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Item 7. Management’s Discussion and Analysis

2025-02-27 compared with 2024-02-27 · 171 added, 189 removed, 215 unchanged (63% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to those statements included later in this Annual Report.

In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties.

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“Risk Factors,” and “Special Note Regarding Forward-Looking Statements.”

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

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 are a clinical-stage biopharmaceutical company focused on developing novel small and large molecule product candidates for immuno-inflammatory diseases.

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

In addition to identifying and developing our novel product 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 product 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

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 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

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.

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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As of December 31, 2024, we had an accumulated deficit of $902.9 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.

In addition, our drug candidates, even if they are approved by regulatory agencies for marketing, may not achieve commercial success.

We may also not be successful in pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates.

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

In addition, our product candidates, even if they are approved by regulatory agencies for marketing, may not achieve commercial success.

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.

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We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms, or at all.

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

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

Impact of Macroeconomic Conditions on Our Business

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

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

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

For example, macroeconomic events, including inflationary pressure 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

Exclusive License Agreement with Biosion

In November 2024, we entered into an exclusive license agreement (the “Biosion Agreement”) with Biosion, Inc.

(“Biosion”) pursuant to which we received the exclusive rights to develop, manufacture and commercialize bosakitug

(ATI-045) and ATI-052 worldwide, excluding Mainland China, Macau, Hong Kong and Taiwan (“Greater China”).

In connection with the Biosion Agreement, we also entered into a collaboration agreement (the “CTTQ Agreement”) with Biosion and Chia Tai Tianqing Pharmaceutical Group, Co., Ltd.

(“CTTQ”), a licensee of bosakitug in Greater China.

As partial consideration for the rights and licenses under the Biosion Agreement and CTTQ Agreement, we agreed to, in the aggregate, (i) pay $30.0 million in upfront cash consideration, plus $4.5 million for the reimbursement of certain development costs, (ii) issue warrants (the “Warrants”) to purchase 14,281,985 shares of our common stock and (iii) pay $6.2 million for the reimbursement of certain development costs and drug product material as set forth in the Biosion Agreement.

We determined that the transaction was an acquisition of assets with no alternative future use and therefore expensed as incurred the fair value of the consideration given of $85.6 million as a component of in-process research and development expense during the year ended December 31, 2024.

We incurred $1.3 million in expenses related to this transaction which were expensed as incurred.

In addition, we agreed to pay, in the aggregate, (i) up to $125 million upon the achievement of specified regulatory milestones commencing with product approval, (ii) up to $795 million upon the achievement of specified sales milestones, (iii) a tiered low-to-mid single digit royalty based upon a percentage of annual net sales, subject to specified reductions as set forth in the Biosion Agreement, and (iv) a portion of any sublicense consideration received from the grant of any sublicense or similar rights under any of the rights or licenses granted to us under the Biosion Agreement.

We will expense these payments in the period when either they are determined to be probable of occurring or when the payment is triggered.

The Warrants have an initial exercise price of $0.00001 per share, subject to adjustment as provided in the Warrants.

The Warrants are immediately exercisable, subject to any applicable overseas direct investment filing that may be required for the holders.

The Warrants will terminate when exercised in full.

We classified the Warrants within equity because they are indexed to our own stock.

We assigned an estimated fair value of $44.8 million to the Warrants, which was based on the fair value of our common stock on the date of issuance less the nominal exercise price of $0.00001 per share.

Royalty Purchase Agreement with OCM IP Healthcare Portfolio LP

In July 2024, we entered into a royalty purchase agreement with OCM IP Healthcare Portfolio LP, an investment vehicle for Ontario Municipal Employees Retirement System (“OMERS”).

Under the royalty purchase agreement, we sold to OMERS a portion of the future royalty payments and the remaining anniversary milestones associated with our existing license to Eli Lilly and Company (“Lilly”), relating to OLUMIANT® (baricitinib) for the treatment of alopecia areata (see “—License Agreement with Eli Lilly and Company”).

Under the terms of the royalty purchase agreement, we received an upfront payment of $26.5 million.

In exchange, OMERS acquired a portion of the royalty payable by Lilly to us for worldwide net sales of OLUMIANT for the treatment of alopecia areata from April 1, 2024 through the remainder of the royalty term under our license agreement with Lilly, and 100% of the remaining anniversary milestone payments payable by Lilly to us under the license agreement.

The royalty payments and milestones we sold to OMERS represent our entire financial interest in the Lilly license agreement after taking into account our other contractual third-party obligations.

We recognized $1.9 million of non-cash royalty income during the year ended December 31, 2024.

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.

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

(“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.

Under the license agreement, Sun Pharma has paid us an upfront payment and certain regulatory payments, and has agreed to pay us other regulatory and commercial milestone payments upon the achievement of specified milestones set forth in the agreement, 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.

We recognized $3.0 million and $15.0 million of licensing revenue during the years ended December 31, 2024 and 2023, respectively.

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.

In November 2022, we entered into a license agreement with Pediatrix Therapeutics, Inc.

(“Pediatrix”) under which we granted Pediatrix the exclusive rights to develop, manufacture and commercialize lepzacitinib in Greater China.

Pediatrix has paid us an upfront payment, and has agreed to pay us development, regulatory and commercial milestone payments upon the achievement of specified milestones set forth in the agreement, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of lepzacitinib by Pediatrix in Greater China.

A portion of the 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.”

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.

In August 2022, we entered into a non-exclusive patent license agreement with 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.

Under the license agreement, Lilly has paid us an upfront payment and regulatory and certain commercial milestone payments, and agreed to pay us anniversary payments and other commercial milestone payments upon the achievement of specified milestones as set forth in the agreement, 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.

In July 2024, we entered into a royalty purchase agreement with OMERS pursuant to which we sold to OMERS a portion of our future royalty payments and the remaining anniversary milestones associated with the license to Lilly (see “—Royalty Purchase Agreement with OCM IP Healthcare Portfolio LP” above).

We recognized $13.2 million and $12.7 million of licensing revenue during the years ended December 31, 2024 and 2023, respectively.

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.

In October 2019, we sold RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”) to EPI Health, LLC (“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.

As a result of the bankruptcy proceedings, all amounts that were due and outstanding by EPI Health have been fully reserved.

Agreement and Plan of Merger with Confluence

In 2017, we entered into an Agreement and Plan of Merger, or the Confluence Agreement, with Confluence Life Sciences, Inc.

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

In 2017, we entered into an Agreement and Plan of Merger (the “Confluence Agreement”) with Confluence Life Sciences, Inc.

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

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

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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.

Discontinued Programs

We were previously developing zunsemetinib (ATI-450) as a potential treatment for various immuno-inflammatory diseases, including hidradenitis suppurativa, psoriatic arthritis, and rheumatoid arthritis.

Following the results of the Phase 2 trials for these programs, we discontinued further development of our mitogen-activated protein kinase-activated protein kinase 2 (“MK2”) inhibitor programs in immuno-inflammatory diseases in 2023.

We were also 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.

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.

In December 2023, our board of directors approved a reduction of our workforce by approximately 46%, which was completed as of December 31, 2024.

For the year ended December 31, 2024, we incurred severance expenses of $2.7 million and made cash severance payments of $5.6 million to impacted employees.

In the year ended December 31, 2023, we recorded a restructuring charge of $3.1 million, representing one-time termination benefits for employees with retention periods less than the sixty-day minimum retention period.

Components of Our Results of Operations

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

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

Cost and Expenses

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Research and Development

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

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

These expenses primarily include:

● expenses incurred under agreements with contract research organizations, or CROs, as well as clinical trial sites and consultants that conduct our clinical trials and preclinical studies, and investigator-initiated trials;

● expenses incurred under agreements with contract research organizations (“CROs”), as well as clinical trial sites and consultants that conduct our clinical trials and preclinical studies, and investigator-initiated trials;

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

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● outsourced professional scientific development services;

● medical affairs expenses related to our drug candidates;

● medical affairs expenses related to our product candidates;

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

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Research and development activities are central to our business model.

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 development of our drug candidates and pursue our discovery programs.

Product 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 development of our product candidates and pursue our discovery programs.

We expense research and development costs as incurred.

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

The successful development of our drug candidates is highly uncertain.

We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates.

This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

The successful development of our product candidates is highly uncertain.

This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of discovery, as well as clinical trials, which vary significantly over the life of a project as a result of many factors, including:

● the number of clinical sites included in the trials;

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● the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our drug candidates.

Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our product candidates.

We may obtain unexpected results from our clinical trials or other development activities.

We may elect to discontinue, delay or modify the development, including clinical trials, of some drug candidates or focus on others.

A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate.

We may elect to discontinue, delay or modify the development, including clinical trials, of some product candidates or focus on others.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.

