What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-16 · 172 added, 128 removed, 251 unchanged (54% of the section changed)

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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.

Our strategy is to focus on validated biological targets, and to use our drug development 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.

Our lead product candidate, roflumilast cream, has successfully completed pivotal Phase 3 clinical trials in plaque psoriasis.

We are currently preparing an NDA, with a submission to the FDA expected in the second half of 2021.

Roflumilast cream is a highly potent and selective PDE4 inhibitor, an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for dermatological conditions.

Our lead product candidate, roflumilast cream, has successfully completed pivotal Phase 3 clinical trials in plaque psoriasis, demonstrating symptomatic improvement and favorable tolerability in this population.

We have submitted a NDA to the FDA, and the FDA has set a PDUFA action date of July 29, 2022.

Roflumilast cream is a once-daily topical formulation of roflumilast, a highly potent and selective PDE4 inhibitor.

PDE4 is an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for the systematic treatment of 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 recently initiated 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 psoriasis.

In seborrheic dermatitis, we had a successful End of Phase 2 meeting with the FDA and plan to initiate a single pivotal Phase 3 clinical trial in the second or third quarter of 2021, with topline data expected in the second or third quarter of 2022.

Pending discussions with regulators, we expect to initiate our Phase 3 program in scalp psoriasis in the second half of 2021, with topline data anticipated in the second half of 2022.

Beyond this, we have completed enrollment in a Phase 2b clinical study of ARQ-252, a potent and highly selective topical JAK1 inhibitor for the treatment of chronic hand eczema, and expect topline data by mid-2021.

We also plan to initiate a Phase 2 proof of concept study of ARQ-252 for the treatment of vitiligo in the first quarter of 2021.

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.

We have also successfully completed a long-term safety study of roflumilast cream in plaque psoriasis subjects showing continued symptomatic improvement and favorable tolerability over a treatment period of 52 to 64 weeks.

In atopic dermatitis, we have initiated three pivotal Phase 3 clinical studies:

INTEGUMENT-1 and -2 are enrolling subjects six years of age or older and INTEGUMENT-PED is enrolling subjects between the ages of two and five years.

We expect to provide topline data from each of INTEGUMENT-1 and -2 by the end of 2022.

We intend to submit an sNDA for topical roflumilast cream for the treatment of atopic dermatitis patients aged six years or older in 2023 based on the results of INTEGUMENT-1 and -2.

We expect to provide topline data from INTEGUMENT-PED in 2023 and submit a subsequent sNDA for the younger age cohort following the potential initial atopic dermatitis approval in patients aged six years or older.

We are also developing a topical foam formulation of roflumilast, and have successfully completed Phase 2 clinical trials in both seborrheic dermatitis and scalp and body psoriasis.

In seborrheic dermatitis, we have initiated a single pivotal Phase 3 clinical trial, with topline data anticipated in mid-year 2022.

We also initiated a single pivotal Phase 3 clinical trial in scalp and body psoriasis indications, with topline data anticipated in the second half of 2022.

If these pivotal Phase 3 trials for roflumilast foam are positive, we expect the data to be sufficient basis for an NDA submission to the FDA for each indication.

Beyond topical roflumilast, we are developing ARQ-252, a potent and highly selective topical JAK1 inhibitor.

In May 2021, we announced that the Phase 2 study of ARQ-252 in chronic hand eczema did not meet its primary endpoint with further analyses of the study pointing to inadequate local drug delivery to the skin.

Given these analyses, we also elected to terminate the Phase 2a clinical trial evaluating ARQ-252 as a potential treatment in vitiligo, as we began reformulation efforts to develop an enhanced formulation of ARQ-252 that delivers more active drug to targets in the skin.

Additionally, we have formulation and nonclinical efforts continuing for ARQ-255, an alternative deep-penetrating topical formulation of ARQ-252 designed to reach deeper into the skin and hair follicle in order to potentially treat alopecia areata.The ARQ-255 formulation is separate and distinct from ARQ-252, and thus there are no implications to ARQ-255 from ARQ-252.

