Aclaris Therapeutics Inc

Previous wording

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. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A. “Risk Factors,” and “Special Note Regarding Forward-Looking Statements.”

Current wording

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 on Form 10-K (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. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A. “Risk Factors,” and “Special Note Regarding Forward-Looking Statements.”

Previous wording

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 also provide contract research services to third parties enabled by ourearly-stage research and development expertise. In January 2024, we announced that we are undertaking a strategic review of our business.

Current wording

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 ourearly-stage research and development expertise.

Previous wording

Since our inception, we have incurred significant net losses. Our net loss was $88.5 million for the year ended December 31, 2023 and $86.9 million for the year ended December 31, 2022. As of December 31, 2023, we had an accumulated deficit of $770.8 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. 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. As a result, we will need substantial additional funding to support our continuing operations.

Current wording

Since our inception, we have incurred significant net losses. Our net loss was $132.1 million for the year ended December 31, 2024 and $88.5 million for the year ended December 31, 2023. 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 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. 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 product candidates. 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. As a result, we will need substantial additional funding to support our continuing operations.

Previous wording

We have historically financed our operations primarily with sales of equity securities and incurring indebtedness in the form of loans from commercial lenders. In the near term, we expect to finance our operations through these and other capital sources, including potential partnerships with other companies or other strategic transactions. 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.

Current wording

We have historically financed our operations primarily with sales of equity securities and incurring indebtedness in the form of loans from commercial lenders. In the near term, we expect to finance our operations through these and other capital sources, including potential partnerships with other companies or other strategic transactions. 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 product candidates.

Previous wording

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. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled “Risk Factors.”

Current wording

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 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. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled “Risk Factors.”

Previous wording

In December 2023, we entered into an exclusive patent license agreement with Sun Pharmaceutical Industries, Inc., or Sun Pharma. Under the license agreement, we granted Sun Pharma exclusive rights under certain patents that we exclusively license from a third party. The patents relate to the use of deuruxolitinib, Sun Pharma’s JAK inhibitor, or other isotopic forms of ruxolitinib, to treat alopecia areata or androgenetic alopecia. Under the license agreement, Sun Pharma has agreed to pay us an upfront payment, regulatory and commercial milestone payments, and a mid single-digit tiered royalty calculated as a percentage of Sun Pharma’s net sales. We have separate contractual obligations under which we have agreed to pay to third parties a portion of the consideration we may receive under the license agreement.

Current wording

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 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.

Previous wording

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.”

Current wording

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.”

Previous wording

In August 2022, we entered into a non-exclusive patent license agreement with Eli Lilly and Company, or Lilly. Under the license agreement, we granted Lilly non-exclusive rights under certain patents and patent applications that we exclusively license from a third party. The patents and patent applications relate to the use of baricitinib, Lilly’s JAK inhibitor, to treat alopecia areata. Under the license agreement, Lilly has agreed to pay us an upfront payment, regulatory and commercial milestone payments, anniversary payments, and a low single-digit royalty calculated as a percentage of Lilly’s net sales of baricitinib for the treatment of alopecia areata. We have separate contractual obligations under which we have agreed to pay to third parties an amount equal to any regulatory and commercial milestone payments we receive under the Lilly license agreement, as well as a portion of the upfront consideration and a portion of the royalties we may receive under the license agreement.

Current wording

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 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. 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).

Previous wording

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.

Current wording

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, all amounts that were due and outstanding by EPI Health have been fully reserved.

Previous wording

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

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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. We expense research and development costs as incurred. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, clinical trial sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials and are tracked on a program-by-program basis. We do not allocate personnel costs or other indirect expenses to specific research and development programs.

Current wording

Research and development activities are central to our business model. 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. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, clinical trial sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials and are tracked on a program-by-program basis. We do not allocate personnel costs or other indirect expenses to specific research and development programs.

Previous wording

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:

Current wording

The successful development of our product 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 product candidates. 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:

Previous wording

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

Current wording

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 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.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

We record a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments. Significant judgement is involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of our contingent consideration liability can result from changes to one or more of these assumptions. These assumptions are highly dependent on the outcome and timing of the development of certain of our drug candidates. We evaluate the fair value estimate of our contingent consideration liability on a quarterly basis with changes, if any, recorded as income or expense in our consolidated statement of operations. Any such changes could have a material impact on our financial results.

Current wording

We record a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments. Significant judgement is involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of our contingent consideration liability can result from changes to one or more of these assumptions. These assumptions are highly dependent on the outcome and timing of the development of 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. Any such changes could have a material impact on our financial results.

Previous wording

The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments. Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data. The probability of success assumption was 35% at December 31, 2023. Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value. The discount rate ranged between 7.3% and 8.6% depending on the year of each potential payment.

Current wording

The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments. Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data. Probability of success assumptions ranged between 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.

Previous wording

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 not issued awards that include market-based conditions. For service-based awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service period. For performance-based awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service period beginning in the period that it becomes probable the performance conditions will occur. 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

Current wording

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 (“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. For service-based awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service period. For performance-based awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service period beginning in the period that it becomes probable the performance conditions will occur. 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.

Previous wording

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. The expected term of our stock options has been determined using the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options we granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We use an expected dividend yield of zero because we have not paid cash dividends to date and have no intention of paying cash dividends in the future.

Current wording

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. 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. The expected term of stock options we granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We use an expected dividend yield of zero because we have not paid cash dividends to date and have no intention of paying cash dividends in the future.

Previous wording

Contract research revenue was $3.0 million and $4.4 million for the years ended December 31, 2023 and 2022, 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.

Current wording

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, which was offset by a higher average billing rate.

Previous wording

Licensing revenue was $28.2 million and $25.1 million for the years ended December 31, 2023 and 2022, respectively. The increase was primarily driven by 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.

Current wording

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

Previous wording

Cost of revenue was $3.4 million and $4.0 million for the years ended December 31, 2023 and 2022, respectively, and in each case related to providing laboratory services to our clients. 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.

Current wording

Cost of revenue was $2.8 million and $3.4 million for the years ended December 31, 2024 and 2023, respectively, and in each case related to providing laboratory services to our clients. Changes in cost of revenue generally correlate to changes in contract research revenue. 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.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

The increase inprofessional 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.

Current wording

The decrease inprofessional 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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 in July 2023. There was no bad debt expense during the year ended December 31, 2024.

Previous wording

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 partiesin connection with amounts earned **under the Lilly agreement.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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. 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. We may engage in additional debt and equity financing transactions in order to raise funds. 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.

Current wording

Since our inception, we have incurred net losses and negative cash flows from our operations. 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. We may engage in additional debt and equity financing transactions in order to raise funds. 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 product candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our liquidity.

Previous wording

As of December 31, 2023, we had cash, cash equivalents and marketable securities of $181.9 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

In April 2023, we sold 3.4 million shares of our common stock for aggregate gross proceeds of $27.5 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023. We paid selling commissions of $0.8 million in connection with the sale.

Current wording

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.

Previous wording

Cash and cash equivalents were $39.9 million as of December 31, 2023 compared to $45.3 million as of December 31, 2022. We also had $142.0 million in short- and long-term marketable securities as of December 31, 2023 compared to $184.5 million as of December 31, 2022.

Current wording

Cash and cash equivalents were $24.6 million as of December 31, 2024 compared to $39.9 million as of December 31, 2023. We also had $179.3 million in short- and long-term marketable securities as of December 31, 2024 compared to $142.0 million as of December 31, 2023.