PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for the periods ended June 30, 2022 [Unaudited Condensed Consolidated Balance Sheets](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) The balance sheets show an increase in total assets and a decrease in total liabilities as of June 30, 2022 Condensed Consolidated Balance Sheets (in thousands) | Asset/Liability/Equity | June 30, 2022 | December 31, 2021 | | :--------------------- | :------------ | :------------------ | | **Assets** | | | | Cash and cash equivalents | $68,264 | $27,349 | | Short-term marketable securities | $180,339 | $164,065 | | Total current assets | $259,354 | $205,032 | | Total assets | $277,976 | $251,211 | | **Liabilities** | | | | Total current liabilities | $16,217 | $22,931 | | Contingent consideration | $23,800 | $28,400 | | Total liabilities | $42,224 | $53,870 | | **Stockholders' Equity** | | | | Total stockholders' equity | $235,752 | $197,341 | - Total assets increased by **$26.765 million (10.65%)** from December 31, 2021, to June 30, 2022, primarily driven by an increase in cash and cash equivalents and short-term marketable securities[9](index=9&type=chunk) - Total liabilities decreased by **$11.646 million (21.62%)** from December 31, 2021, to June 30, 2022, mainly due to a reduction in current liabilities and contingent consideration[9](index=9&type=chunk) [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The statements detail revenue, expenses, and net loss, highlighting increased R&D spending and a higher net loss for the quarter Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $1,528 | $1,824 | $2,981 | $3,601 | | Total costs and expenses | $22,522 | $19,830 | $42,882 | $50,136 | | Loss from operations | $(20,994) | $(18,006) | $(39,901) | $(46,535) | | Net loss | $(20,532) | $(18,161) | $(39,321) | $(46,915) | | Net loss per share, basic and diluted | $(0.31) | $(0.34) | $(0.62) | $(0.90) | | Comprehensive loss | $(20,886) | $(18,205) | $(40,422) | $(47,005) | - Net loss for the three months ended June 30, 2022, was **$(20.5) million**, an increase from $(18.2) million in the prior year period, while the six-month net loss improved to **$(39.3) million** from $(46.9) million[13](index=13&type=chunk) - **Research and development expenses significantly increased** to $18.8 million for the three months ended June 30, 2022, from $7.9 million in the prior year, and to $33.1 million for the six-month period from $15.7 million[13](index=13&type=chunk) [Unaudited Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) The statements show an increase in stockholders' equity driven by common stock issuance, offsetting the net loss Changes in Stockholders' Equity (in thousands, except share data) | Item | Six Months Ended June 30, 2022 (Shares) | Six Months Ended June 30, 2022 (Total Equity) | Six Months Ended June 30, 2021 (Shares) | Six Months Ended June 30, 2021 (Total Equity) | | :---------------------------------------------------------------- | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------- | :-------------------------------------------- | | Balance at December 31, 2021 / March 31, 2021 | 61,228,446 | $197,341 | 52,081,729 | $112,294 | | Issuance of common stock (options/RSUs) | 600,425 | $137 | 1,690,810 | $(1,538) | | Issuance of common stock (at-the-market/public offerings) | 4,838,709 | $72,659 | 8,098,592 | $134,852 | | Unrealized loss/gain on marketable securities | — | $(1,102) | — | $(44) | | Stock-based compensation expense | — | $6,038 | — | $6,507 | | Net loss | — | $(39,321) | — | $(46,915) | | Balance at June 30, 2022 / June 30, 2021 | 66,667,580 | $235,752 | 61,204,987 | $233,815 | - Total stockholders' equity increased by **$38.411 million** to $235.752 million as of June 30, 2022, primarily due to proceeds from common stock issuance and stock-based compensation, partially offset by net loss and unrealized losses[15](index=15&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The statements reflect increased cash used in operations and a significant shift in investing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(40,635) | $(24,453) | | Net cash provided by (used in) investing activities | $8,709 | $(120,784) | | Net cash provided by financing activities | $72,841 | $236,621 | | Net increase in cash and cash equivalents | $40,915 | $91,384 | | Cash and cash equivalents at end of period | $68,264 | $113,447 | - Net cash used in operating activities increased to **$(40.6) million** for the six months ended June 30, 2022, from $(24.5) million in the prior year period[19](index=19&type=chunk) - Net cash provided by investing activities significantly improved to **$8.7 million** for the six months ended June 30, 2022, compared to net cash used of $(120.8) million in the prior year, primarily due to increased proceeds from sales and maturities of marketable securities[19](index=19&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed disclosures on accounting policies, fair value, and other financial information [1. Organization and Nature of Business](index=8&type=section&id=1.%20Organization%20and%20Nature%20of%20Business) The Company is a clinical-stage biopharmaceutical firm focused on immuno-inflammatory diseases - Aclaris Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases, also pursuing strategic alternatives with third-party partners[22](index=22&type=chunk) - As of June 30, 2022, the Company had **$255.8 million** in cash, cash equivalents, and marketable securities, with an accumulated deficit of **$634.7 million**[23](index=23&type=chunk) - The Company believes its existing cash and marketable securities are sufficient to fund operations for **more than 12 months**, alleviating substantial doubt about its going concern ability[25](index=25&type=chunk) [2. Summary of Significant Accounting Policies](index=10&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the basis of preparation and key accounting policies for the financial statements - The unaudited interim condensed consolidated financial statements are prepared on the same basis as audited annual statements, reflecting normal recurring adjustments necessary for fair statement[26](index=26&type=chunk) - The Company's financial statements are prepared in conformity with GAAP, consolidating accounts of Aclaris Therapeutics, Inc. and its wholly-owned subsidiaries, ATIL and Confluence[27](index=27&type=chunk) - Contingent consideration liability is initially recorded at fair value based on unobservable inputs (Level 3) and re-evaluated quarterly, with changes recorded as income or expense[31](index=31&type=chunk) [3. Fair Value of Financial Assets and Liabilities](index=12&type=section&id=3.%20Fair%20Value%20of%20Financial%20Assets%20and%20Liabilities) This note details the fair value measurements of the Company's financial instruments Fair Value Measurements (in thousands) as of June 30, 2022 | Item | Level 1 | Level 2 | Level 3 | Total | | :----------------------- | :------ | :--------- | :------ | :--------- | | **Assets** | | | | | | Cash equivalents | $63,838 | $— | $— | $63,838 | | Marketable securities | $— | $187,560 | $— | $187,560 | | Total assets | $63,838 | $187,560 | $— | $251,398 | | **Liabilities** | | | | | | Contingent consideration | $— | $— | $23,800 | $23,800 | | Total liabilities | $— | $— | $23,800 | $23,800 | - A decrease of **$4.6 million** in the fair value of contingent consideration liability during the six months ended June 30, 2022, was primarily due to higher discount rates, partially offset by the impact of the passage of time[38](index=38&type=chunk) Marketable Securities by Type (in thousands) as of June 30, 2022 | Security Type | Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | | :--------------------------- | :------------- | :-------------------- | :-------------------- | :--------- | | Corporate debt securities | $47,201 | $— | $(398) | $46,803 | | Commercial paper | $56,053 | $— | $— | $56,053 | | Asset-backed debt securities | $28,423 | $— | $(175) | $28,248 | | U.S. government agency debt securities | $57,211 | $— | $(755) | $56,456 | | Total marketable securities | $188,888 | $— | $(1,328) | $187,560 | [4. Property and Equipment, Net](index=15&type=section&id=4.%20Property%20and%20Equipment%2C%20Net) This note provides a breakdown of the Company's property and equipment and related depreciation Property and Equipment, Net (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :------------------------- | :------------ | :---------------- | | Property and equipment, gross | $4,977 | $4,728 | | Accumulated depreciation | $(3,701) | $(3,393) | | Property and equipment, net | $1,276 | $1,335 | - Depreciation expense was **$0.2 million** for each of the three months ended June 30, 2022 and 2021, and **$0.4 million** for each of the six-month periods[42](index=42&type=chunk) [5. Intangible Assets](index=15&type=section&id=5.%20Intangible%20Assets) This note details the Company's intangible assets, including in-process R&D and amortization schedules Intangible Assets (in thousands) | Item | June 30, 2022 (Gross Cost) | December 31, 2021 (Gross Cost) | June 30, 2022 (Accumulated Amortization) | December 31, 2021 (Accumulated Amortization) | | :--------------------------------- | :------------------------- | :----------------------------- | :--------------------------------------- | :--------------------------------------------- | | Other intangible assets | $751 | $751 | $369 | $332 | | In-process research and development | $6,629 | $6,629 | $— | $— | | Total intangible assets | $7,380 | $7,380 | $369 | $332 | - Amortization expense was **$19 thousand** for each of the three months ended June 30, 2022 and 2021, and **$38 thousand** for each of the six-month periods[43](index=43&type=chunk) Estimated Future Amortization Expense (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $37 | | 2023 | $75 | | 2024 | $75 | | 2025 | $75 | | 2026 | $75 | | Thereafter | $45 | | Total | $382 | [6. Accrued Expenses](index=16&type=section&id=6.%20Accrued%20Expenses) This note provides a breakdown of the Company's accrued expenses as of the reporting dates Accrued Expenses (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :----------------------------- | :------------ | :---------------- | | Employee compensation expenses | $2,885 | $4,389 | | Research and development expenses | $2,771 | $1,278 | | Litigation settlements | $— | $2,650 | | Other | $1,915 | $1,734 | | Total accrued expenses | $7,571 | $10,051 | - Total accrued expenses decreased by **$2.48 million** from December 31, 2021, to June 30, 2022, primarily due to the settlement of litigation and a decrease in employee compensation expenses[46](index=46&type=chunk) [7. Debt](index=16&type=section&id=7.%20Debt) This note discloses information regarding the Company's historical debt arrangements - The Company fully repaid its **$11.0 million** term loan from Silicon Valley Bank in July 2021, including accrued interest and fees, totaling **$11.7 million**[47](index=47&type=chunk) [8. Stockholders' Equity](index=16&type=section&id=8.%20Stockholders'%20Equity) This note details changes in the Company's stockholders' equity, including stock issuances - As of June 30, 2022, the Company had **66,667,580 shares** of common stock issued and outstanding, an increase from 61,228,446 shares at December 31, 2021[49](index=49&type=chunk) - In April 2022, the Company sold **4,838,709 shares** of common stock through an at-the-market facility, generating gross proceeds of **$75.0 million**[54](index=54&type=chunk) - The Company completed public offerings in January and June 2021, raising net proceeds of **$103.3 million** and **$134.9 million**, respectively[52](index=52&type=chunk)[53](index=53&type=chunk) [9. Stock-Based Awards](index=18&type=section&id=9.%20Stock-Based%20Awards) This note provides details on the Company's stock-based compensation plans and expenses - As of June 30, 2022, **3,372,766 shares** remained available for grant under the 2015 Equity Incentive Plan[55](index=55&type=chunk) Stock Option Activity for Six Months Ended June 30, 2022 | Item | Number of Shares | Weighted Average Exercise Price | | :------------------------- | :--------------- | :------------------------------ | | Outstanding Dec 31, 2021 | 3,792,450 | $17.50 | | Granted | 1,891,950 | $14.40 | | Exercised | (85,672) | $1.40 | | Forfeited and cancelled | (583,775) | $15.70 | | Outstanding June 30, 2022 | 5,014,953 | $16.81 | Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $335 | $530 | $582 | $582 | | Research and development | $1,154 | $828 | $2,030 | $2,030 | | General and administrative | $2,449 | $2,343 | $4,680 | $3,895 | | Total stock-based compensation expense | $3,692 | $3,832 | $6,038 | $6,507 | [10. Net Loss per Share](index=21&type=section&id=10.%20Net%20Loss%20per%20Share) This note explains the calculation of net loss per share and details potentially dilutive securities Net Loss per Share (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(20,532) | $(18,161) | $(39,321) | $(46,915) | | Weighted average common shares outstanding | 65,990,031 | 53,968,405 | 63,723,123 | 52,163,136 | | Net loss per share, basic and diluted | $(0.31) | $(0.34) | $(0.62) | $(0.90) | - Potentially dilutive securities (stock options and RSUs) were excluded from diluted net loss per share calculation as their effect would be **anti-dilutive**[70](index=70&type=chunk) Potential Shares of Common Stock Excluded from Diluted EPS Calculation | Item | June 30, 2022 | June 30, 2021 | | :--------------------------------- | :------------ | :------------ | | Options to purchase common stock | 5,014,953 | 3,738,625 | | Restricted stock unit awards | 1,457,309 | 1,498,716 | | Total potential shares of common stock | 6,472,262 | 5,237,341 | [11. Leases](index=23&type=section&id=11.%20Leases) This note provides information on the Company's operating lease agreements and related liabilities - The Company has sublease agreements for office and laboratory space in Wayne, PA (through Oct 2023) and St. Louis, MO (through June 2029)[73](index=73&type=chunk) Operating Lease Supplemental Balance Sheet Information (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :--------------------------------- | :------------ | :---------------- | | Other assets (Gross cost) | $5,240 | $5,240 | | Other assets (Accumulated amortization) | $(2,173) | $(1,803) | | Other assets | $3,067 | $3,437 | | Current portion of lease liabilities | $741 | $693 | | Other liabilities | $1,820 | $2,151 | | Total operating lease liabilities | $2,561 | $2,844 | [12. Agreements Related to Intellectual Property](index=23&type=section&id=12.%20Agreements%20Related%20to%20Intellectual%20Property) This note details royalty and contingent consideration agreements related to intellectual property - The Company receives **high single-digit royalties** from EPI Health on net sales of RHOFADE, totaling $0.3 million and $0.5 million for the three and six months ended June 30, 2022, respectively[75](index=75&type=chunk)[77](index=77&type=chunk) - Under the Confluence Agreement, the Company has agreed to pay former equity holders up to **$75.0 million** in contingent consideration based on future milestones, plus low single-digit royalty payments[78](index=78&type=chunk) - The contingent consideration liability related to Confluence was **$23.8 million** as of June 30, 2022, down from $28.4 million at December 31, 2021[79](index=79&type=chunk) [13. Income Taxes](index=25&type=section&id=13.%20Income%20Taxes) This note explains the Company's income tax position and the status of its deferred tax assets - The Company did not record a federal or state income tax benefit for losses incurred due to a **full valuation allowance** on deferred tax assets[80](index=80&type=chunk) [14. Discontinued Operations](index=25&type=section&id=14.%20Discontinued%20Operations) This note provides information on liabilities associated with the Company's discontinued operations Liabilities from Discontinued Operations (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Accrued expenses | $2,202 | $2,202 | | Discontinued operations - current liabilities | $2,202 | $2,202 | [15. Segment Information](index=25&type=section&id=15.%20Segment%20Information) This note details the Company's reportable operating segments and their financial performance - The Company operates in two reportable segments: **therapeutics** (focused on immuno-inflammatory diseases) and **contract research** (providing laboratory services)[83](index=83&type=chunk) Segment Results of Operations (in thousands) for Three Months Ended June 30, 2022 | Metric | Therapeutics | Contract Research | Corporate and Other | Total Company | | :--------------------- | :----------- | :---------------- | :------------------ | :------------ | | Total revenue | $309 | $4,399 | $(3,180) | $1,528 | | Loss from operations | $(15,277) | $(496) | $(5,221) | $(20,994) | - Intersegment revenue from contract research to therapeutics was **$3.2 million** and **$6.1 million** for the three and six months ended June 30, 2022, respectively, which is eliminated in consolidated statements[87](index=87&type=chunk) [16. Legal Proceedings](index=27&type=section&id=16.%20Legal%20Proceedings) This note discloses the status of significant legal matters involving the Company - The Company settled a securities class action lawsuit in December 2021 for **$2.7 million**, which was covered by insurance[91](index=91&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition and operational results [Overview](index=29&type=section&id=2.1%20Overview) The Company is a clinical-stage biopharmaceutical firm focused on immuno-inflammatory diseases - Aclaris Therapeutics is a clinical-stage biopharmaceutical company developing novel drug candidates for immuno-inflammatory diseases and exploring strategic partnerships[95](index=95&type=chunk) [Clinical Programs](index=29&type=section&id=2.2%20Clinical%20Programs) This section details the progress of the Company's key drug candidates in clinical development [Zunsemetinib, an Investigational Oral MK2 Inhibitor](index=29&type=section&id=2.2.1%20Zunsemetinib%2C%20an%20Investigational%20Oral%20MK2%20Inhibitor) Zunsemetinib is being developed for multiple inflammatory conditions, with several Phase 2 trials underway - Zunsemetinib (ATI-450) is an oral MK2 inhibitor being developed for rheumatoid arthritis, hidradenitis suppurativa, and psoriatic arthritis[96](index=96&type=chunk) - Phase 2a trial (ATI-450-RA-201) in moderate to severe rheumatoid arthritis showed **durable clinical activity** and was generally well-tolerated[103](index=103&type=chunk) - Phase 2b trials for rheumatoid arthritis, hidradenitis suppurativa, and psoriatic arthritis were initiated, with topline data expected in the **first half of 2023**[105](index=105&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) [ATI-1777, an Investigational Topical "Soft" JAK 1/3 Inhibitor](index=33&type=section&id=2.2.2%20ATI-1777%2C%20an%20Investigational%20Topical%20%22Soft%22%20JAK%201%2F3%20Inhibitor) ATI-1777 is a topical inhibitor for atopic dermatitis that has shown positive Phase 2a results - ATI-1777 is a topical 'soft' JAK 1/3 inhibitor for moderate to severe atopic dermatitis, designed for skin activity with **minimal systemic exposure**[110](index=110&type=chunk) - Phase 2a trial (ATI-1777-AD-201) achieved its primary endpoint with a **74.4% reduction in mEASI score** at week 4 (p<0.001)[111](index=111&type=chunk) - A Phase 2b trial (ATI-1777-AD-202) for atopic dermatitis was initiated in May 2022, with topline data expected in the **first half of 2023**[113](index=113&type=chunk) [ATI-2138, an Investigational Oral ITJ Inhibitor](index=33&type=section&id=2.2.3%20ATI-2138%2C%20an%20Investigational%20Oral%20ITJ%20Inhibitor) ATI-2138 is an oral inhibitor for T cell-mediated autoimmune diseases currently in Phase 1 trials - ATI-2138 is an oral ITK/TXK/JAK3 (ITJ) inhibitor for T cell-mediated autoimmune diseases, with an IND allowed by the FDA in November 2021[114](index=114&type=chunk) - A Phase 1 SAD trial for ATI-2138 in healthy subjects was initiated in December 2021, with topline data expected in **2022**[114](index=114&type=chunk)[115](index=115&type=chunk)[117](index=117&type=chunk) [Preclinical Programs](index=35&type=section&id=2.3%20Preclinical%20Programs) The Company is advancing ATI-2231, an oral MK2 inhibitor, toward clinical development - ATI-2231, an oral MK2 inhibitor, is being explored for cancer and bone loss, with an IND submission expected by **end of 2022**[118](index=118&type=chunk) [Discovery Programs](index=35&type=section&id=2.4%20Discovery%20Programs) The Company's discovery efforts focus on novel inhibitors for inflammatory and neurodegenerative diseases - The Company is developing oral gut-biased JAK inhibitors for inflammatory bowel disease and brain penetrant kinase inhibitor candidates for neurodegenerative diseases[119](index=119&type=chunk) [Financial Overview](index=35&type=section&id=2.5%20Financial%20Overview) The Company has a history of net losses and expects to require substantial additional funding for its operations - The Company has incurred significant net losses since inception, with a net loss of **$39.3 million** for the six months ended June 30, 2022, and an accumulated deficit of **$634.7 million**[120](index=120&type=chunk) - **Significant expenses and operating losses** are expected to continue as drug candidates advance through development, requiring substantial additional funding[120](index=120&type=chunk) - Operations have historically been financed through equity sales and debt, with future funding expected from these sources and potential partnerships[121](index=121&type=chunk) [Impacts of COVID-19 on Our Business](index=35&type=section&id=2.6%20Impacts%20of%20COVID-19%20on%20Our%20Business) The COVID-19 pandemic has caused business disruptions, and its future impact remains uncertain - The Company implemented a virtual operations strategy to protect employee health and ensure business continuity, but COVID-19 has caused disruptions[122](index=122&type=chunk) - Ongoing COVID-19 spread could lead to further disruptions in development programs, clinical trials, and supply chains, with the full extent of impact remaining uncertain[125](index=125&type=chunk) [Acquisition and License Agreements](index=37&type=section&id=2.7%20Acquisition%20and%20License%20Agreements) The Company has ongoing financial obligations related to past acquisitions and licensing deals - Under the Confluence Agreement, the Company is obligated to pay up to **$75.0 million** in contingent consideration for milestones and low single-digit royalties on net sales[127](index=127&type=chunk) - The asset purchase agreement with EPI Health for RHOFADE includes potential sales milestone payments up to **$20.0 million** and high single-digit royalties on net sales[129](index=129&type=chunk) [Components of Our Results of Operations](index=38&type=section&id=2.8%20Components%20of%20Our%20Results%20of%20Operations) This section breaks down the key drivers of the Company's revenue and expenses - Revenue is primarily derived from contract research services and royalties on RHOFADE sales[130](index=130&type=chunk)[131](index=131&type=chunk) - **Research and development expenses**, which are central to the business, include costs for CROs, clinical trials, manufacturing, and personnel, and are expensed as incurred[132](index=132&type=chunk)[133](index=133&type=chunk) - General and administrative expenses cover executive, administrative, finance, and legal functions, including salaries, professional fees, and facility costs[137](index=137&type=chunk) [Critical Accounting Estimates](index=40&type=section&id=2.9%20Critical%20Accounting%20Estimates) This section highlights the significant judgments and estimates used in financial reporting - The **contingent consideration liability** is a critical estimate, valued quarterly using a probability-weighted model with significant judgment involved in assumptions like probability of success (10-40%) and discount rates (10.2-10.9%)[144](index=144&type=chunk)[145](index=145&type=chunk) - During the six months ended June 30, 2022, a **$4.6 million decrease** in contingent consideration was recorded due to higher discount rates, partially offset by the passage of time[146](index=146&type=chunk) [Results of Operations](index=43&type=section&id=2.10%20Results%20of%20Operations) This section provides a detailed comparison of financial results for the current and prior year periods [Comparison of Three and Six Months Ended June 30, 2022 and 2021](index=43&type=section&id=2.10.1%20Comparison%20of%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202022%20and%202021) The Company's financial performance shows decreased revenue and increased operating loss for the quarter Key Financial Results (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | Change (3 Months) | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | Change (6 Months) | | :--------------------- | :--------------------------- | :--------------------------- | :---------------- | :--------------------------- | :--------------------------- | :---------------- | | Total revenue | $1,528 | $1,824 | $(296) | $2,981 | $3,601 | $(620) | | Total costs and expenses | $22,522 | $19,830 | $2,692 | $42,882 | $50,136 | $(7,254) | | Loss from operations | $(20,994) | $(18,006) | $(2,988) | $(39,901) | $(46,535) | $6,634 | | Net loss | $(20,532) | $(18,161) | $(2,371) | $(39,321) | $(46,915) | $7,594 | [Revenue](index=43&type=section&id=2.10.2%20Revenue) Revenue decreased due to lower contract research activity, partially offset by higher royalty income - Contract research revenue decreased by **$0.4 million (24.9%)** for the three months and **$0.7 million (20.0%)** for the six months ended June 30, 2022, due to lower billed hours[151](index=151&type=chunk) - Other revenue, primarily RHOFADE royalties, increased to **$0.3 million** for the three months and **$0.5 million** for the six months ended June 30, 2022[151](index=151&type=chunk) [Cost of Revenue](index=43&type=section&id=2.10.3%20Cost%20of%20Revenue) The cost of revenue declined in line with the decrease in contract research revenue - Cost of revenue decreased by **$0.195 million (15.4%)** for the three months and **$0.242 million (9.8%)** for the six months ended June 30, 2022, correlating with the decrease in contract research revenue[152](index=152&type=chunk) [Research and Development Expenses](index=44&type=section&id=2.10.4%20Research%20and%20Development%20Expenses) R&D expenses increased substantially, driven by advancing clinical trials for key drug candidates Research and Development Expenses by Program (in thousands) | Program | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | Change (3 Months) | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | Change (6 Months) | | :----------------------- | :--------------------------- | :--------------------------- | :---------------- | :--------------------------- | :--------------------------- | :---------------- | | Zunsemetinib | $6,606 | $2,252 | $4,354 | $11,318 | $4,325 | $6,993 | | ATI-1777 | $3,510 | $497 | $3,013 | $5,866 | $1,444 | $4,422 | | ATI-2138 | $1,141 | $967 | $174 | $2,267 | $2,350 | $(83) | | ATI-2231 | $1,503 | $70 | $1,433 | $3,089 | $70 | $3,019 | | Discovery | $1,183 | $774 | $409 | $2,272 | $1,466 | $806 | | Personnel | $3,552 | $1,798 | $1,754 | $6,780 | $3,250 | $3,530 | | Stock-based compensation | $941 | $1,154 | $(213) | $828 | $2,030 | $(1,202) | | Total R&D expenses | $18,779 | $7,897 | $10,882 | $33,085 | $15,735 | $17,350 | - **Zunsemetinib R&D expenses increased significantly** due to clinical development activities for multiple Phase 2 trials[155](index=155&type=chunk) - **ATI-1777 R&D expenses rose** due to manufacturing, preclinical activities, and start-up costs for a Phase 2b trial[156](index=156&type=chunk) [General and Administrative Expenses](index=46&type=section&id=2.10.5%20General%20and%20Administrative%20Expenses) G&A expenses increased primarily due to higher personnel costs and stock-based compensation General and Administrative Expenses (in thousands) | Category | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | Change (3 Months) | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | Change (6 Months) | | :--------------------------- | :--------------------------- | :--------------------------- | :---------------- | :--------------------------- | :--------------------------- | :---------------- | | Personnel | $1,365 | $1,147 | $218 | $2,938 | $2,106 | $832 | | Professional and legal fees | $1,160 | $1,336 | $(176) | $2,289 | $2,691 | $(402) | | Facility and support services | $482 | $414 | $68 | $1,091 | $812 | $279 | | Other G&A | $619 | $630 | $(11) | $1,176 | $1,193 | $(17) | | Stock-based compensation | $2,449 | $2,343 | $106 | $4,680 | $3,895 | $785 | | Total G&A expenses | $6,075 | $5,870 | $205 | $12,174 | $10,697 | $1,477 | - Personnel and stock-based compensation expenses increased due to **higher average headcount** and new equity awards[164](index=164&type=chunk) - Professional and legal fees decreased due to lower legal fees, partially offset by higher Sarbanes-Oxley and other accounting compliance expenses[165](index=165&type=chunk) [Revaluation of Contingent Consideration](index=46&type=section&id=2.10.6%20Revaluation%20of%20Contingent%20Consideration) The fair value of contingent consideration decreased due to changes in discount rates - The decrease in contingent consideration fair value for the six months ended June 30, 2022, was mainly due to **higher discount rates** applied to potential payments[167](index=167&type=chunk)[168](index=168&type=chunk)[170](index=170&type=chunk) - The prior year's increase was due to updated probability of success and estimated sales levels for zunsemetinib and ATI-1777[170](index=170&type=chunk) [Other Income (Expense), net](index=48&type=section&id=2.10.7%20Other%20Income%20(Expense)%2C%20net) Other income increased due to lower interest expense and higher interest income - Other income (expense), net, increased for both three and six months ended June 30, 2022, due to **lower interest expense** from the repaid SVB loan and **higher interest income** on investments[171](index=171&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=2.11%20Liquidity%20and%20Capital%20Resources) This section discusses the Company's financial position, cash flows, and funding requirements [Overview](index=48&type=section&id=2.11.1%20Overview) The Company has historically financed its operations through equity sales and loans - The Company has historically incurred net losses and negative cash flows, financing operations primarily through equity sales and commercial loans[172](index=172&type=chunk) - As of June 30, 2022, cash, cash equivalents, and marketable securities totaled **$255.8 million**[173](index=173&type=chunk) [Equity Financing](index=48&type=section&id=2.11.2%20Equity%20Financing) The Company has recently raised significant capital through at-the-market and public offerings - In April 2022, the Company sold **4,838,709 shares** of common stock for **$75.0 million** gross proceeds through an at-the-market facility[174](index=174&type=chunk) - Public offerings in June 2021 and January 2021 generated net proceeds of **$134.9 million** and **$103.3 million**, respectively[175](index=175&type=chunk)[177](index=177&type=chunk) [Debt Financing](index=50&type=section&id=2.11.3%20Debt%20Financing) The Company's term loan from Silicon Valley Bank was fully repaid in 2021 - The **$11.0 million** term loan from Silicon Valley Bank, borrowed in March 2020, was fully repaid in July 2021 for a total of **$11.7 million**[178](index=178&type=chunk) [Cash Flows](index=50&type=section&id=2.11.4%20Cash%20Flows) Cash flow analysis shows increased operating outflow and a positive shift in investing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(40,635) | $(24,453) | | Net cash provided by (used in) investing activities | $8,709 | $(120,784) | | Net cash provided by financing activities | $72,841 | $236,621 | - Operating cash outflow increased due to higher net losses (after non-cash adjustments) and increased cash paid for accounts payable and accrued expenses[182](index=182&type=chunk) - Investing activities shifted from a net use of **$120.8 million** in 2021 to a net provision of **$8.7 million** in 2022, driven by changes in marketable securities transactions[186](index=186&type=chunk) [Funding Requirements](index=54&type=section&id=2.11.5%20Funding%20Requirements) The Company anticipates continued net losses and will require additional capital for future development - The Company anticipates continued net losses due to ongoing clinical development of zunsemetinib, ATI-1777, and ATI-2138, as well as preclinical and discovery efforts[190](index=190&type=chunk) - Existing cash and marketable securities are believed to be sufficient for **over 12 months**, but additional capital will be required to complete clinical development[192](index=192&type=chunk) - Future funding requirements are highly dependent on the scope and success of drug candidate development, regulatory outcomes, and the ability to secure partnerships[193](index=193&type=chunk) [Leases](index=56&type=section&id=2.11.6%20Leases) The Company has ongoing lease obligations for its office and laboratory facilities - Aggregate remaining lease payment obligations for office and laboratory spaces totaled **$3.3 million** as of June 30, 2022[196](index=196&type=chunk) [Agreement and Plan of Merger – Confluence](index=56&type=section&id=2.11.7%20Agreement%20and%20Plan%20of%20Merger%20%E2%80%93%20Confluence) The Company has future payment obligations related to the Confluence acquisition - The Company has contingent consideration obligations up to **$75.0 million** and future royalty payments to former Confluence equity holders[197](index=197&type=chunk) [R&D Obligations](index=56&type=section&id=2.11.8%20R&D%20Obligations) The Company's non-cancelable R&D contract obligations are not considered material - The Company's non-cancelable obligations under R&D contracts with CROs and other service providers are not material, as contracts generally allow for termination upon notice[198](index=198&type=chunk) [Segment Information](index=56&type=section&id=2.11.9%20Segment%20Information) The Company operates through its therapeutics and contract research segments - The Company's two reportable segments are **therapeutics** and **contract research**, with the therapeutics segment focused on immuno-inflammatory diseases and contract research providing laboratory services[199](index=199&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=56&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses the Company's exposure to market risks, primarily interest rate sensitivity - The Company's primary market risk exposure is **interest rate sensitivity** on its cash equivalents and marketable securities[200](index=200&type=chunk) - Due to the short-term and low-risk nature of its investment portfolio, an immediate **10% change in market interest rates** is not expected to materially affect the fair market value of investments[200](index=200&type=chunk) - The economic impact of the COVID-19 pandemic and ongoing geopolitical tensions have introduced significant volatility in financial markets[201](index=201&type=chunk) [Item 4. Controls and Procedures](index=58&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the Company's disclosure controls and internal financial reporting controls - As of June 30, 2022, management concluded that the Company's disclosure controls and procedures were **effective** at a reasonable assurance level[203](index=203&type=chunk) - **No changes** in internal control over financial reporting were identified during the quarter that materially affected or are reasonably likely to materially affect internal controls[204](index=204&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=59&type=section&id=Item%201.%20Legal%20Proceedings) The Company is not currently involved in any material legal proceedings - The Company is not currently a party to any material legal proceedings and is unaware of any pending or threatened legal proceedings that could have a material adverse effect on its business[206](index=206&type=chunk) [Item 1A. Risk Factors](index=59&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the Company's risk factors since its last annual report - The Company's risk factors have **not materially changed** from those described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021[207](index=207&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=59&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section is listed in the report's table of contents but contains no specific content [Item 6. Exhibits](index=59&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q - Exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, employment agreements, Section 302 and 906 certifications, and various XBRL interactive data files[208](index=208&type=chunk)[210](index=210&type=chunk) [Signatures](index=62&type=section&id=Signatures) This section contains the signatures of the authorized officers certifying the report - The report is signed by Neal Walker, Chief Executive Officer, and Frank Ruffo, Chief Financial Officer, on **August 3, 2022**[213](index=213&type=chunk)

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements for the period ended September 30, 2021, reflect a significant increase in cash and total assets, primarily due to two public stock offerings during the year, despite widening net losses driven by increased R&D and contingent consideration revaluation [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2021, total assets significantly increased to **$263.5 million**, driven by cash and marketable securities, while total liabilities rose to **$46.9 million** due to contingent consideration, and stockholders' equity grew to **$216.6 million** from stock offerings | Balance Sheet Highlights (In thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $53,602 | $22,063 | | Marketable securities (Short & Long-term) | $190,015 | $32,068 | | Total current assets | $205,782 | $57,493 | | **Total assets** | **$263,494** | **$70,784** | | **Liabilities & Equity** | | | | Total current liabilities | $17,839 | $14,874 | | Long-term debt, net | $0 | $10,653 | | Contingent consideration | $26,200 | $4,061 | | **Total liabilities** | **$46,913** | **$33,134** | | **Total stockholders' equity** | **$216,581** | **$37,650** | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) For the nine months ended September 30, 2021, revenue slightly increased to **$5.3 million**, but total expenses surged to **$72.1 million** due to higher R&D and contingent consideration revaluation, resulting in a net loss of **$68.1 million** | Statement of Operations (In thousands, except per share data) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total revenue | $5,260 | $4,902 | | Research and development | $29,711 | $20,382 | | General and administrative | $16,676 | $15,632 | | Revaluation of contingent consideration | $22,139 | $2,393 | | Total costs and expenses | $72,090 | $42,254 | | Loss from operations | ($66,830) | ($37,352) | | **Net loss** | **($68,061)** | **($37,842)** | | **Net loss per share, basic and diluted** | **($1.23)** | **($0.90)** | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased from **$37.7 million** to **$216.6 million** by September 30, 2021, primarily driven by **$238.2 million** in net proceeds from two public stock offerings, partially offset by a **$68.1 million** net loss - The company completed two public offerings in 2021, raising net proceeds of **$103.3 million** in January and **$134.9 million** in June, significantly bolstering stockholders' equity[16](index=16&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2021, operating activities used **$35.1 million**, investing activities used **$158.5 million**, and financing activities provided **$225.1 million** from stock offerings, leading to a **$31.5 million** net increase in cash | Cash Flow Summary (In thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($35,059) | ($29,776) | | Net cash provided by (used in) investing activities | ($158,456) | $8,692 | | Net cash provided by financing activities | $225,054 | $10,543 | | **Net increase (decrease) in cash** | **$31,539** | **($10,541)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Key notes highlight the company's strong liquidity, sufficient for over 12 months, and detail the **$22.1 million** increase in contingent consideration, **$238.2 million** raised from stock offerings, full debt repayment, and settled legal proceedings - The company believes its existing cash, cash equivalents, and marketable securities of **$243.6 million** are sufficient to fund operations for more than 12 months from the report's issuance date[22](index=22&type=chunk)[24](index=24&type=chunk) - The contingent consideration liability increased by **$22.1 million** during the first nine months of 2021 due to updated assumptions on success probability and future sales for zunsemetinib and ATI-1777 after positive Phase 2a clinical trial results[38](index=38&type=chunk) - In July 2021, the company fully repaid the **$11.0 million** outstanding under its Loan and Security Agreement with Silicon Valley Bank, for a total payment of **$11.7 million** including interest and fees[47](index=47&type=chunk) - The company settled a securities class action lawsuit for **$2.65 million** and a stockholder derivative action for **$425 thousand**, both expected to be covered by insurance[89](index=89&type=chunk)[94](index=94&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's focus as a clinical-stage biopharmaceutical company, highlighting positive Phase 2a results for zunsemetinib and ATI-1777, increased R&D spending, a significant contingent consideration charge, and strengthened liquidity from public offerings [Overview and Clinical Programs](index=35&type=section&id=Overview%20and%20Clinical%20Programs) The company focuses on developing drug candidates for immuno-inflammatory diseases, with lead candidates zunsemetinib and ATI-1777 showing positive Phase 2a results and planned advancement to Phase 2b trials, alongside preclinical programs - **Zunsemetinib (ATI-450):** Following positive Phase 2a results in moderate to severe rheumatoid arthritis, the company intends to progress to a Phase 2b trial in Q4 2021 and expand into trials for psoriatic arthritis and hidradenitis suppurativa[108](index=108&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) - **ATI-1777:** The Phase 2a trial for moderate to severe atopic dermatitis met its primary endpoint with high statistical