Index to Financial Statements

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 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 approximately $207.4 million in aggregate net proceeds, after deducting underwriting discounts, commissions and estimated offering expenses.

We have not generated any revenue from product sales and have funded our operations primarily with the net proceeds from equity and debt offerings.

Prior to our IPO, we received $162.5 million in net cash proceeds from private placements of our convertible preferred stock.

On February 4, 2020, we received $167.2 million in net proceeds in connection with our IPO.

On October 6, 2020, we closed a public offering and a concurrent private placement of our common stock and received an aggregate of $128.4 million in net proceeds.

Also, on February 5, 2021, we closed a public offering of our common stock and received an aggregate of $207.5 million in net proceeds.

On December 22, 2021, we entered into a loan and security agreement, or the Loan Agreement, with SLR Investment Corp.

(SLR) and the lenders party thereto for an aggregate principal amount of $225.0 million, of which $75.0 million has been funded and is outstanding, resulting in net proceeds of $72.4 million.

See Note 1 to the financial statements for additional information.

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As of December 31, 2021, we had an accumulated deficit of $408.3 million and cash, cash equivalents, restricted cash and marketable securities of $388.6 million.

As of December 31, 2021, we had $75.0 million outstanding under the Loan Agreement and an aggregate of up to $150.0 million in additional funding under the Loan Agreement that may become available subject to the satisfaction of specified conditions.

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.

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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.

In addition, we expect that our expenses will increase substantially as we continue nonclinical 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.

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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, along with the cash proceeds received in February 2021 related to our financing, will be sufficient to fund our operations 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.

Based on our current planned operations, we expect that our current cash, cash equivalents, and marketable securities, combined with committed funding under the Loan Agreement, will be sufficient to fund our operations into 2024.

We rely on third parties in the conduct of our nonclinical 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 nonclinical 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.

Index to Financial Statements

COVID-19 Update

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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, roflumilast foam and ARQ-252.

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.

We believe that the rapid spread of the Omicron variant in late 2021 and early 2022 has likely had a minor impact on the enrollment of our clinical trials.

Because of this likely impact, along with the inherent challenges of enrolling young children in clinical trials, we have updated our expectation for providing topline data for the INTEGUMENT-PED trial, in atopic dermatitis subjects between two and five years of age, to 2023.

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, including our commercialization activities.

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.

Index to Financial Statements

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.

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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 and payments up to an additional aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones.

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.

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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 EU (including for clarity the United Kingdom).

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.

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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.

Since our inception, we have focused significant resources on our research and development activities, including conducting nonclinical 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 to our product candidates;

internal costs are not allocated to specific product candidates.

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 allocable 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 and roflumilast foam for seborrheic dermatitis and scalp psoriasis, the preclinical studies and clinical trials for the continued development of ARQ-252 for hand eczema and vitiligo, and ARQ-255 for alopecia areata.

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.

Index to Financial Statements

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.

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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.

Index to Financial Statements

The successful development of our product candidates is highly uncertain.

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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 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 general and administrative expenses include costs related to sales support as we prepare for commercialization, legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for marketing, auditing, tax, and general legal services.

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, restricted cash and marketable securities.

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

Index to Financial Statements

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(in thousands)

Direct Costs:

Preclinical and clinical $ 82,529 $ 23,097 59,432 257 %

Manufacturing

13,383 3,481 9,902 284 %

Product milestones — 3,500 (3,500) (100) %

Direct external costs:

Topical roflumilast program $ 89,196 $ 80,971 $ 8,225 10 %

Topical JAK inhibitor program 11,683 14,691 (3,008) (20) %

Other early stage programs 548 250 298 119 %

Indirect costs:

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Research and development expenses increased by $30.3 million, or 26%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was due to an increase in clinical trial costs of $59.4 million, an increase in manufacturing costs of $9.9 million, an increase in compensation and personnel-related expenses of $9.2 million, and an increase of $3.8 million in other costs, including regulatory, research and clinical consulting costs, partially offset by a decrease in licensing milestones of $3.5 million.

The increases in clinical trial and manufacturing costs relate primarily to new and ongoing studies, including Phase 3 studies of roflumilast cream for plaque psoriasis, Phase 2 studies of roflumilast foam in scalp psoriasis and seborrheic dermatitis, and the ARQ-252 Phase 2 study for hand eczema.

The increase in compensation and personnel-related expenses, which includes stock compensation, was primarily due to an increase in headcount.

Licensing milestones consisted of a $2.0 million cash milestone payment made to AstraZeneca in August 2019 and a $1.5 million cash option payment to Hengrui in December 2019.

The increase was primarily due to an increase in compensation and personnel-related costs of $15.0 million, an increase in other indirect costs of $9.8 million, and an increase in direct costs related to the topical roflumilast program of $8.2 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 $3.0 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 indirect costs was primarily due to an increase in medical affairs spending and consulting activity.

The increase in topical roflumilast program costs was primarily due to increased manufacturing costs partially offset by a 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.

General and Administrative Expenses

General and administrative expenses increased by $39.6 million, or 186%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was primarily due to an increase in compensation and personnel-related expenses of $7.6 million, an increase in professional services of $3.8 million, and an increase in insurance costs of $2.6 million.

The increase in compensation and personnel-related expenses, which includes stock compensation, was primarily due to an increase in headcount.

The increases in professional services and insurance costs were mainly due to overall Company growth and the costs associated with being a public company.

The increase was primarily due to an increase in compensation and personnel related expenses of $25.3 million, and an increase in professional services of $13.1 million.

The increase in compensation and personnel related expenses, which includes stock-based compensation, was primarily due to an increase in headcount as we prepare for commercialization.

The increase in professional services was due to an increase in sales and marketing expenses and consulting activity.

Index to Financial Statements

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Other income, net decreased by $0.8 million, or 82%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The decrease was primarily due to a lower yield on our investment portfolio, partially offset by higher balances.

Comparison of the Year Ended December 31, 2019 and 2018

The decrease was primarily due to a lower yield on our investment portfolio.

Comparison of the Years Ended December 31, 2020 and 2019

The following table sets forth our results of operations for the periods indicated:

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(in thousands)

Direct Costs:

Preclinical and clinical

$ 23,097 $ 8,448 $ 14,649 173 %

Manufacturing

3,481 2,493 988 40 %

Product milestones 3,500 4,400 (900) (20) %

Direct external costs:

Topical roflumilast program $ 80,971 $ 26,677 $ 54,294 204 %

Topical JAK inhibitor program 14,691 3,379 11,312 335 %

Other early stage programs 250 22 228 1036 %

Indirect costs:

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Research and development expenses increased by $78.8 million, or 216%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was due to an increase in clinical trial costs of $14.6 million, an increase in compensation and personnel-related expenses of $3.0 million, and an increase in manufacturing costs of $1.0 million.

The increases in clinical trial and manufacturing costs relate to the initiation of the Phase 2b and open label extension studies in roflumilast cream for plaque psoriasis in the second half of 2018 and the initiation of the Phase 2 study in roflumilast cream in atopic dermatitis in early 2019.

The increase was due to an increase in direct costs related to the topical roflumilast program of $54.3 million, an increase in direct costs related to the topical JAK inhibitor program of $11.3 million, an increase in compensation and personnel-related expenses of $9.2 million, and an increase of $3.8 million in other indirect costs which includes regulatory, research and clinical consulting costs.

The increase in topical roflumilast program costs was primarily due to new and ongoing studies, including Phase 3 studies of roflumilast cream for plaque psoriasis, Phase 2 studies of roflumilast foam in scalp psoriasis and seborrheic dermatitis, as well as an increase in manufacturing costs.

The increase in compensation and personnel-related expenses, which includes stock compensation, was primarily due to an increase in headcount.

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General and administrative expenses increased by $14.7 million, or 223%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was primarily due to an increase in professional services associate with the general growth of the business of $2.3 million, which includes legal, tax, audit, market research studies and various other administrative functions, as well as an increase of $2.1 million in compensation and personnel-related expenses, which includes stock compensation, due to an increase in headcount.

The increase in compensation and personnel-related expenses, which includes stock compensation, was primarily due to an increase in headcount.

The increases in professional services and insurance costs were mainly due to overall Company growth and the costs associated with being a public company.

Index to Financial Statements

Other Income, Net

Other income, net increased by $0.7 million, or 137%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

The increase was primarily due to interest earned on marketable securities, in which we had larger balances in 2019 than in 2018 due to the timing of issuances of our Series B and C convertible preferred stock.

Other income, net decreased by $0.2 million, or 15%, for the year ended December 31, 2020 compared to

the year ended December 31, 2019.

The decrease was primarily due to a lower yield on our investment portfolio,

partially offset by higher balances.

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.

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 nonclinical and clinical trials and providing general and administrative support for these operations.

As of December 31, 2021 and 2020, we had cash, cash equivalents, restricted cash, and marketable securities of $388.6 million and $286.0 million, respectively, and an accumulated deficit of $408.3 million and $202.0 million, respectively.

In addition, on February 5, 2021, we completed an equity offering and received approximately $207.4 million in aggregate net proceeds, after deducting underwriting discounts, commissions and estimated offering expenses.

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 equity offerings in October 2020 and February 2021, and 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.

The following table sets forth our cash flows for the periods indicated:

Year Ended December 31,

2020 2019 2018

(in thousands)

Cash used in operating activities $ (113,033) $ (42,836) $ (14,085)

Cash used in investing activities (181,824) (26,325) (11,532)

Cash provided by financing activities 298,145 93,103 61,593

Net increase in cash, cash equivalents and restricted cash $ 3,288 $ 23,942 $ 35,976

Net Cash Used in Operating Activities

During the year ended December 31, 2020, net cash used in operating activities was $113.0 million, which consisted of a net loss of $135.7 million, offset by a change in net operating assets and liabilities of $14.1 million and net non-cash charges of $8.5 million.

The change in net operating assets and liabilities was primarily due to an increase of $17.6 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 $7.9 million.

During the year ended December 31, 2019, net cash used in operating activities was $42.8 million, which consisted of a net loss of $42.0 million, a change in net operating assets and liabilities of $1.5 million, partially offset by net non-cash charges of $0.7 million.

The change in net operating assets and liabilities was due to an increase of $3.3 million in prepaid expenses and other current assets for advances made for clinical trial costs, partially offset by an increase of $1.9 million in accounts payable and accrued liabilities due to our overall growth, increased research and development spending and timing of payments.

The net non-cash charges were primarily related to stock-based compensation expense of $0.8 million, and depreciation and right-of-use asset amortization of $0.2 million, partially offset by net amortization/accretion on marketable securities of $0.4 million.

Index to Financial Statements

During the year ended December 31, 2018, net cash used in operating activities was $14.1 million and consisted primarily of a net loss of $19.3 million adjusted by non-cash charges of $3.1 million and a change of $2.1 million in our net operating assets and liabilities.

The non-cash charges were primarily related to the issuance of convertible preferred stock in connection with the AstraZeneca License Agreement, which was expensed to research and development.

The change in net operating assets and liabilities was primarily due to a net increase of $1.9 million in accounts payable and accrued liabilities due to our overall growth, increased research and development spending and timing of payments.

Net Cash Used in Investing Activities

During the year ended December 31, 2020, net cash used in investing activities was $181.8 million, which was comprised primarily of purchases of marketable securities of $279.1 million, partially offset by proceeds from the maturities of marketable securities of $97.6 million.

During the year ended December 31, 2019, net cash used in investing activities was $26.3 million, which was comprised of purchases of marketable securities of $60.8 million and property and equipment of $0.3 million, partially offset by proceeds from the maturities of marketable securities of $34.8 million.

During the year ended December 31, 2018, net cash used in investing activities was $11.5 million, which represented the purchase of marketable securities.

Net Cash Provided by Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was $298.1 million, which was comprised primarily of the net cash proceeds received from the IPO of $168.6 million and follow-on financing in October 2020 of $128.4 million.

During the year ended December 31, 2019, net cash provided by financing activities was $93.1 million, which was comprised of the net proceeds received from the issuance of Series C convertible preferred stock of $94.2 million as well as the proceeds from the exercise of stock options of $0.3 million, offset by deferred financing costs of $1.4 million paid in connection with the IPO.

