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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 161 added, 101 removed, 191 unchanged (58% of the section changed)

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As a result of many factors, including those factors identified below and those set forth in the “Risk Factors” section of our Annual Report on Form 10-K, our actual results and the timing of selected events could differ materially from the forward-looking statements contained in the following discussion and analysis.

We are a late-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs.

We are an early commercial-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs.

Our current portfolio is comprised of highly differentiated topical treatments with significant potential to treat immune-mediated dermatological diseases and conditions.

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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, demonstrating symptomatic improvement and favorable tolerability in this population.

We have submitted a New Drug Application (NDA) to the FDA, and the FDA has set a Prescription Drug User Fee Act (PDUFA) action date of July 29, 2022.

Roflumilast cream is a once-daily topical formulation of roflumilast, a highly potent and selective phosphodiesterase-4 (PDE4) inhibitor.

Our lead product, ZORYVE TM (roflumilast) cream 0.3%, recently obtained FDA approval on July 29, 2022 for the treatment of plaque psoriasis, including psoriasis in the intertriginous areas (e.g., groin or axillae), in individuals 12 years of age or older.

ZORYVE is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on the duration of use.

In addition, we submitted and Health Canada has accepted a New Drug Submission (NDS) for roflumilast cream for plaque psoriasis in Canada with a target action date of April 30, 2023.

ZORYVE 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 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 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.

In addition to the recent approval of ZORYVE for plaque psoriasis, we are also developing roflumilast cream for the treatment of atopic dermatitis.

In atopic dermatitis, we completed enrollment in INTEGUMENT-1, the first of two pivotal Phase 3 clinical trials in subjects six years of age or older.

We continue to enroll subjects in our other two pivotal Phase 3 atopic dermatitis trials:

INTEGUMENT-2 in subjects six years of age or older and INTEGUMENT-PED in 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.

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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 completed enrollment in single pivotal Phase 3 clinical trials in both seborrheic dermatitis and scalp and body psoriasis.

In seborrheic dermatitis, we anticipate topline data in mid-year 2022.

If positive, we expect the data to be a sufficient basis for an NDA submission in the first half of 2023.

We are also developing a topical foam formulation of roflumilast, and have successfully completed a Phase 3 clinical trial in seborrheic dermatitis and completed enrollment in a single pivotal Phase 3 clinical trial in scalp and body psoriasis.

In seborrheic dermatitis, we announced positive topline data in June 2022 and we expect the data to be a sufficient basis for an NDA submission in the first quarter of 2023.

In our Phase 3 scalp and body psoriasis trial, we anticipate topline data late in the third quarter or early in the fourth quarter of 2022.

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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.

Prior to our IPO, we received $162.5 million in net cash proceeds from private placements of convertible preferred stock which was converted into shares of common stock in connection with our IPO.

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

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In March 2022, we received $14.5 million in net proceeds related to shares issued under our ATM.

See Note 1 to the financial statements for additional information.

We have incurred net losses in each year since inception, including net losses of $64.3 million and $36.0 million for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, we had an accumulated deficit of $472.6 million and cash, cash equivalents, restricted cash, and marketable securities of $344.8 million.

As of March 31, 2022, we had $75.0 million outstanding under the Loan Agreement and an aggregate of up to $150.0 million in additional funding 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, regulatory submissions, and commercialization.

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.

As a result, we will need substantial additional funding to support our operating activities.

On August 2, 2022, we received $125.0 million in proceeds under the Loan Agreement.

On August 2, 2022, we priced a public offering of 8,625,000 shares of common stock at an offering price of $20.00 per share, including the underwriters full exercise of their option to purchase an additional 1,125,000 shares.

The aggregate net proceeds to us from the offering, including the exercise of the underwriters’ option to purchase additional shares, are expected to be $161.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The offering is expected to close on August 5, 2022.

We have incurred net losses in each year since inception, including net losses of $67.4 million and $131.7 million for the three and six months ended June 30, 2022, respectively, and $42.0 million and $78.1 million for the three and six months ended June 30, 2021, respectively.

As of June 30, 2022, we had an accumulated deficit of $540.0 million and cash, cash equivalents, restricted cash, and marketable securities of $283.4 million.

As of June 30, 2022, we had $75.0 million outstanding under the Loan Agreement.

Upon FDA approval of ZORYVE for the treatment of psoriasis, we drew down an additional $125.0 million under the Loan agreement, which was received on August 2, 2022.

After this draw down, we have $200.0 million outstanding under the Loan Agreement, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We expect to receive $161.7 million from the closing of the public offering of our common stock on August 5, 2022.

We expect to continue to incur losses for the foreseeable future and expect to incur increased expenses as we begin to commercialize ZORYVE in psoriasis and as we advance ZORYVE and our product candidates through clinical trials, regulatory submissions, and commercialization.

We expect to incur significant commercialization expenses related to sales, marketing, manufacturing, and distribution of ZORYVE, and our other product candidates if we obtain regulatory approval for them.

If our available cash balances, amounts available under the Loan Agreement and anticipated future cash flows from operations are insufficient to cover these expenses, we may need to fund our operations through equity or debt financings or other sources, such as future potential collaboration agreements.

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, combined with committed funding under the Loan Agreement, will be sufficient to fund our operations into 2024.

Any 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.

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 have not yet completed the build out of our entire sales organization.

Accordingly, we expect to incur significant expenses to fully develop a sales organization or commercial infrastructure in advance of generating any product sales.

In addition, we are in the process of completing the build out of our sales organization.

Accordingly, we expect to incur significant expenses related to our sales organization and our commercial infrastructure to support ZORYVE commercialization.

COVID-19 Update

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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.

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, 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.

Upon the approval of ZORYVE in July 2022, $7.5 million became payable to AstraZeneca.

We have agreed to make additional cash payments to AstraZeneca of up to an aggregate of $5.0 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, of which $5.0 million will become payable when we achieve $100.0 million in worldwide sales.

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 financial statements for additional information.

See Note 6 to the unaudited condensed financial statements for additional information.

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).

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 Janus Kinase (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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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 financial statements for additional information.

In June 2022, we entered into a side letter agreement with Hengrui and one of its subsidiaries to extend certain rights and obligations under the Hengrui License Agreement to the subsidiary under specified circumstances, including a change of control of such subsidiary.

See Note 6 to the unaudited condensed financial statements for additional information.

Components of Our Results of Operations

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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.

In particular, we expect to incur substantial research and development expenses for the Phase 3 trials of roflumilast cream for atopic dermatitis, ARQ-252 for chronic hand eczema and vitiligo, and ARQ-255 for alopecia areata.

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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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 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.

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;

Other general and administrative expenses include costs related to sales and marketing as we begin commercialization of ZORYVE, 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 begin commercialization of ZORYVE, 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.

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Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

Comparison of the Three Months Ended June 30, 2022 and 2021

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

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 $ %

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Research and Development Expenses

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 $ %

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Total research and development expense $ 38,205 $ 30,765 $ 7,440 24 %

Research and development expenses increased by $19.0 million, or 88%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Research and development expenses increased by $7.4 million, or 24%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase was primarily due to an increase in direct costs related to the topical roflumilast program of $4.2 million, an increase in compensation and personnel-related costs of $3.9 million, and an increase in other costs of $2.7 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 $3.4 million.

The increase in topical roflumilast program costs was primarily due to increased clinical trial costs and increased manufacturing.

Clinical trial costs increased due to the ongoing Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis partially offset by the completion of Phase 3 studies of roflumilast cream in plaque psoriasis.

Manufacturing costs increased due to the timing of purchases of roflumilast active pharmaceutical ingredient (API).

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 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.

The increase in topical roflumilast program costs was primarily due to increased manufacturing costs and, to a lesser extent, clinical trial costs .

Manufacturing costs increased due to the timing of purchases of roflumilast active pharmaceutical ingredient (API) and manufacturing of commercial supply ahead of launch.

Clinical trial costs increased due to the ongoing Phase 3 studies of roflumilast cream in atopic dermatitis partially offset by the completion of Phase 3 studies of roflumilast cream in plaque psoriasis and Phase 3 studies of roflumilast foam in seborrheic dermatitis.

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

The increase in other costs was primarily due to an

increase in medical affairs spending and consulting activity.

The decrease in topical JAK inhibitor program costs was primarily due to the completion of our Phase 2 studies of ARQ-252 in chronic hand eczema and vitiligo.

General and Administrative Expenses

General and administrative expenses increased by $7.6 million, or 52%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The increase was primarily due to higher professional services of $5.3 million and higher compensation and personnel-related expenses of $1.3 million.

The increase in professional services was due to an increase in consulting activity and marketing expenses primarily related to roflumilast.

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.

General and administrative expenses increased by $16.3 million, or 144%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase was primarily due higher compensation and personnel-related expenses of $9.5 million, higher sales and marketing expenses of $4.1 million, and higher professional services of $1.9 million.

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

The increase in sales and marketing expenses was primarily related to commercialization efforts for ZORYVE.

The increase in professional services was due to an increase in consulting activity.

Other Income, Net

Other income, net increased by $0.1 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to a larger marketable securities balance for the three months ended March 31, 2022.

Other income, net increased by $0.3 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to a larger marketable securities balance for the three months ended June 30, 2022.

Interest Expense

Interest expense increased by $1.8 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, due to interest expense of $1.8 million related to our long-term debt.

Interest expense increased by $2.0 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to interest expense related to our long-term debt.

Comparison of the Six Months Ended June 30, 2022 and 2021

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

Six Months Ended June 30, Change

2022 2021 $ %

(in thousands)

Operating expenses:

Research and development $ 78,827 $ 52,396 $ 26,431 50 %

General and administrative 49,628 25,769 23,859 93 %

Total operating expenses $ 128,455 $ 78,165 $ 50,290 64 %

Loss from operations (128,455) (78,165) (50,290) 64 %

Other income (expense):

Other income, net 563 115 448 390 %

Interest expense (3,838) — (3,838) *

Total other income (expense) (3,275) 115 $ (3,390) (2948) %

Net loss $ (131,730) $ (78,050) $ (53,680) 69 %

______________

*Not applicable

Research and Development Expenses

Six Months Ended June 30, Change

2022 2021 $ %

(in thousands)

Direct external costs:

Topical roflumilast program $ 46,311 $ 26,673 $ 19,638 74 %

Topical JAK inhibitor program 1,393 7,515 (6,122) (81) %

Other early stage programs 492 256 236 92 %

Indirect costs:

Compensation and personnel-related 19,630 11,438 8,192 72 %

Other 11,001 6,514 4,487 69 %

Total research and development expense $ 78,827 $ 52,396 $ 26,431 50 %

Research and development expenses increased by $26.4 million, or 50%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase was primarily due to an increase in direct costs related to the topical roflumilast program of $19.6 million, compensation and personnel-related costs of $8.2 million, and an increase in other costs of $4.5 million.

These increases were partially offset by a decrease in direct costs related to the topical JAK inhibitor program of $6.1 million.

The increase in topical roflumilast program costs relate primarily to increased clinical trial costs and increased manufacturing.

Clinical trial costs increased due to the ongoing Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in scalp psoriasis partially offset by the completion of Phase 3 studies of roflumilast cream in plaque psoriasis.

Manufacturing costs increased due to the timing of purchases of roflumilast API and manufacturing of commercial supply ahead of launch.

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

The increase in other costs were primarily due to an increase in medical affairs spending and consulting activity.

The decrease in topical JAK inhibitor program costs were primarily due to the completion of our Phase 2 studies of ARQ-252 in chronic hand eczema and vitiligo.

General and Administrative Expenses

General and administrative expenses increased by $23.9 million, or 93%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase was primarily due to an increase in compensation and personnel-related expenses of $11.2 million, an increase in sales and marketing expenses of $7.7 million, and an increase in professional services of $3.6 million.

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

The increase in sales and marketing expenses was primarily related to commercialization efforts for ZORYVE.

The increase in professional services was mainly due to an increase in consulting activity.

Other Income, Net

Other income, net increased by $0.4 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to a larger marketable securities balance for the six months ended June 30, 2022.

Interest Expense

Interest expense increased by 3.8 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to interest expense related to our long-term debt.

Liquidity, Capital Resources, and Requirements

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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 March 31, 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $344.8 million, and an accumulated deficit of $472.6 million.

As of March 31, 2022, we had $75.0 million outstanding under our Loan Agreement.

We have historically financed our operations primarily through private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020 and February 2021, our Loan Agreement, and our ATM.

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.

As of June 30, 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $283.4 million, and an accumulated deficit of $540.0 million.

As of June 30, 2022, we had $75.0 million outstanding under our Loan Agreement.

Upon FDA approval of ZORYVE, we drew down an additional $125 million under the Loan Agreement, which we received on August 2, 2022.

After this draw down, we have $200 million outstanding under the Loan Agreement and $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

We expect to receive $161.7 million from the closing of the public offering of our common stock on August 5, 2022.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

We have historically financed our operations primarily through private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020, February 2021, and August 2022, our Loan Agreement, and our ATM.

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

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

Cash used in operating activities $ (118,955) $ (82,034)

Cash provided by investing activities 15,297 61,996

Cash provided by (used in) investing activities 67,862 (102,923)

Cash provided by financing activities 15,847 209,003

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Net Cash Used in Operating Activities

During the three months ended March 31, 2022, net cash used in operating activities was $57.0 million, which consisted of a net loss of $64.3 million and a change in net operating assets and liabilities of $0.4 million, partially offset by net non-cash charges of $7.8 million.

During the six months ended June 30, 2022, net cash used in operating activities was $119.0 million, which consisted of a net loss of $131.7 million and a change in net operating assets and liabilities of $4.0 million, partially offset by net non-cash charges of $16.8 million.

The net non-cash charges were primarily related to stock-based compensation expense of $14.6 million.

During the three months ended March 31, 2021, net cash used in operating activities was $46.2 million, which consisted of a net loss of $36.0 million and a change in net operating assets and liabilities of $19.5 million offset by net non-cash charges of $9.3 million.

During the six months ended June 30, 2021, net cash used in operating activities was $82.0 million, which consisted of a net loss of $78.1 million and a change in net operating assets and liabilities of $18.6 million offset by net non-cash charges of $14.6 million.

The change in net operating assets and liabilities was primarily due to an increase of $9.8 million in prepaid expenses and other current assets due to an increase in prepaid clinical trials and a decrease of $9.0 million in accounts payable and accrued liabilities due to the timing of payments to contract research organizations and payment of employee bonuses accrued for at December 31, 2020.

The net non-cash charges were primarily related to stock-based compensation expense of $12.8 million.

Net Cash Provided by Investing Activities

During the three months ended March 31, 2022, net cash provided by investing activities was $15.3 million, which was comprised primarily of proceeds from the maturities of marketable securities of $70.9 million, partially offset by purchases of marketable securities of $55.5 million.

During the three months ended March 31, 2021, net cash provided by investing activities was $62.0 million, which was comprised primarily of proceeds from the maturities of marketable securities of $62.6 million, partially offset by the purchases of property and equipment of $0.6 million.

Net Cash Provided by (Used in) Investing Activities

During the six months ended June 30, 2022, net cash provided by investing activities was $67.9 million, which was comprised primarily of proceeds from the maturities of marketable securities of $203.8 million, partially offset by purchases of marketable securities of $135.7 million.

During the six months ended June 30, 2021, net cash used in investing activities was $102.9 million, which was comprised primarily of purchases of marketable securities of $211.9 million, partially offset by the proceeds from the maturities of marketable securities of $109.6 million.

Net Cash Provided by Financing Activities

During the three months ended March 31, 2022, net cash provided by financing activities was $14.7 million, which was comprised primarily of the net cash proceeds received from shares sold under our ATM of $14.5 million.

During the three months ended March 31, 2021, net cash provided by financing activities was $207.8 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 six months ended June 30, 2022, net cash provided by financing activities was $15.8 million, which was comprised primarily of the net cash proceeds received from shares sold under our ATM of $14.5 million.

During the six months ended June 30, 2021, net cash provided by financing activities was $209.0 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million.

Funding Requirements

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $472.6 million as of March 31, 2022.

We had cash, cash equivalents, and marketable securities of $343.6 million as of March 31, 2022.

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, accessing or incurring additional debt, entering into licensing or collaboration agreements with partners, grants, or other sources of financing.

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $540.0 million as of June 30, 2022.

We had cash, cash equivalents, and marketable securities of $282.2 million as of June 30, 2022.

As of June 30, 2022, we had $75.0 million outstanding under the Loan Agreement.

Upon FDA approval of ZORYVE, we drew down an additional $125.0 million under the Loan Agreement which we received on August 2, 2022.

Following this draw down, we have $200.0 million outstanding under the Loan Agreement, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We expect to receive $161.7 million from the closing of the public offering of our common stock on August 5, 2022.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

If our available cash balances, amounts available under the Loan Agreement and anticipated future cash flows from operations are insufficient to satisfy our liquidity requirements, we may need 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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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 nonclinical studies and clinical trials, in particular our planned or ongoing clinical studies of roflumilast cream in atopic dermatitis, roflumilast foam in seborrheic dermatitis and scalp and body psoriasis, ARQ-252 in chronic hand eczema and vitiligo, and our IND-enabling 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;

• 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;

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

• 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 scalp and body psoriasis, ARQ-252 in chronic hand eczema and vitiligo, and ARQ-255 in alopecia areata;

• suspensions or delays in the enrollment, issues with data collection, or changes to the number of subjects we decide to enroll in our ongoing clinical trials as a result of the COVID-19 pandemic, competing trials or otherwise;

• the number and scope of clinical programs we decide to pursue, and the number and characteristics of any product candidates we develop or acquire;

• the timing of, and the costs involved in, obtaining regulatory reviews and approvals for our product candidates;

• the cost of manufacturing any current and future products and product candidates, including any products we successfully commercialize, including costs associated with building out our supply chain;

• the cost of commercialization activities for any current and future products that are approved for sale, including marketing, sales, and distribution costs, and any discounts or rebates to channel to obtain access;

• 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;

• the costs related to milestone payments due to AstraZeneca, Hengrui, or any future collaboration or licensing partners upon the achievement of negotiated 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;

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

• the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio.

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:

Pursuant to the Loan Agreement, the lenders agreed to extend term loans to 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.

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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.

With the approval of ZORYVE on July 29, 2022, we drew down $125.0 million on the tranche B term loans, which we received on August 2, 2022.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

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.

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(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 March 31, 2022, the rate was 7.68%.

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

On June 30, 2022, the rate was 8.57%.

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.

If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, we are required to make certain mandatory prepayments, including fees applicable by reason of such prepayment.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, restrictions on our ability to merge or consolidate with any other entity, to incur additional indebtedness, or to pay any dividends or other distributions on 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 March 31, 2022.

We were in compliance with all covenants under the Loan Agreement as of June 30, 2022.

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.

In connection with the Loan Agreement, we are 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 of 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.

Contractual Obligations and Contingent Liabilities

The following summarizes our significant contractual obligations as of March 31, 2022.

The following summarizes our significant contractual obligations as of June 30, 2022.

Facility Operating Lease

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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, as of March 31, 2022, we have a letter of credit and related restricted cash account of $1.2 million.

The total commitment under the operating lease agreement is $6.4 million, including $0.6 million for the remaining nine months of 2022, $1.0 million for each of the years 2023 through 2027, and $0.6 million for the year 2028.

Accordingly, as of June 30, 2022, we have a letter of credit and related restricted cash account of $1.2 million.

The total commitment under the operating lease agreement is $6.2 million, including $0.4 million for the remaining six months of 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 unaudited condensed financial statements for additional information.

Long-Term Debt Obligations

As of March 31, 2022, 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 $108.7 million, including $4.5 million for 2022, $6.0 million for each of the years 2023 through 2026, and $80.2 million for 2027.

As of June 30, 2022, we had $75.0 million outstanding under our Loan Agreement.

Upon FDA approval of ZORYVE, we drew down an additional $125.0 million under the Loan Agreement which we received on August 2, 2022.

After this draw down, we have $200.0 million outstanding under the Loan Agreement and $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

The total commitment under the Loan Agreement as of June 30, 2022 is $109.5 million, including $3.3 million for the remaining six months of 2022, $6.5 million for each of the years 2023 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.

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

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

Upon FDA approval of ZORYVE on [July 29, 2022], a $7.5 million milestone payment became payable to AstraZeneca.

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

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 $9.3 million within the next nine months and then approximately $0.6 million per year for the following three years.

We have entered into manufacturing supply agreements for the commercial supply of ZORYVE, which include certain minimum purchase commitments.

Firm future purchase commitments under these agreements are approximately $8.1 million within the next six months and then approximately $0.6 million per year for the following three 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.

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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, 2021.

There were no material changes to our critical accounting policies during the three months ended March 31, 2022.

There were no material changes to our critical accounting policies during the six months ended June 30, 2022.

Recent Accounting Pronouncements

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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-Q

Item 2. Management’s Discussion and Analysis