

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

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

The sub-sublease was terminated in December 2022.

We occupy space for our headquarters in Wayne, Pennsylvania under a lease agreement which has a term through February 2029.

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 spaces was $2.9 million as of December 31, 2022.

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

Our aggregate remaining lease payment obligation for these two spaces was $4.6 million as of December 31, 2023.

Agreement and Plan of Merger – Confluence

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Recently Issued Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

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

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40).

ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification, or ASC, 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).

The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements.

This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements.

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

In November 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No.

2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” This standard requires disclosure of significant segment expenses and other segment items by reportable segment.

This ASU becomes effective for annual periods beginning in 2024 and interim periods in 2025.

We are assessing the impact of this ASU and upon adoption expect that any impact would be limited to additional segment expense disclosures in the footnotes to the our consolidated financial statements.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” This standard enhances disclosures related to income taxes, including the rate reconciliation and information on income taxes paid.

This ASU becomes effective January 1, 2025.

We are currently assessing the impact of this ASU.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis