Arcutis Biotherapeutics, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto as of and for the year ended December 31, 2020 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2020, which has been filed with the Securities and Exchange Commission (SEC). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans, objectives, expectations, projections, and strategy for our business, includes forward-looking statements that involve risks and uncertainties. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. As a result of many factors, including those factors identified below and those set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results and the timing of selected events could differ materially from the forward-looking statements contained in the following discussion and analysis. Overview We are a late-stage biopharmaceutical company focused on developing meaningful innovations in immuno-dermatology to address the urgent needs of patients living with immune-mediated dermatological diseases and conditions. Our current portfolio is comprised of highly differentiated topical treatments with significant potential to treat immune-mediated dermatological diseases and conditions. We believe we have built the industry's leading platform for dermatologic product development. Our strategy is to focus on validated biological targets, and to use our platform and deep dermatology expertise to develop differentiated products that have the potential to address the major shortcomings of existing therapies in our targeted indications. We believe this strategy uniquely positions us to rapidly progress towards our goal of bridging the treatment innovation gap in dermatology, while maximizing our probability of technical success and financial resources. In September 2021, we submitted a New Drug Application (NDA) to the FDA for our lead product candidate, roflumilast cream, for the treatment of mild-to-severe plaque psoriasis. Roflumilast cream is a once-daily topical formulation of roflumilast, a highly potent and selective phosphodiesterase-4 (PDE4) inhibitor. PDE4 is an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for dermatological conditions. We are developing roflumilast cream for the treatment of plaque psoriasis, including psoriasis in intertriginous regions such as the groin, axillae, and inframammary areas, as well as atopic dermatitis. We have also successfully completed a long-term safety study of roflumilast cream in plaque psoriasis patients. Additionally, we have completed a Phase 2 proof of concept study of roflumilast cream in atopic dermatitis, and enrollment is underway in pivotal Phase 3 clinical trials, with topline data expected in the second half of 2022. We are also developing a topical foam formulation of roflumilast, and have successfully completed Phase 2 studies in both seborrheic dermatitis and scalp and body psoriasis. Enrollment is underway in single pivotal Phase 3 clinical trials in each of the seborrheic dermatitis and scalp and body psoriasis indications. Topline data is expected in the second or third quarter of 2022 for seborrheic dermatitis and the second half of 2022 for scalp and body psoriasis. If successful, we believe these studies will be sufficient bases to file for regulatory approval, based on our discussions with the FDA. We are developing ARQ-252, a potent and highly selective topical JAK1 inhibitor, for the treatment of chronic hand eczema and vitiligo. As previously disclosed, our Phase 1/2b study of ARQ-252 for the treatment of chronic hand eczema did not meet its primary endpoint. Further analyses of that study pointed toward inadequate local drug delivery to the skin as a key driver of the lack of efficacy. Importantly, there were no safety or tolerability issues seen in that study. Based on these findings, we also terminated our Phase 2 proof of concept study evaluating ARQ-252 as a potential treatment for vitiligo. We are currently working on re-formulating ARQ-252 to develop an enhanced formulation that delivers more active drug to targets in the skin. Additionally, we have formulation and preclinical efforts underway for ARQ-255, an alternative topical formulation of ARQ-252 designed to reach deeper into the skin in order to potentially treat alopecia areata. 24 Table of Contents Since our inception in 2016, we have invested a significant portion of our efforts and financial resources in clinical development activities. We have not generated any revenue from product sales and have funded our operations primarily with the net proceeds from our IPO completed in January 2020 and with the net proceeds from our follow-on equity offerings in October 2020 and February 2021, respectively, as well as with $162.5 million in net cash proceeds from private placements of our convertible preferred stock prior to IPO. On February 4, 2020, we closed our IPO of 10,781,250 shares of common stock at an offering price of $17.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 1,406,250 additional shares of common stock. Our net proceeds, after deducting underwriting discounts, commissions, and offering related transaction costs, were $167.2 million. In addition, on October 6, 2020, we closed our public offering of 4,000,000 shares of common stock and concurrent private placement of 1,400,000 shares of common stock, both at a price of $25.00 per share, receiving an aggregate of $128.4 million in net proceeds after deducting the underwriting discounts, commissions, and offering related transaction costs. Also, on February 5, 2021, we closed our public offering of 6,325,000 shares of common stock at a price of $35.00 per share, including 825,000 shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares, receiving an aggregate of $207.5 million in net proceeds, after deducting