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

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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

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

In-process Research and Development

In-process research and development (“IPR&D”) consists of expenses related to in-licensed assets with no future alternative use and impairment charges recorded for IPR&D intangible assets.

Interest Income

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

Non-cash Royalty Income

In July 2024, we entered into the royalty purchase agreement with OMERS pursuant to which we sold a portion of our royalties due to us under the license agreement with Lilly and received upfront proceeds of $26.5 million.

We evaluated the royalty purchase agreement under Accounting Standards Codification (“ASC”) 470 – Debt and concluded that the upfront payment should be accounted for as deferred income because the criteria for debt classification were not met.

We apply the “units-of-revenue” method of recognizing income in the consolidated statements of operations and comprehensive loss and such amounts are included in non-cash royalty income.

Critical Accounting Estimates

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

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Intangible Assets

Our intangible assets include both definite-lived and indefinite-lived assets.

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 used up.

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

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.

The cost of IPR&D assets is either amortized over their estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned.

Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

Indefinite-lived intangible assets are tested for impairment at least annually, which we perform during the fourth quarter, or when indicators of an impairment are present.

We recognize an impairment loss when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.

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

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.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Contingent Consideration

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

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

These assumptions are highly dependent on the outcome and timing of the development of certain of our product 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.

The probability of success assumption was 35% at December 31, 2023.

Probability of success assumptions ranged between 17% and 40% at December 31, 2024.

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 7.4% and 8.7% depending on the year of each potential payment.

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.

During the year ended December 31, 2024, we adjusted estimated sales and the probability of success for certain product candidates.

These changes, as well as the passage of time, partially offset by higher discount rates resulting from higher risk-free rates and changes in credit spreads, resulted in an overall increase of $2.5 million during the year ended December 31, 2024.

Stock-Based Compensation

We measure the compensation expense of stock-based awards granted to employees and directors using the grant date fair value of the award.

We have issued stock options and restricted stock unit, or RSU, awards with service-based vesting conditions, as well as with performance-based vesting conditions.

We have issued stock options and restricted stock unit (“RSU”) awards with service-based vesting conditions, as well as with performance-based vesting conditions.

We have not issued awards that include market-based conditions.

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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.

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

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We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model.

Historically, we estimated expected volatility based on historical volatility of a set of peer companies, which are publicly traded.

Starting in 2022, we estimated expected volatility based on our stock price's historical volatility, as we determined that we had adequate historical data regarding the volatility of our own publicly-traded stock price.

We estimate expected volatility based on our stock price's historical volatility, as we have determined that we have adequate historical data regarding the volatility of our own publicly-traded stock price.

The expected term of our stock options has been determined using the “simplified” method for awards that qualify as “plain vanilla” options.

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Results of Operations

For discussion on financial condition and results of operations pertaining to the year ended December 31, 2022 compared to the year ended December 31, 2021, see our Annual Report on Form 10-K for the year ended December 31, 2022, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Comparison of Years Ended December 31, 2024 and 2023

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Revaluation of contingent consideration

Intangible asset impairment

In-process research and development

Total costs and expenses

Loss from operations

Other income, net

Other income:

Interest income

Non-cash royalty income

Total other income

Loss before income taxes

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Contract research revenue was $2.5 million and $3.0 million for the years ended December 31, 2024 and 2023, respectively, and was comprised of fees earned from the provision of laboratory services to our clients.

The decrease was driven by lower overall hours billed, partially due to an increased focus on internal development programs, which was offset by a higher average billing rate.

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

Licensing revenue was $16.2 million and $28.2 million for the years ended December 31, 2024 and 2023, respectively.

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.

The decrease was primarily driven by the upfront payment received under the Sun Pharma agreement during the year ended December 31, 2023, partially offset by the achievement of higher milestones under license agreements during the year ended December 31, 2024.

Cost and Expenses

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

Cost of revenue decreased during the year ended December 31, 2023 due to lower variable costs resulting from the decrease in hours billed, partially offset by an increase in fixed overhead costs, including personnel-related costs.

Cost of revenue decreased during the year ended December 31, 2024 due to lower variable costs resulting from a decrease in hours billed, which was offset by an increase in termination benefits as a result of our restructuring that was announced in December 2023.

Research and Development

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

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

(In thousands)

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Total research and development expenses

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.

The decrease in expenses for ATI-2138 during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to a decrease in clinical development expenses associated with a Phase 1 MAD trial which was completed in September 2023, as well as a decrease in preclinical development activities.

This decrease was partially offset by clinical development expenses associated with a Phase 2a trial that was initiated in August 2024.

Research and development expenses related to ATI-052 for the year ended December 31, 2024 primarily consisted of product candidate manufacturing costs and preclinical development activities.

Because we in-licensed ATI-052 in 2024, there were no related expenses for the year ended December 31, 2023.

The decrease in expenses for lepzacitinib during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to lower costs associated with preclinical development activities and costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis, which was initiated in May 2022 and was completed in January 2024.

The decrease in expenses for zunsemetinib during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to a decrease in costs associated with Phase 2 clinical development activities which were completed in 2023 as well as a decrease in product manufacturing costs.

Personnel and stock-based compensation

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.

The decrease in personnel and stock-based compensation expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to lower headcount, lower termination benefits and higher forfeiture credits as a result of our restructuring that was announced in December 2023.

General and Administrative

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Personnel and stock-based compensation

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.

The aggregate decrease in personnel and stock-based compensation expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to lower headcount and higher forfeiture credits.

Professional and legal fees

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.

The decrease in professional and legal fees, including accounting, investor relations and corporate communication costs, during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by a decrease in accounting related expenses, which were partially offset by an increase in business development expenses.

Facility and support services

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.

The decrease in facility and support services, including general office expenses, information technology costs and other expenses, during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by a decrease in rent expense and information technology expenses.

There was no bad debt expense during the year ended December 31, 2024.

The decrease in licensing expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by the upfront payment received under the Sun Pharma agreement during the year ended December 31, 2023, a portion of which was payable to third parties, partially offset by the achievement of higher milestones under license agreements during the year ended December 31, 2024.

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.

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.

The revaluation of contingent consideration loss during the year ended December 31, 2024 was primarily due to changes in estimated sales levels and changes to the probability of success for certain product candidates, compared to the revaluation of contingent consideration gain during the year ended December 31, 2023 which was primarily due to the removal of estimated sales levels of zunsemetinib following our decision to discontinue further development of our MK2 inhibitor programs in immuno-inflammatory diseases.

In-process Research and Development

In-process research and development expenses recorded during the year December 31, 2024 included the fair value of the consideration expensed in connection with the in-license of bosakitug and ATI-052, as well as transaction costs incurred as part of the transaction.

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

Our impairment analysis resulted in a fair value of the IPR&D intangible asset which was less than the carrying value and as a result, we recorded an impairment charge for the full balance of the IPR&D intangible asset during the year ended December 31, 2023.

Interest Income

Interest income decreased during the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily due to lower interest income on investment portfolio balances.

Non-cash Royalty Income

Non-cash royalty income includes income related to the proceeds from the sale of future royalties to OMERS, recognized under the “units-of-revenue” method.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations.

Prior to our acquisition of Confluence in August 2017, we did not generate any revenue.

Prior to our acquisition of Confluence, we did not generate any revenue.

We have financed our operations over the last several years primarily through sales of our equity securities and incurring indebtedness in the form of loans from commercial lenders.

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We may receive royalties and milestone payments from third-party licensing and acquisition agreements.

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.

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 product candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our liquidity.

As of December 31, 2024, we had cash, cash equivalents and marketable securities of $203.9 million.

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

We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, other than our contingent obligations under the Confluence Agreement, which is summarized above under “Overview—Acquisition and License Agreements,” and our lease obligations.

We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, other than our contingent obligations under the Confluence Agreement, Biosion Agreement and CTTQ Agreement, which are summarized above under “Overview—Acquisition and License Agreements,” and our lease obligations.

Equity Financing

Sale of Common Stock under At-the-Market Facility

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.

Private Placement

In November 2024, we closed a private placement in which we sold 35.6 million shares of our common stock for aggregate gross proceeds of $80.0 million.

We paid placement agent and other fees of $5.1 million in connection with the private placement.

At-the-Market Facility

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 Leerink Partners LLC (formerly 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.

Cash and cash equivalents were $24.6 million as of December 31, 2024 compared to $39.9 million as of December 31, 2023.

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Net cash used in operating activities

Net cash provided by investing activities

Net cash (used in) provided by investing activities

Net cash provided by financing activities

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Non-cash adjustments to reconcile net loss to net cash used in operating activities

Change in accounts payable and accrued expenses

Change in accounts receivable

Change in prepaid expenses and other assets

Change in accounts payable and accrued expenses

Change in deferred income

Net cash used in operating activities

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.

Net cash used in operating activities decreased for the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily as a result of lower net losses after adjusting for non-cash items and proceeds from the royalty sale to OMERS.

The change was partially offset by an increase in cash used for accounts payable and accrued expenses, which was due to the timing of payments to vendors and severance payments as a result of our restructuring announced in December 2023.

The increase in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly the result of in-process research and development expenses recorded in connection with the in-license of bosakitug and ATI-052.

Investing Activities

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(In thousands)

Purchases of property and equipment

Purchases of property and equipment, net

Purchases of marketable securities

Proceeds from sales and maturities of marketable securities

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.

Acquisition of in-licensed assets, including transaction costs

Net cash (used in) provided by investing activities

Net cash used in investing activities for the year ended December 31, 2024 was $69.8 million compared to net cash provided by investing activities during the year ended December 31, 2023 of $46.2 million.

The change was primarily

due to the consideration paid for the acquisition of in-licensed assets in connection with the Biosion Agreement and CTTQ Agreement and lower sales and maturities of marketable securities, partially offset by a reduction in purchases of marketable securities.

Financing Activities

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(In thousands)

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

Proceeds from issuance of common stock under securities purchase agreement, net of issuance costs

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 and exercise of employee stock options

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

Net cash provided by financing activities

Net cash provided by financing activities decreased for the 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.

The increase in net cash provided by financing activities for the year ended December 31, 2024 compared to December 31, 2023 was primarily due to proceeds from our private placement in November 2024, offset by proceeds from sales under our at-the-market sales agreement in 2023.

Funding Requirements

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.

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

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.

Our future funding requirements will be heavily determined by the resources needed to support the development of our product candidates, without taking into account any potential business development activities.

As a publicly traded company, we incur and will continue to incur significant legal, accounting and other similar expenses.

In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the Nasdaq Stock Market LLC, requires public companies to implement specified corporate governance practices that could increase our compliance costs.

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 develop our drug candidates and to support our discovery efforts.

We will require additional capital to develop our product 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.

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

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

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

We may raise additional capital through the sale of equity or debt securities.

In such an event, our stockholders’ ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a holder of our common stock.

Because of the numerous risks and uncertainties associated with research and development of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements.

Because of the numerous risks and uncertainties associated with research and development of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements.

Our funding requirements in the near term will depend on many factors, including:

● the number and development requirements of the drug candidates that we may pursue;

● the scope, progress, results and costs of preclinical development, laboratory testing and conducting preclinical and clinical trials for our drug candidates;

● the costs, timing and outcome of regulatory review of our drug candidates;

● the extent to which we in-license or acquire additional drug candidates and technologies;

● the number and development requirements of the product candidates that we may pursue;

● the scope, progress, results and costs of preclinical development, laboratory testing and conducting preclinical and clinical trials for our product candidates;

● the costs, timing and outcome of regulatory review of our product candidates;

● the extent to which we in-license or acquire additional product candidates and technologies;

● 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;

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

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

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

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We also occupy office and laboratory space in St.

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

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

Our aggregate remaining lease payment obligation for these two spaces was $3.2 million as of December 31, 2024.

Agreement and Plan of Merger – Confluence

Agreement and Plan of Merger with Confluence

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

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Exclusive License Agreement with Biosion;

Collaboration Agreement with Biosion and CTTQ

Under the Biosion and CTTQ Agreements, we agreed to pay, in the aggregate, up to $920 million upon the achievement of specified regulatory and sales milestones.

In addition, we have agreed to pay future royalty payments calculated as a low-to-mid single digit percentage of annual net sales, subject to specified reductions, as set forth in the Biosion Agreement.

In addition to the payments described above, we have also agreed to pay a portion of any sublicense consideration received from the grant of any sublicense or similar rights under any of the rights or licenses granted to us under the Biosion Agreement.

R&D Obligations

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Recently Issued Accounting Pronouncements

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 November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses.” This standard requires disclosure of additional information about specific expense categories in the notes to financial statements on an annual and interim basis.

This ASU becomes effective for annual periods beginning after December 15, 2026 and interim reporting periods within annual reporting periods beginning after December 15, 2027.

We are currently assessing the impact of this ASU.

In December 2023, the FASB issued ASU No.

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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.

This ASU becomes effective for annual periods beginning after December 15, 2024.

We are currently assessing the impact of this ASU.

In November 2023, the FASB issued 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.

We adopted ASU No.

2023-07 effective December 31, 2024, on a retrospective basis, the impact of which is limited to additional segment expense disclosures in the notes to our consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

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