significance (p<0.001), with a Phase 2b trial planned for the first half of 2022[114](index=114&type=chunk)[115](index=115&type=chunk) - **ATI-2138:** An IND was submitted in October 2021 for this ITJ inhibitor for psoriasis, with plans for a first-in-human Phase 1 trial if allowed[116](index=116&type=chunk) [Results of Operations](index=49&type=section&id=Results%20of%20Operations) Total revenue slightly increased to **$5.3 million**, while R&D expenses rose by **$9.3 million** to **$29.7 million**, and a significant **$22.1 million** charge was recorded for contingent consideration revaluation due to positive clinical trial outcomes | R&D Expenses by Program (In thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Zunsemetinib | $12,532 | $4,925 | | ATI-1777 | $1,894 | $2,553 | | ATI-2138 | $3,330 | $1,753 | | Other & Personnel | $9,955 | $9,351 | | **Total R&D Expenses** | **$29,711** | **$20,382** | - The increase in zunsemetinib expenses was primarily due to costs for drug product manufacturing and clinical development activities for upcoming Phase 2b and Phase 2 trials[160](index=160&type=chunk) - The revaluation of contingent consideration increased by **$19.7 million** year-over-year, driven by updated success probabilities and sales estimates for zunsemetinib and ATI-1777 after positive Phase 2a trial results[175](index=175&type=chunk) [Liquidity and Capital Resources](index=56&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity was significantly strengthened to **$243.6 million** in cash and marketable securities by two public offerings raising **$238.2 million**, enabling full debt repayment and ensuring over 12 months of operational funding - The company raised net proceeds of **$103.3 million** from a public offering in January 2021 and **$134.9 million** from another in June 2021[179](index=179&type=chunk)[180](index=180&type=chunk) - The company repaid its **$11.0 million** term loan with SVB in full in July 2021 for a total payment of **$11.7 million**[182](index=182&type=chunk) - Management believes existing cash, cash equivalents, and marketable securities are sufficient to fund operating and capital expenditure requirements for more than 12 months from the date of the report[194](index=194&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=64&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate sensitivity on its investment portfolio, but due to its short-term, low-risk nature, a significant impact from rate changes is not expected, and debt-related interest rate risk was eliminated upon loan repayment - The company's primary market risk is interest rate sensitivity on its investment portfolio, but due to its short-term, low-risk nature, a significant impact from rate changes is not expected[201](index=201&type=chunk) - Interest rate risk from debt was eliminated when the company repaid its Loan and Security Agreement with SVB in full in July 2021[202](index=202&type=chunk) [Item 4. Controls and Procedures](index=64&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[207](index=207&type=chunk) - No changes occurred during the quarter ended September 30, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[207](index=207&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=66&type=section&id=Item%201.%20Legal%20Proceedings) The company reached settlement agreements for the Consolidated Securities Action and Consolidated Derivative Action, both preliminarily approved in August 2021, with financial obligations expected to be covered by insurance - In June 2021, the company agreed to settle the Consolidated Securities Action related to its former product ESKATA, with preliminary court approval in August 2021 and final approval pending[212](index=212&type=chunk) - The company also agreed to settle the Consolidated Derivative Action in June 2021, involving policy implementation and attorneys' fees, with preliminary court approval in August 2021[217](index=217&type=chunk) - The company expects the financial obligations for both settlements to be within the limits of its insurance coverage[212](index=212&type=chunk)[217](index=217&type=chunk) [Item 1A. Risk Factors](index=68&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the company's risk factors from those described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - Risk factors have not changed materially from those disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[218](index=218&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=68&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities during the reporting period[219](index=219&type=chunk) [Item 6. Exhibits](index=68&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the company's articles of incorporation, bylaws, and certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's financial statements, management's analysis, market risk, and internal controls [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's financial position strengthened significantly due to public offerings, increasing cash and assets, despite continued operating losses from a non-cash contingent consideration charge [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $113,447 | $22,063 | | Total marketable securities | $152,730 | $32,068 | | **Total Assets** | **$288,046** | **$70,784** | | **Liabilities & Equity** | | | | Contingent consideration | $25,300 | $4,061 | | Total liabilities | $54,231 | $33,134 | | Total stockholders' equity | $233,815 | $37,650 | | **Total Liabilities and Stockholders' Equity** | **$288,046** | **$70,784** | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) This section outlines the company's revenues, expenses, and net loss over specified periods Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $1,824 | $2,046 | $3,601 | $3,453 | | Research and development | $7,897 | $6,466 | $15,735 | $14,142 | | Revaluation of contingent consideration | $4,800 | $— | $21,239 | $1,767 | | Loss from operations | $(18,006) | $(11,381) | $(46,535) | $(26,887) | | **Net loss** | **$(18,161)** | **$(11,597)** | **$(46,915)** | **$(27,183)** | | **Net loss per share** | **$(0.34)** | **$(0.28)** | **$(0.90)** | **$(0.65)** | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details the company's cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(24,453) | $(17,626) | | Net cash (used in) provided by investing activities | $(120,784) | $3,455 | | Net cash provided by financing activities | $236,621 | $10,821 | | **Net increase (decrease) in cash** | **$91,384** | **$(3,350)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides additional details and explanations for the figures presented in the financial statements - The company believes its existing cash, cash equivalents, and marketable securities of **$266.2 million** are sufficient to fund its operating and capital expenditure requirements for more than 12 months from the issuance date of the financial statements[21](index=21&type=chunk)[23](index=23&type=chunk) - The contingent consideration liability increased by **$21.2 million** during the first six months of 2021, reaching **$25.3 million**. This was due to updated assumptions