underwriting discounts, commissions, and offering related transaction costs. See Note 1 to the unaudited condensed financial statements for additional information. We have incurred net losses in each year since inception, including net losses of $57.0 million and $135.0 million for the three and nine months ended September 30, 2021, respectively, and $38.2 million and $101.6 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $337.0 million and cash, cash equivalents, restricted cash, and marketable securities of $368.8 million. We expect to continue to incur losses for the foreseeable future and expect to incur increased expenses as we advance our product candidates through clinical trials and regulatory submissions. We do not expect to generate revenue from product sales unless, and until, we obtain regulatory approval or clearance from the FDA or other foreign regulatory authorities for our product candidates. If we obtain regulatory approval or clearance for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. In addition, we expect that our expenses will increase substantially as we continue preclinical studies and clinical trials for, and research and development of, our product candidates and maintain, expand, and protect our intellectual property portfolio. As a result, we will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as future potential collaboration agreements. Our failure to obtain sufficient funds on acceptable terms as and when needed could have a material adverse effect on our business, results of operations, and financial condition. See “Liquidity, Capital Resources, and Requirements” below and Note 1 to the financial statements for additional information. Based on our current planned operations, we expect that our current cash, cash equivalents, and marketable securities will be sufficient to fund our operations well into 2023. We rely on third parties in the conduct of our preclinical studies and clinical trials and for manufacturing and supply of our product candidates. We have no internal manufacturing capabilities, and we will continue to rely on third parties, many of whom are single source suppliers, for our preclinical and clinical trial materials, as well as the commercial supply of our products. In addition, we do not yet have a sales organization or fully developed commercial infrastructure. Accordingly, we expect to incur significant expenses to fully develop a sales organization or commercial infrastructure in advance of generating any product sales. COVID-19 Update In March 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak. COVID-19 has placed strains on the providers of healthcare services, including the sites where we conduct our clinical trials. These strains have resulted in some clinical sites slowing or halting enrollment in clinical trials and restricting the on-site monitoring of clinical trials. We follow FDA guidance on clinical trial conduct during the COVID-19 pandemic, including the remote monitoring of clinical data. We are monitoring the impact COVID-19 may have on the clinical development of our product candidates, including potential delays or modifications to ongoing and planned trials. Thus far, we have seen limited impact on our clinical trials, including some disruptions in screening, enrollment, and monitoring; however at this time, we do not expect delays to previously disclosed clinical timelines, including those for roflumilast cream and roflumilast foam. We cannot, at this time, predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our ongoing and planned clinical trials and other business operations. 25 Table of Contents There have been no disruptions in our supply chain of drug manufacturers necessary to conduct our clinical trials and, given our drug inventories, we believe that we will be able to supply the drug needs of our ongoing clinical studies. In alignment with public health guidance designed to slow the spread of COVID-19, we implemented a remote work plan for all employees as of mid-March 2020. We developed a return-to-work protocol, and as the pandemic conditions improved in the southern California region, we reopened our office for in-person work beginning in the first quarter of 2021, and have now returned to normal operations. We may need to undertake additional actions that could impact our operations as required by applicable laws or regulations, or which we determine to be in the best interests of our employees. License Agreements AstraZeneca License Agreement In July 2018, we entered into the AstraZeneca License Agreement with AstraZeneca, granting us a worldwide exclusive license, with the right to sublicense through multiple tiers, under certain AstraZeneca-controlled patent rights, know-how and regulatory documentation, to research, develop, manufacture, commercialize, and otherwise exploit products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, the AZ-Licensed Products, for all diagnostic, prophylactic and therapeutic uses for human dermatological indications, or the Dermatology Field. Under this agreement, we have sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at our expense, and we shall use commercially reasonable efforts to develop, obtain, and maintain regulatory approvals for, and commercialize the AZ-Licensed Products in the Dermatology Field in each of the United States, Italy, Spain, Germany, the United Kingdom, France, China, and Japan. We paid AstraZeneca an upfront non-refundable cash payment of $1.0 million and issued 484,388 shares of our Series B Preferred stock, valued at $3.0 million on the date of the AstraZeneca License Agreement. We subsequently paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product. We have agreed to make additional cash payments to AstraZeneca of up to an aggregate