During the year ended December 31, 2018, net cash provided by financing activities was $61.6 million, which was comprised of $61.2 million in proceeds from the issuance of our Series A and Series B convertible preferred stock and $0.4 million from proceeds received from the exercise of stock options.

As of December 31, 2021, we had $75.0 million outstanding under our loan and security agreement, or the Loan Agreement, with SLR Investment Corp., or SLR, and the lenders party thereto.

During the year ended December 31, 2021, we expanded our financing sources to include our ATM program and our Loan Agreement.

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.

During the year ended December 31, 2021, we did not issue or sell any shares of our common stock through our ATM program.

On December 22, 2021 we entered into a Loan Agreement with SLR and the lenders party thereto.

Pursuant to the Loan Agreement, the lenders agreed to extend term loans to the us in an aggregate principal amount of up to $225.0 million, comprised of four tranches that become available subject to the satisfaction of specified conditions.

We received gross proceeds of $75.0 million from the first tranche on December 22, 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.

Funding Requirements

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We had cash, cash equivalents, and marketable securities of $387.1 million and $284.4 million as of December 31, 2021 and 2020, respectively.

In addition, on February 5, 2021, we received approximately $207.4 million in net proceeds from an equity offering, after deducting underwriting discounts, commissions and estimated offering expenses.

Based on our current planned operations, we expect that our current cash, cash equivalents and marketable securities, along with the cash proceeds from our financing in February 2021, will be sufficient to fund our operations into 2023.

As of December 31, 2021, we had $75.0 million outstanding under our Loan Agreement and an aggregate of up to $150.0 million in additional funding that may become available subject to the satisfaction of specified conditions.

Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations.

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.

We will need to raise substantial additional capital to fund our operations through the sale of our equity securities, accessing or incurring additional 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.

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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.

Index to Financial Statements

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.

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Our future funding requirements will depend on many factors, including, but not limited to:

Index to Financial Statements

• 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 psoriasis, ARQ-252 in hand eczema and vitiligo, and our formulation and preclinical efforts for ARQ-255 in 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 scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting nonclinical 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 psoriasis, ARQ-252 in hand eczema and vitiligo, and our formulation and nonclinical efforts for ARQ-255 in alopecia areata;

• suspensions or delays in the enrollment or changes to the number of subjects 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;

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• the timing, receipt and amount of sales of any future approved products, if any.

On December 22, 2021 we entered into a Loan Agreement with SLR and the lenders party thereto.

Pursuant to the Loan Agreement, the lenders agreed to extend term loans to the us in an aggregate principal amount of up to $225.0 million, comprised of:

(i) a tranche A term loan of $75.0 million, (ii) a tranche B-1 term loan of $50.0 million, (iii) a tranche B-2 term loan of up to $75.0 million, available in minimum increments of $15.0 million, and (iv) a tranche C term loan of up to $25.0 million.

We refer to the tranche A, tranche B and tranche C term loans together as our Term Loans.

As security for the obligations under the Loan Agreement, we granted SLR, for the benefit of the lenders, a continuing security interest in substantially all of our assets, including our intellectual property, subject to certain exceptions.

The tranche A term loan was funded on December 22, 2021.

Each tranche B term loan is available following delivery to SLR of satisfactory evidence that we have received FDA approval of roflumilast cream for an indication relating to the treatment of patients with plaque psoriasis, which we refer to as the FDA Approval.

The tranche B-1 term loan will remain available for funding until the earlier of (i) 15 days after we have received FDA Approval and (ii) June 30, 2023.

The tranche B-2 term loan will remain available for funding until June 30, 2023.

The tranche C term loan is available following the achievement of a net product revenue milestone of $110.0 million, calculated on a trailing six month basis.

The tranche C term loan will remain available for funding until September 30, 2024.

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Principal amounts outstanding under the Term Loans will accrue interest at a floating rate equal to the applicable rate in effect from time to time, as determined by SLR on the third business day prior to the funding date of the applicable Term Loan and on the first business day of the month prior to each payment date of each Term Loan.