on the probability of success and future sales levels following positive Phase 2a clinical trial results for ATI-450 and ATI-1777[37](index=37&type=chunk)[82](index=82&type=chunk) - The company significantly boosted its liquidity through two public offerings in 2021: a January offering raised **$103.3 million** in net proceeds, and a June offering raised **$134.9 million** in net proceeds[55](index=55&type=chunk)[56](index=56&type=chunk) - In June 2021, the company agreed to settle a securities class action and a stockholder derivative action. It accrued liabilities of **$2.65 million** and **$425,000**, respectively, which are expected to be covered by insurance[92](index=92&type=chunk)[95](index=95&type=chunk) - As a subsequent event in July 2021, the company repaid its **$11.0 million** term loan with Silicon Valley Bank (SVB) in full, for a total payment of **$11.7 million** including interest and fees[98](index=98&type=chunk)[46](index=46&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's drug pipeline and positive clinical trial results, noting a wider net loss due to contingent consideration revaluation, while liquidity significantly improved from public offerings [Drug Pipeline and Development Programs](index=31&type=section&id=Drug%20Pipeline%20and%20Development%20Programs) This section details the company's ongoing drug development initiatives and clinical trial progress - **ATI-450 (Oral MK2 Inhibitor):** Following a successful Phase 2a trial in moderate to severe rheumatoid arthritis that demonstrated durable clinical activity, the company plans to initiate a Phase 2b trial in Q4 2021. Development is also planned for hidradenitis suppurativa and psoriatic arthritis[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk) - **ATI-1777 (Topical JAK 1/3 Inhibitor):** The Phase 2a trial in moderate to severe atopic dermatitis met its primary endpoint with high statistical significance (**p<0.001**), showing a **74.4% reduction in mEASI score**. A Phase 2b trial is planned[113](index=113&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk) - **ATI-2138 (Oral ITJ Inhibitor):** The company is developing ATI-2138 for T-cell mediated autoimmune diseases like psoriasis and/or inflammatory bowel disease and expects to submit an IND in the second half of 2021[117](index=117&type=chunk) [Results of Operations](index=44&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including revenue, expenses, and net loss trends Comparison of Operating Results (in thousands) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $1,824 | $2,046 | $3,601 | $3,453 | | R&D Expenses | $7,897 | $6,466 | $15,735 | $14,142 | | G&A Expenses | $5,870 | $5,572 | $10,697 | $11,773 | | Revaluation of contingent consideration | $4,800 | $— | $21,239 | $1,767 | | **Net Loss** | **$(18,161)** | **$(11,597)** | **$(46,915)** | **$(27,183)** | - The increase in net loss for the three and six months ended June 30, 2021 was primarily driven by charges of **$4.8 million** and **$21.2 million**, respectively, for the revaluation of contingent consideration. This was a result of positive clinical trial outcomes for ATI-450 and ATI-1777, which increased the probability of future milestone payments[168](index=168&type=chunk)[169](index=169&type=chunk) - R&D expenses increased by **$1.4 million** in Q2 2021 compared to Q2 2020, mainly due to costs for ATI-450 clinical trial preparations and development activities for ATI-2138[158](index=158&type=chunk)[159](index=159&type=chunk)[161](index=161&type=chunk) [Liquidity and Capital Resources](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet its short-term and long-term financial obligations and funding sources - As of June 30, 2021, the company had **$266.2 million** in cash, cash equivalents, and marketable securities[173](index=173&type=chunk) - Net cash provided by financing activities was **$236.6 million** for the first six months of 2021, primarily from two public offerings that raised net proceeds of **$103.3 million** (January) and **$134.9 million** (June)[174](index=174&type=chunk)[175](index=175&type=chunk)[187](index=187&type=chunk) - Management believes that existing cash, cash equivalents, and marketable securities are sufficient to fund operating and capital requirements for more than 12 months from the filing date of this report[190](index=190&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=58&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate sensitivity on its short-term, low-risk cash and marketable securities - The company's main market risk is interest rate sensitivity for its cash and marketable securities, but due to the short-term, low-risk profile of the portfolio, a **10% change in rates** is not expected to be material[197](index=197&type=chunk) [Item 4. Controls and Procedures](index=58&type=section&id=Item%204.%20Controls%20and%20Procedures) The company's CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[204](index=204&type=chunk) - No changes occurred during the fiscal quarter ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[204](index=204&type=chunk) [PART II. OTHER INFORMATION](index=60&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and filed exhibits [Item 1. Legal Proceedings](index=60&type=section&id=Item%201.%20Legal%20Proceedings) The company reached agreements in June 2021 to settle a Securities Class Action and a Stockholder Derivative Action, with expected financial obligations covered by insurance and subject to court approval - In June 2021, the company agreed to settle the Consolidated Securities Action. The settlement is subject to court approval, and the company expects its financial obligation to be within its insurance coverage limits[210](index=210&type=chunk)[92](index=92&type=chunk) - In June 2021, the company also agreed to settle the Consolidated Derivative Action. The terms include implementing certain policies and paying attorneys' fees, which are expected to be covered by insurance. This settlement is also subject to court approval[213](index=213&type=chunk)[95](index=95&type=chunk) [Item 1A. Risk Factors](index=62&type=section&id=Item%201A.%20Risk%20Factors) The company reports no material changes to its risk factors from those described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - Risk factors have not changed materially from those described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[214](index=214&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=62&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds for the period - None reported[214](index=214&type=chunk) [Item 6. Exhibits](index=64&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and officer certifications required by the Sarbanes-Oxley Act - The report includes a list of filed exhibits, such as corporate governance documents and officer certifications (Sections 302 and 906 of the Sarbanes-Oxley Act)[216](index=216&type=chunk)

Table of Contents 7 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | |----------------------------------------------------------------------------------------------|----------------------------------------------| | | | | ...