of $12.5 million upon the achievement of specific regulatory approval milestones with respect to the AZ-Licensed Products, which includes $7.5 million upon FDA approval of our first product, and payments up to an additional aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones. With respect to any AZ-Licensed Products we commercialize under the AstraZeneca License Agreement, we will pay AstraZeneca a low to high single-digit percentage royalty rate on our, our affiliates’ and our sublicensees’ net sales of such AZ-Licensed Products, until, as determined on an AZ-Licensed Product-by-AZ-Licensed Product and country-by-country basis, the later of the date of the expiration of the last-to-expire AstraZeneca-licensed patent right containing a valid claim in such country and ten years from the first commercial sale of such AZ-Licensed Product in such country. See Note 6 to the unaudited condensed financial statements for additional information. 26 Table of Contents Hengrui Exclusive Option and License Agreement In January 2018, we entered into the Hengrui License Agreement, with Hengrui, whereby Hengrui granted us an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a JAK 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Canada, Japan, and the European Union (including for clarity the United Kingdom). We made a $0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement. In December 2019, we exercised our exclusive option under the agreement, for which we made a $1.5 million cash payment, and also contemporaneously amended the agreement to expand the territory to additionally include Canada. In addition, we have agreed to make cash payments of up to an aggregate of $20.5 million upon our achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $200.0 million in sales-based milestones based on achieving certain aggregate annual net sales volumes with respect to a licensed product. With respect to any products we commercialize under the Hengrui License Agreement, we will pay tiered royalties to Hengrui on net sales of each licensed product by us, or our affiliates, or our sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions. We are obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis. Additionally, we are obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income we receive from sublicensees of our rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance. The agreement continues in effect until the expiration of our obligation to pay royalties as described above, unless earlier terminated in accordance with the following: (1) by either party upon written notice for the other party’s material breach or insolvency event if such party fails to cure such breach or the insolvency event is not dismissed within specified time periods; and (2) by us for convenience upon 90 days prior written notice to Hengrui and having discussed and consulted any potential cause or concern with Hengrui in good faith. See Note 6 to the unaudited condensed financial statements for additional information. Components of Our Results of Operations Operating Expenses Research and Development Expenses Since our inception, we have focused significant resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts, and activities related to regulatory filings for our product candidates. Research and development costs are expensed as incurred. These costs include direct program expenses, which are payments made to third parties that specifically relate to our research and development, such as payments to clinical research organizations, clinical investigators, manufacturing of clinical material, preclinical testing, and consultants. In addition, employee costs, including salaries, payroll taxes, benefits, stock-based compensation, and travel; for employees contributing to research and development activities are classified as research and development costs. We allocate direct external costs on a program specific basis (topical roflumilast program, topical JAK inhibitor program, and early stage programs). Our internal costs are primarily related to personnel or professional services and apply across programs, and thus are not allocatable on a program specific basis. We expect to continue to incur substantial research and development expenses in the future as we develop our product candidates. In particular, we expect to incur substantial research and development expenses for the Phase 3 trials of roflumilast cream for atopic dermatitis, the Phase 3 trials of roflumilast foam for seborrheic dermatitis and scalp and body psoriasis, ARQ-252 for chronic hand eczema and vitiligo, and ARQ-255 for alopecia areata. 27 Table of Contents We have entered, and may continue to enter, into license agreements to access and utilize certain molecules for the treatment of dermatological diseases and disorders. We evaluate if the license agreement is an acquisition of an asset or a business. To date, none of our license agreements have been considered to be an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of roflumilast cream, roflumilast foam, ARQ-252, and ARQ-255, or any future product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates. See “Risk Factors” for a discussion of the risks and uncertainties associated with the development of our product candidates. General and Administrative Expenses Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel. Other general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for marketing, auditing, tax, and general legal services. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for potential commercialization of our product candidates, increase our headcount, and support our operations as a public company; including increased expenses related to legal, accounting, insurance, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors and officers liability insurance premiums, and investor relations activities. Other Income, Net Other income, net primarily consists of interest income earned on our cash, cash equivalents, and marketable securities. 