The applicable rate is a per annum interest rate equal to 7.45% plus the greater of (a) 0.10% and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd.

(or on any successor or substitute published rate) for a term of one month, subject to a replacement with an alternate benchmark rate and spread in certain circumstances.

On December 31, 2021, the rate was 7.55%.

Commencing on February 1, 2022, interest payments are payable monthly following the funding of any Term Loan.

Any principal amounts outstanding under the Term Loans, if not repaid sooner, are due and payable on January 1, 2027, or the Maturity Date.

We may voluntarily prepay principal amounts outstanding under the Term Loans in minimum increments of $5.0 million, subject to a prepayment premium of (i) 3.0% of the principal amount of such Term Loan so prepaid prior to December 22, 2022, (ii) 2.0% of the principal amount of such Term Loan so prepaid after December 22, 2022 and prior to December 22, 2023, or (iii) 1.0% of the principal amount of such Term Loan so prepaid after December 22, 2023 and prior to December 22, 2025.

If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, we are required to make mandatory prepayments of (i) all principal amounts outstanding under the Term Loans, plus accrued and unpaid interest thereon through the prepayment date, (ii) any fees applicable by reason of such prepayment, (iii) the prepayment premiums set forth in the paragraph above, plus (iv) all other obligations that are due and payable, including expenses and interest at the Default Rate (as defined below) with respect to any past due amounts.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, requirements as to financial reporting and insurance and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on its property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock or to redeem capital stock.

We have also agreed to a financial covenant whereby, beginning with the month ending December 31, 2023, we must generate net product revenue in excess of specified amounts for applicable measuring periods;

provided, however, that such financial covenant shall not apply if our average market capitalization over the trailing five day period prior to the last day of any measurement month is equal to or in excess of $400.0 million.

We were in compliance with all covenants under the Loan Agreement as of December 31, 2021.

In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans.

Under the Loan Agreement, an event of default will occur if, among other things, we fail to make payments under the Loan Agreement, we breach any of our covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches, the lenders determine that a material adverse change has occurred, or we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings.

Upon the occurrence and for the duration of an event of default, an additional default interest rate, or the Default Rate, equal to 4.0% per annum will apply to all obligations owed under the Loan Agreement.

In connection with the Loan Agreement, we paid a closing fee of $1.0 million on December 22, 2021, and we are further obligated to pay (i) a final fee equal to 6.95% of the aggregate original principal amount of the Term Loans funded upon the earliest to occur of the Maturity Date, the acceleration of any Term Loan and the prepayment, refinancing, substitution or replacement of any Term Loan and (ii) a certain amount of lenders’ expenses incurred in connection with the execution of the Loan Agreement.

Additionally, in connection with the Loan Agreement, we entered into an Exit Fee Agreement, whereby we agreed to pay an exit fee in the amount 3.0% of each Term Loan funded upon (i) any change of control transaction or (ii) a revenue milestone, calculated on a trailing six month basis.

Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement.

Index to Financial Statements

The following table sets forth our cash flows for the periods indicated:

Year Ended December 31,

2021 2020 2019

(in thousands)

Cash used in operating activities $ (174,627) $ (113,033) $ (42,836)

Cash used in investing activities (75,953) (181,824) (26,325)

Cash provided by financing activities 281,947 298,145 93,103

Net increase in cash, cash equivalents and restricted cash $ 31,367 $ 3,288 $ 23,942

Net Cash Used in Operating Activities

During the year ended December 31, 2021, net cash used in operating activities was $174.6 million, which consisted of a net loss of $206.4 million, partially offset by net non-cash charges of $28.1 million and a change in net operating assets and liabilities of $3.6 million.

The net non-cash charges were primarily related to stock-based compensation expense of $23.9 million.

The change in net operating assets and liabilities was primarily due to an increase of $10.7 million in accounts payable and accrued liabilities due to an increase in bonus and clinical accruals, partially offset by an increase of $7.3 million in prepaid expenses and other current assets.