28 Table of Contents Results of Operations Comparison of the Three Months Ended September 30, 2021 and 2020 The following table sets forth our results of operations for the periods indicated: Three Months Ended September 30, Change 2021 2020 $ % (unaudited) (in thousands) Operating expenses: Research and development $ 40,604 $ 32,743 $ 7,861 24 % General and administrative 16,474 5,560 10,914 196 % Total operating expenses $ 57,078 $ 38,303 $ 18,775 49 % Loss from operations (57,078) (38,303) (18,775) 49 % Other income, net 98 99 (1) (1) % Net loss $ (56,980) $ (38,204) $ (18,776) 49 % Research and Development Expenses Three Months Ended September 30, Change 2021 2020 $ % (unaudited) (in thousands) Direct external costs: Topical roflumilast program $ 26,743 $ 24,146 $ 2,597 11 % Topical JAK inhibitor program 955 4,172 (3,217) (77) % Other early stage programs 178 39 139 356 % Indirect costs: Compensation and personnel-related 8,436 3,664 4,772 130 % Other 4,292 722 3,570 494 % Total research and development expense $ 40,604 $ 32,743 $ 7,861 24 % Research and development expenses increased by $7.9 million, or 24%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily due to an increase in compensation and personnel-related costs of $4.8 million, an increase in other costs of $3.6 million, and an increase in direct costs related to the topical roflumilast program of $2.6 million. These increases were partially offset by a decrease in direct costs related to the topical JAK inhibitor program (ARQ-252 and ARQ-255) of $3.2 million. The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount to manage our growing clinical programs. The increase in other costs was primarily due to an increase in consulting activity and medical affairs spending. The increase in topical roflumilast program costs was primarily due to increased manufacturing costs offset by a slight decrease in clinical trial costs. Clinical trial costs declined due to the completion of Phase 3 studies of roflumilast cream in plaque psoriasis, partially offset by the initiation of Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis. The decrease in topical JAK inhibitor program costs was primarily due to the completion of our Phase 2 study of ARQ-252 in chronic hand eczema. 29 Table of Contents General and Administrative Expenses General and administrative expenses increased by $10.9 million, or 196%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily due to an increase in compensation and personnel-related expenses of $6.9 million, and an increase in professional services of $3.1 million. The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount. The increase in professional services was due to an increase in consulting activity and marketing expenses primarily related to roflumilast. Other Income, Net Other income, net decreased by $1,000, or 1%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Comparison of the Nine Months Ended September 30, 2021 and 2020 The following table sets forth our results of operations for the periods indicated: Nine Months Ended September 30, Change 2021 2020 $ % (unaudited) (in thousands) Operating expenses: Research and development $ 93,000 $ 87,934 $ 5,066 6 % General and administrative 42,243 14,647 27,596 188 % Total operating expenses $ 135,243 $ 102,581 $ 32,662 32 % Loss from operations (135,243) (102,581) (32,662) 32 % Other income, net 213 952 (739) (78) % Net loss $ (135,030) $ (101,629) $ (33,401) 33 % Research and Development Expenses Nine Months Ended September 30, Change 2021 2020 $ % (unaudited) (in thousands) Direct external costs: Topical roflumilast program $ 53,416 $ 67,980 $ (14,564) (21) % Topical JAK inhibitor program 8,470 7,785 685 9 % Other early stage programs 434 76 358 471 % Indirect costs: Compensation and personnel-related 19,874 9,040 10,834 120 % Other 10,806 3,053 7,753 254 % Total research and development expense $ 93,000 $ 87,934 $ 5,066 6 % 30 Table of Contents Research and development expenses increased by $5.1 million, or 6%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to an increase in compensation and personnel-related costs of $10.8 million, an increase in other costs of $7.8 million, and an increase in direct costs related to the topical JAK inhibitor program of $0.7 million. These increases were partially offset by a decrease in direct costs related to the topical roflumilast program of $14.6 million. The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount to manage our growing clinical programs. The increase in other costs were primarily due to an increase in consulting activity and medical affairs spending. The increase in topical JAK inhibitor program costs were primarily due to our Phase 2 study of ARQ-252 in vitiligo, partially offset by lower costs related to our Phase 2 study of ARQ-252 in chronic hand eczema. The decrease in topical roflumilast program costs relate primarily to the completion of the Phase 3 studies of roflumilast cream for plaque psoriasis and the Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp and body psoriasis. This decrease was partially offset by the costs related to our Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp and body psoriasis. General and Administrative Expenses General and administrative expenses increased by $27.6 million, or 188%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to an increase in compensation and personnel-related expenses of $18.1 million, and an increase in professional services of $7.8 million. The increase in compensation and personnel-related expenses, which includes stock-based compensation, was due to an increase in headcount, coupled with the recognition of $5.3 million of incremental stock-based compensation expense as a result of modification to the vesting schedule and exercise term of previously-granted awards in connection with the retirement of our former Chief Financial Officer during the first quarter. The increase in professional services was mainly due to an increase in consulting activity and marketing expenses primarily related to roflumilast. Other Income, Net Other income, net decreased by $0.7 million, or 78%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was due to a lower yield on our investment portfolio. Liquidity, Capital Resources, and Requirements Sources of Liquidity We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop our product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. As of September 30, 2021, we had cash, cash equivalents, restricted cash, and marketable securities of $368.8 million, and an accumulated deficit of $337.0 million. We anticipate that operating losses and net cash used in operating activities will increase over the next several years as we further develop roflumilast cream, roflumilast foam, ARQ-252, and ARQ-255, move into later and more costly stages of product development, develop new product candidates, hire personnel, and prepare for regulatory submissions and the commercialization of our product candidates. We have historically financed our operations primarily through private placements of preferred stock, as well as our IPO completed in January 2020, and our follow-on financings in October 2020 and February 2021. We will continue to be dependent upon equity, debt financing, collaborations, or other forms of capital at least until we are able to generate positive cash flows from our operations. On May 6, 2021, we entered into a Sales Agreement, with Cowen, to sell shares of our common stock, from time to time, with aggregate gross sales proceeds of up to $100.0 million through an ATM equity offering program under which Cowen acts as sales agent. During the nine months ended September 30, 2021, we did not issue or sell any shares of our common stock through our ATM. 31 Table of Contents Cash Flows The following table sets forth our cash flows for the periods indicated: Nine Months Ended September 30, 2021 2020 (unaudited) (in thousands) Cash used in operating activities $ (122,918) $ (80,462) Cash used in investing activities (99,452) (105,932) Cash provided by financing activities 209,066 168,765 Net decrease in cash, cash equivalents, and restricted cash $ (13,304) $ (17,629) Net Cash Used in Operating Activities During the nine months ended September 30, 2021, net cash used in operating activities was $122.9 million, which consisted of a net loss of $135.0 million and a change in net operating assets and liabilities of $9.2 million, partially offset by net non-cash charges of $21.3 million. The change in net operating assets and liabilities was primarily due to an increase of $6.1 million in prepaid expenses and other current assets and a decrease of $3.4 million in accounts payable and accrued liabilities due to the timing of payments and lower outstanding accounts payable balances for our contract research organizations (CROs). The net non-cash charges were primarily related to stock-based compensation expense of $18.2 million. During the nine months ended September 30, 2020, net cash used in operating activities was $80.5 million, which consisted of a net loss of $101.6 million, offset by a change in net operating assets and liabilities of $15.9 million and net non-cash charges of $5.3 million. The change in net operating assets and liabilities was primarily due to an increase of $16.3 million in accounts payable and accrued liabilities due to our operating expense growth and timing of payments. The net non-cash charges were primarily related to stock-based compensation expense of $5.3 million. Net Cash Used in Investing Activities During the nine months ended September 30, 2021, net cash used in investing activities was $99.5 million, which was comprised primarily of purchases of marketable securities of $244.3 million, partially offset by the proceeds from the maturities of marketable securities of $145.6 million. During the nine months ended September 30, 2020, net cash used in investing activities was $105.9 million, which was comprised primarily of purchases of marketable securities of $179.4 million, partially offset by proceeds from the maturities of marketable securities of $73.6 million. Net Cash Provided by Financing Activities During the nine months ended September 30, 2021, net cash provided by financing activities was $209.1 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million. During the nine months ended September 30, 2020, net cash provided by financing activities was $168.8 million, which was comprised primarily of the net cash proceeds received from the IPO of $168.6 million. Funding Requirements We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $337.0 million as of September 30, 2021. We had cash, cash equivalents, and marketable securities of $367.3 million as of September 30, 2021. Based on our current planned operations, we expect that our current cash, cash equivalents, and marketable securities will be sufficient to fund our operations well into 2023. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. 32 Table of Contents We will need to raise substantial additional capital to fund our operations through the sale of our equity securities, incurring debt, entering into licensing or collaboration agreements with partners, grants, or other sources of financing. There can be no assurance that sufficient funds will be available to us at all or on attractive terms when needed from these sources. If we are unable to obtain additional funding from these or other sources when needed it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development, and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting preclinical studies and clinical trials, in particular our planned or ongoing clinical studies of roflumilast cream in plaque psoriasis and atopic dermatitis, roflumilast foam in seborrheic dermatitis and scalp and body psoriasis, ARQ-252 in chronic hand eczema and vitiligo, and our formulation and preclinical efforts for ARQ-255 for alopecia areata; • suspensions or delays in the enrollment or changes to the number of patients we decide to enroll in our ongoing clinical trials as a result of the COVID-19 pandemic; • the timing of, and the costs involved in, obtaining regulatory approvals for our lead product candidate or our other product candidates; • the number and characteristics of any additional product candidates we develop or acquire; • the cost of manufacturing our lead product candidates or any future product candidates and any products we successfully commercialize, including costs associated with building out our supply chain; • the cost of commercialization activities if our lead product candidates or any future product candidates are approved for sale, including marketing, sales, and distribution costs; • the cost of building a sales force in anticipation of product commercialization; • our ability to establish and maintain strategic collaborations, licensing or other arrangements, and the financial terms of any such agreements that we may enter into; • the costs related to milestone payments to AstraZeneca or Hengrui, upon the achievement of predetermined milestones; • any product liability or other lawsuits related to our products; • the expenses needed to attract and retain skilled personnel; • the costs associated with being a public company; • the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims, and the outcome of this and any other future patent litigation we may be involved in; and • the timing, receipt, and amount of sales of any future approved products, if any. 33 Table of Contents Contractual Obligations and Contingent Liabilities The following summarizes our significant contractual obligations as of September 30, 2021. Facility Operating Lease In April 2020, we amended our lease agreement for our facility in Westlake Village, California to relocate to a new expanded space including 22,643 square feet. The lease payment term for the new space began on December 30, 2020 and will terminate 91 months thereafter, with a renewal option term of five years. We have a one-time option to cancel the lease after month 67. The lease is subject to fixed rate escalation increases with an initial base rent of $76,000 per month and includes rent free periods aggregating approximately one year. The amended lease agreement required that we deliver a letter of credit to the landlord of $1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met. Accordingly, in November 2020, we entered into a letter of credit for $1.5 million, which is secured with a restricted cash account in the same amount. The total commitment under the operating lease agreement is $6.7 million, including $0.1 million for the remaining three months of 2021, $0.8 million for 2022, $1.0 million for each of the years 2023, 2024 and 2025, and $2.8 million for 2026 and thereafter. See Note 7 to the unaudited condensed financial statements for additional information. Manufacturing Agreements We have entered into manufacturing supply agreements for the commercial supply of topical roflumilast cream which include certain minimum purchase commitments. Firm future purchase commitments under these agreements are approximately $5.4 million within the next 3 months and then approximately $0.6 million per year for the following 4 years. This amount does not represent all of the our anticipated purchases, but instead represents only the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts. Indemnification In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations. In accordance with our certificate of incorporation and bylaws, we have indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. Critical Accounting Policies and Use of Estimates The preparation of our condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020. There were no material changes to our critical accounting policies during the nine months ended September 30, 2021. Recent Accounting Pronouncements See Note 2 to our unaudited condensed financial statements. 34 Table of Contents Emerging Growth Company Status We are an emerging growth company as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we are (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We early adopted ASU No. 016-01, Financial Instruments—Overall (Topic 825)—Recognition and Measurement of Financial Assets and Financial Liabilities , ASU 2016-09, Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share Based Payment Accounting , ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , ASU No. 2016-02, Leases, ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, and ASU No. 2019-12, Income Taxes (Topic 740), as the JOBS Act does not preclude an emerging growth company from early adopting a new or revised accounting standard earlier than the time such standard applies to private companies. We expect to use the extended transition period for any other new or revised accounting standards during the period in which we remain an emerging growth company. As of June 30, 2021, we determined that we will become a "large accelerated filer" under the rules of the SEC and we will no longer be classified as an emerging growth company as of December 31, 2021.