The net non-cash charges were primarily related to stock-based compensation expense of $7.9 million.

Net Cash Used in Investing Activities

During the year ended December 31, 2021, net cash used in investing activities was $76.0 million, which was comprised primarily of purchases of marketable securities of $292.5 million, partially offset by the proceeds from the maturities of marketable securities of $217.6 million.

Net Cash Provided by Financing Activities

During the year ended December 31, 2021, net cash provided by financing activities was $281.9 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million as well as from our debt financing in December 2021 of $72.4 million.

Index to Financial Statements

Contractual Obligations and Contingent Liabilities

The following summarizes our significant contractual obligations as of December 31, 2021:

Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

(in thousands)

Operating leases $ 6,673 $ 114 $ 1,746 $ 2,019 $ 2,794

Total obligations $ 6,673 $ 114 $ 1,746 $ 2,019 $ 2,794

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.

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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 provides for a leasehold improvement allowance up to $1.25 million.

It also 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.

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.

Index to Financial Statements

The total commitment under the operating lease agreement is $6.6 million, including $0.8 million for the year 2022, $1.0 million for each of the years 2023 through 2027, and $0.6 million for the year 2028.

See Note 7 to the financial statements for additional information.

Manufacturing Agreements

We have entered into manufacturing supply agreements for the commercial supply of roflumilast cream that include certain minimum purchase commitments.

Firm future purchase commitments under these agreements are approximately $8.2 million for 2022 and $0.6 million per year for 2023, 2024 and 2025.

This amount does not represent all of our anticipated purchases, but instead represents only the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts.

Long-Term Debt Obligations

As of December 31, 2021, we had $75.0 million outstanding under our Loan Agreement and an aggregate of up to $150.0 million in additional funding under the Loan Agreement that may become available subject to the satisfaction of specified conditions.

The total commitment under the Loan Agreement is $108.9 million, including $5.7 million for each of the years 2022 through 2026, and $80.2 million for 2027.

These amounts do not represent or include any future draw downs, but instead represent only the contractually obligated minimum payments of interest, principal, and loan fees related to the funding of the $75.0 million tranche A term loan on December 22, 2021.

License Agreements

The terms of certain of our license agreements require us to pay potential future milestone payments based on product development and commercial success.

The amount and timing of such obligations are unknown or uncertain.

These potential obligations are further described in Note 6 to the financial statements.

Indemnification

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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.

Index to Financial Statements

Off-Balance Sheet Arrangements

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While our significant accounting policies are more fully described in the notes to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements and understanding and evaluating our reported financial results.

Preclinical and Clinical Accruals and Costs

We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical studies, clinical trials and contract manufacturing activities.

Nonclinical and Clinical Accruals and Costs

We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of nonclinical studies, clinical studies, clinical trials and contract manufacturing activities.

These costs are a significant component of our research and development expenses.

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We have not experienced any material differences between accrued costs as of December 31, 2021 and 2020 and actual costs incurred.

Index to Financial Statements

Stock-Based Compensation

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We account for forfeitures as they occur.

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We calculate the fair value measurement of stock options using the Black-Scholes option pricing model and assumptions discussed below.

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We used the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term.

Expected Volatility —Since we do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants.

Expected Volatility —Since we do not yet have sufficient trading history for our common stock to use it solely for our historical volatility, the expected volatility was estimated based a combination of our own historical common stock volatility as well as the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants.

The comparable companies were chosen based on their similar size, stage in the life cycle and area of specialty.

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• the prices of each of our series of preferred stock sold by us to outside investors in arm’s length transactions, and the rights, preferences and privileges of each of these series of preferred stock relative to our common stock;

Index to Financial Statements

• our results of operations, financial position and the status of our research and development efforts;

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• the market performance of publicly traded companies in the life sciences and biotechnology sectors;

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• the likelihood of achieving a liquidity event for the holders of our shares of common stock, such as a sale of the company or an IPO, given prevailing market conditions;

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See Note 2 to our financial statements.

Index to Financial Statements

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.

We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the completion of our IPO.

However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three year period, we will cease to be an emerging growth company prior to the end of such five year period.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis