What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-28 · 178 added, 229 removed, 259 unchanged (61% of the section changed)

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Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”

License Agreements & Acquisition

AstraZeneca License Agreement

In July 2018, we entered into the AstraZeneca License Agreement with AstraZeneca, granting us a worldwide exclusive license, with the right to sublicense through multiple tiers, under certain AstraZeneca-controlled patent rights, know-how and regulatory documentation, to research, develop, manufacture, commercialize, and otherwise exploit products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, the AZ-Licensed Products, for all diagnostic, prophylactic and therapeutic uses for human dermatological indications, or the Dermatology Field.

Under this agreement, we have sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at our expense, and we shall use commercially reasonable efforts to develop, obtain, and maintain regulatory approvals for, and commercialize the AZ-Licensed Products in the Dermatology Field in each of the United States, Italy, Spain, Germany, the United Kingdom, France, China, and Japan.

We paid AstraZeneca an upfront non-refundable cash payment of $1.0 million and issued 484,388 shares of our Series B convertible preferred stock, valued at $3.0 million on the date of the AstraZeneca License Agreement.

We subsequently paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product.

We also paid AstraZeneca $7.5 million upon ZORYVE's FDA approval in plaque psoriasis.

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.

We began making quarterly royalty payments in 2022.

See Note 6 to the consolidated 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 ivarmacitinib, a JAK 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Canada, Japan, and the European Union (including for clarity the United Kingdom).

We made a $0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement.

In December 2019, we exercised our exclusive option under the agreement, for which we made a $1.5 million cash payment, and also contemporaneously amended the agreement to expand the territory to additionally include Canada.

In addition, we have agreed to make cash payments of up to an aggregate of $20.5 million upon our achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $200.0 million in sales-based milestones based on achieving certain aggregate annual net sales volumes with respect to a licensed product.

With respect to any products we commercialize under the Hengrui License Agreement, we will pay tiered royalties to Hengrui on net sales of each licensed product by us, or our affiliates, or our sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net

We are a 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 and systemic treatments with significant potential to treat immune-mediated dermatological diseases and conditions.

We believe we have built the industry's leading platform for dermatologic product development and commercialization.

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 advance our goal of bridging the treatment innovation gap in dermatology, while maximizing our probability of technical success and financial resources.

We launched our lead product, ZORYVE® (roflumilast) cream 0.3% ("ZORYVE cream"), in August 2022 after obtaining our initial U.S.

Food and Drug Administration ("FDA") approval 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 cream is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use.

In October 2023, we received FDA approval for an expanded indication in plaque psoriasis down to 6 years of age.

We are currently working with the FDA to potentially further expand this indication in plaque psoriasis down to 2 years of age following the generation of additional clinical data.

In April 2023, we had our first commercial launch outside of the United States following Health Canada approval of ZORYVE cream for the treatment of plaque psoriasis in individuals 12 years or age or older.

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

PDE4 is an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for the treatment of dermatological conditions.

We have made significant progress in driving access and coverage of ZORYVE cream since launch.

Weekly prescriptions have continued to increase since launch, with approximately 165,000 prescriptions written as of February 16, 2024.

We believe this growth is due to our ability to drive prescriber awareness and use, patient engagement and positive experience with ZORYVE cream, and our efforts to establish broad, high-quality access for ZORYVE cream.

For example, we established access through three large pharmacy benefit managers in the United States within 12 months of launch.

We estimate that more than 10,700 unique prescribers have prescribed ZORYVE cream since launch.

We estimate that approximately one third of our prescriptions are currently refill prescriptions, and we experienced significant growth in refill prescriptions in the second half of 2023 following our early commercialization efforts and patient engagement.

Market research points to an increasing preference among dermatologists to prescribe ZORYVE cream as a topical treatment of plaque psoriasis, and transitions from topical corticosteroids have been the largest source of new prescriptions for ZORYVE cream since launch.

With respect to commercial payers, we have engaged multiple key insurers and estimate that insurance coverage for ZORYVE cream is available to approximately 132 million commercially covered lives in the United States.

We anticipate that we will be able to obtain Medicare and Medicaid coverage for ZORYVE as early as 2024.

In December 2023, we received FDA approval for ZORYVE® (roflumilast) topical foam 0.3% ("ZORYVE foam") for the treatment of seborrheic dermatitis in individuals aged 9 years and older, with no limitation on severity, location, or duration of use.

ZORYVE foam has been shown to provide rapid disease clearance and significant reduction in itch in clinical trials.

In a pivotal Phase 3 study, 80% of individuals treated with ZORYVE foam achieved the primary efficacy endpoint of IGA Success, defined as an IGA score of “clear” or “almost clear” plus a 2-point improvement at Week 8 and just over 50% of individuals achieved an IGA score of clear at Week 8.

Index to Financial Statements

sales bands subject to specified reductions.

We are obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.

Additionally, we are obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income we receive from sublicensees of our rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance.

The agreement continues in effect until the expiration of our obligation to pay royalties as described above, unless earlier terminated in accordance with the following:

(1) by either party upon written notice for the other party’s material breach or insolvency event if such party fails to cure such breach or the insolvency event is not dismissed within specified time periods;

and (2) by us for convenience upon 90 days prior written notice to Hengrui and having discussed and consulted any potential cause or concern with Hengrui in good faith.

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 consolidated financial statements for additional information.

Ducentis Acquisition

On September 7, 2022, the Company entered into a Share Purchase Agreement with Ducentis, pursuant to which the Company acquired all of the outstanding equity interests in Ducentis for (i) 610,258 shares of the Company common stock valued at approximately $12.5 million and $15.9 million in cash, inclusive of liabilities acquired, and (ii) contingent payments, the amount of which is indeterminable until achieved, which may become payable upon the achievement of certain development, regulatory, and commercial milestones.

The Company currently estimates that these contingent payments may be up to an aggregate of approximately $400 million (although the actual amount may differ depending on whether the applicable milestones are achieved).

In addition, if applicable, the Company will make payments amounting to a mid-single-digit percentage of any annual net sales of Ducentis’s products exceeding $1.5 billion.

As of December 31, 2022, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying consolidated financial statements with respect to these contingent payments.

Under the terms of the Share Purchase Agreement, the Company will develop and seek FDA approval of a therapeutic product containing Ducentis’s DS-234 product candidate, now ARQ-234, for an atopic dermatitis indication, and if FDA approval of ARQ-234 is obtained by the Company, to launch it in the United States.

individuals treated with ZORYVE foam reported reductions in itch from baseline within 48 hours of first application.

ZORYVE foam is a once-daily steroid-free foam and, as a PDE4 inhibitor, is the first drug approved for the treatment of seborrheic dermatitis with a new mechanism of action in over two decades.

ZORYVE foam became commercially available in late January 2024, and as of February 16, 2024, 7,000 prescriptions have been written since launch.

Seborrheic dermatitis is estimated to occur in as many as 10 million people in the United States, and is associated with a substantial psychosocial burden for those suffering from the disease.

In addition to the approval of ZORYVE cream for plaque psoriasis and ZORYVE foam for seborrheic dermatitis (collectively, "ZORYVE"), we are also developing ZORYVE cream for the treatment of atopic dermatitis.

In atopic dermatitis, we have successfully completed three pivotal Phase 3 clinical trials:

INTEGUMENT-1 and -2 enrolled subjects 6 years of age or older and INTEGUMENT-PED enrolled subjects between the ages of 2 and 5 years.

We are also conducting INTEGUMENT-OLE, an open label extension study of the long-term safety of ZORYVE cream 0.15% in individuals 6 years of age or older and roflumilast cream 0.05% in subjects between the ages 2 and 5 years.

In the fourth quarter of 2022, we announced positive topline data from both INTEGUMENT-1 and -2 in atopic dermatitis, and in September 2023 we announced positive topline data from INTEGUMENT-PED and positive interim results from INTEGUMENT-OLE.

In September 2023, we submitted a supplemental new drug application (“sNDA”) for ZORYVE cream 0.15% for the treatment of mild to moderate atopic dermatitis in individuals 6 years of age or older, which was accepted by the FDA and assigned a Prescription Drug User Fee Act ("PDUFA") target action date of July 7, 2024.

Based on the positive results from the INTEGUMENT-PED study in September 2023, we expect to submit a subsequent sNDA for topical ZORYVE cream 0.05% for children ages 2 to 5 years of age if our current sNDA for ZORYVE cream 0.15% is approved for the treatment of mild to moderate atopic dermatitis in individuals 6 years of age or older.

Beyond seborrheic dermatitis, we are also developing ZORYVE foam for scalp and body psoriasis and have successfully completed our pivotal Phase 3 clinical trial.

We announced positive topline data in September 2022, and we plan to submit an sNDA in the second half of 2024.

Beyond ZORYVE, we are developing ARQ-255, a deep-penetrating topical formulation of ivarmacitinib, a potent and highly selective topical Janus kinase type 1 ("JAK1") inhibitor, designed to preferentially deliver the drug deep into the hair follicle, the site of inflammation in alopecia areata, in order to potentially develop the first topical treatment for this disease.

In December 2022, we announced that the first subject had been enrolled in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata.

The first subject in the alopecia areata cohort enrolled in the second quarter of 2023.

In September 2022, we acquired Ducentis BioTherapeutics LTD ("Ducentis") and its lead asset, DS-234 (now ARQ-234), a fusion protein that is a potent and highly selective checkpoint agonist of the CD200 Receptor (CD200R).

Currently in the preclinical stage, we plan to develop ARQ-234 in atopic dermatitis, where we believe it could be a potentially highly complementary biologic treatment option to ZORYVE cream in that indication, if approved.

ARQ-234 could potentially be used to treat other inflammatory conditions as well.

We have incurred net losses in each year since inception, including net losses of $262.1 million, $311.5 million and $206.4 million for the years ended December 31, 2023, 2022 and 2021, respectively.

As of December 31, 2023, we had an accumulated deficit of $981.9 million and cash, cash equivalents, restricted cash and marketable securities of $272.8 million.

As of December 31, 2023, we had $200.0 million outstanding under the Loan Agreement.

We expect to continue to incur losses and significant expenses as we commercialize ZORYVE cream in psoriasis and ZORYVE foam in seborrheic dermatitis, and as we advance our product candidates and label extensions through clinical trials, regulatory submissions, and commercialization.

We expect to incur significant and prioritized commercialization expenses related to the sales, marketing, manufacturing, and distribution of ZORYVE cream and foam, while we focus our clinical development spend on ARQ-234, ARQ-255, and ZORYVE label extensions, if we obtain regulatory approval for them.

If our available cash and marketable securities 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.

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.

See “Liquidity, Capital Resources, and Requirements” below and Note 1 to the consolidated financial statements for additional information.

Index to Financial Statements

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.

Components of Our Results of Operations

In August 2022, in conjunction with the launch of our first FDA approved product, ZORYVE, we began to recognize revenue from product sales, net of rebates, chargebacks, discounts, and other adjustments.

We will continue to evaluate trends related to revenue momentum for ZORYVE.

Product Revenue, Net

In August 2022, in conjunction with the launch of our first FDA approved product, ZORYVE cream, we began to recognize revenue from product sales, net of rebates, chargebacks, discounts, and other adjustments.

We will continue to evaluate trends related to revenue for ZORYVE.

Additionally, if our development efforts for our other product candidates and ZORYVE label extensions are successful and result in regulatory approval, we may generate additional revenue in the future from product sales.

Other Revenue

Other revenue relates primarily to the Huadong Agreement .

See Note 6 to the consolidated financial statements for additional information.

Cost of Sales

Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our net product sales and amortization of intangible assets associated with ZORYVE.

Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE cream, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our net product sales and amortization of intangible assets associated with ZORYVE.

Our cost of sales will reflect a lower average per unit cost of materials until inventory that was previously expensed is sold, which is expected to occur over the next two years.

As of December 31, 2023 and December 31, 2022, the value of this inventory, mostly at the raw materials stage, was approximately $8.7 million and $14.1 million, respectively.

Operating Expenses

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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 ongoing pediatric and open label extension Phase 3 trials of roflumilast cream for atopic dermatitis, ARQ-255 for alopecia areata, and development of ARQ-234 for atopic dermatitis.

We expect to continue to incur research and development expenses in the future as we develop our product candidates.

In particular, we expect to incur research and development expenses for the pediatric and open label extension Phase 3 trials of ZORYVE cream for atopic dermatitis, phase 1 ARQ-255 study for alopecia areata, and early development of ARQ-234 for atopic dermatitis.

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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The successful development of our product candidates is highly uncertain.

At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of roflumilast cream, roflumilast foam, ARQ-255, and ARQ-234 or any other product candidates.

At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of ZORYVE cream, ZORYVE foam, ARQ-255, and ARQ-234 or any other product candidates.

This is due to the numerous risks and uncertainties associated with the development of product candidates.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel.

Other selling, general and administrative expenses include costs related to sales and marketing 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.

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.

Index to Financial Statements

Our selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel, and costs related to sales and marketing of ZORYVE cream.

Other selling, 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 selling, general and administrative expenses to continue to increase in the future as we continue to commercialize ZORYVE and potentially other product candidates, and support our operations, 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

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Interest expense is related to interest incurred on our long term debt.

Provision for Income Taxes

Provision for income taxes is primarily due to foreign withholding taxes on the up-front payment received in connection with the Huadong Agreement .

See Note 6 and Note 11 to the consolidated financial statements for additional information.

Index to Financial Statements

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Product revenue, net $ 29,186 $ 3,686 $ 25,500 692 %

Other revenue

30,420 — $ 30,420 *

Total revenues 59,606 3,686 55,920 1517 %

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Total operating expenses 300,707 305,313 (4,606) (2) %

$ 305,313 $ 206,529 $ 98,784 48 %

Loss from operations

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Interest expense (29,712) (15,652) (14,060) 90 %

Total other income (expense) (9,831) 173 (10,004) (5783) %

Loss before income taxes

(259,027) (311,458) 52,431 (17) %

Provision for income taxes

3,113 — 3,113 *

Net loss $ (262,140) $ (311,458) $ 49,318 (16) %

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Product revenue, net

We began recognizing product revenues in the third quarter of 2022 following the FDA approval of ZORYVE and our subsequent commercial launch in the United States in August 2022.

During the year ended December 31, 2022, we recognized $3.7 million of net product revenues related to sales of ZORYVE.

Revenues were primarily driven by end customer demand as well as an initial build up of inventories by our wholesaler customers.

Sales discounts consisted primarily of co-pay card discounts and distribution fees.

We began recording U.S.

product revenue in the third quarter of 2022 following the FDA approval and subsequent commercial launch of ZORYVE cream in August 2022, and Canada product revenue in the second quarter of 2023 following the Health Canada approval and subsequent commercial launch of ZORYVE cream in June 2023.

Net product revenue increased by $25.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase in revenue was primarily driven by end customer demand.

Other revenue

Other revenue is a result of license revenues received in connection with the Huadong Agreement.

See Note 6 to the consolidated financial statements for additional information.

Cost of Sales

Cost of sales of $0.8 million for the year ended December 31, 2022 is related primarily to amortization of intangible assets as a result of the milestone payment to AstraZeneca in connection with the FDA approval of ZORYVE.

Cost of sales also included product costs incurred after FDA approval as well as royalties on net sales payable to AstraZeneca under a license agreement.

Prior to the initial date regulatory approval was received, costs of raw materials were recorded as research and development expense.

Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to be over the next two years.

Cost of sales increased by $4.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was related primarily to additional ZORYVE cream product costs incurred.

Prior to the date on which the initial regulatory approval was received, costs of raw materials were recorded as research and development expense.

Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to occur over the next two years.

Index to Financial Statements

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*Not applicable

Research and development expenses increased by $36.9 million, or 25%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to In-process research and development (IPR&D) expense as a result of the acquisition of Ducentis of $29.7 million, an increase in compensation and personnel-related costs of $12.7 million, and an increase in other indirect costs of $7.3 million.

These increases were partially offset by decreases in direct costs related to the topical roflumilast program of $6.2 million and the topical JAK inhibitor program (ARQ-252 and ARQ-255) of $7.2 million.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount to sustain the development of our ongoing programs.

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

The decrease in topical roflumilast program costs was primarily due to the completion of Phase 3 studies of roflumilast cream in plaque psoriasis and roflumilast foam in seborrehic dermatitis and scalp psoriasis, partially offset by the Phase 3 studies of roflumilast cream in atopic dermatitis.

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

Research and development expenses decreased by $71.9 million, or 39%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease was primarily due the completion of Phase 3 studies of ZORYVE cream in atopic dermatitis and ZORYVE foam in seborrheic dermatitis and scalp and body psoriasis, as well as the IPR&D expense as a result of the acquisition of ARQ-234 from Ducentis in the third quarter of 2022.

Additionally, manufacturing costs recorded as research and development expenses decreased as we began capitalizing such costs to inventory upon FDA approval of ZORYVE cream in July 2022.

Selling, General and Administrative Expenses

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The increase was primarily due to an increase in compensation and personnel related expenses of $29.4 million, an increase in sales and marketing expenses of $24.8 million and an increase in professional services of $5.6 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 for ZORYVE.

The increase in sales and marketing expenses, as well as professional services, was primarily related to commercialization efforts for ZORYVE.

Index to Financial Statements

These increases were primarily due to our commercialization efforts, including the hiring of our full sales force for ZORYVE cream.

Other Income, Net

Other income, net increased by $5.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to the impact of rising interest rates and a larger marketable securities balance for the year ended December 31, 2022.

Other income, net increased by $6.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to the impact of higher interest rates, partially offset by a lower marketable securities balance.

Interest Expense

Interest expense increased by $15.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, due to interest expense related to our long-term debt.

Interest expense increased by $14.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to an increase in our average long-term debt balance and the impact of higher interest rates.

See Note 8 to the consolidated financial statements for additional information.

Provision for Income Taxes

Income tax expense of $3.1 million for the year ended December 31, 2023 was primarily due to foreign withholding taxes on the up-front payment received in connection with the Huadong Agreement.

See Note 6 and Note 11 to the consolidated financial statements for additional information.

Comparison of the Years Ended December 31, 2022 and 2021

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

Year Ended December 31, Change

2021 2020 $ %

(in thousands)

Operating expenses:

Research and development

$ 145,558 $ 115,308 $ 30,250 26 %

Selling, general and administrative 60,971 21,337 39,634 186 %

Total operating expenses

$ 206,529 $ 136,645 $ 69,884 51 %

Loss from operations

(206,529) (136,645) (69,884) 51 %

Other income, net

173 967 (794) (82) %

Net loss $ (206,356) $ (135,678) $ (70,678) 52 %

Research and Development Expenses

Year Ended December 31, Change

2021 2020 $ %

(in thousands)

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:

Compensation and personnel-related 28,729 13,747 14,982 109 %

Other 15,402 5,649 9,753 173 %

Total research and development expense $ 145,558 $ 115,308 $ 30,250 26 %

Index to Financial Statements

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 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.

Selling, General and Administrative Expenses

Selling, 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 $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.

Other Income, Net

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.

For a discussion of the year ended December 31, 2022 compared to the year ended December 31,

2021, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.

Liquidity, Capital Resources and Requirements

To date, our primary sources of capital have been 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, our ATM, and revenue from the sale of our approved product.

Our primary sources of capital have been private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020, February 2021, August 2022, and October 2023, our Loan

Index to Financial Statements

Agreement, our ATM, and revenue from the sale of ZORYVE cream.

We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop and commercialize our products and product candidates, including conducting nonclinical and clinical trials and providing selling, general and administrative support for these operations.

As of December 31, 2023 and 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $272.8 million and $410.8 million, respectively, and an accumulated deficit of $981.9 million and $719.8 million, respectively.

Upon FDA approval of ZORYVE, we drew down an additional $125.0 million under the Loan Agreement and, as of December 31, 2022, had $200.0 million outstanding, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We received $161.6 million in aggregate net proceeds from the closing of the public offering of our common stock in August 2022 and $14.5 million from the sale of stock under our ATM facility in March 2022.

See Notes 1 and 8 to the consolidated financial statements for additional information.

We believe that our existing capital resources will be sufficient to meet the projected operating requirements for at least 12 months from the date of issuance of our financial statements.

We maintain cash balances with financial institutions in excess of insured limits.

In September 2023, we received an upfront net payment of $27.0 million related to the Huadong Agreement.

See Note 6 to the consolidated financial statements for additional information.

In October 2023, we completed a public offering of shares of our common stock and prefunded warrants to purchase shares of our common stock, and received net proceeds of $93.6 million.

Additionally, in November 2023, we received $2.2 million net proceeds due to the underwriters exercising their option to purchase additional shares related to our public offering.

In December 2023, we sold 1,250,000 shares under the ATM and received $3.1 million in net proceeds.

See Note 1 to the consolidated financial statements for additional information.

As of December 31, 2023, we had $200.0 million outstanding under the Loan Agreement.

On November 1, 2023, we entered into an amendment to the Loan Agreement with SLR.

Pursuant to the amendment, the terms of the Loan Agreement were revised to, among others, (i) eliminate the undrawn tranche C term loan of up to $25.0 million, (ii) modify the financial covenant relating to minimum net product revenue, and (iii) include an additional minimum financing covenant.

The minimum financing covenant requires that we raise $31 million by April 1, 2024.

To date, we have raised $5.3 million and have not complied with the minimum financing covenant.

If we do not comply with the covenant, the debt could be accelerated.

We intend to raise additional capital through (a) the sale or issuance of equity interests, (b) business development or collaboration agreements (including upfront, milestone, royalty and other payments), or (c) subordinated debt, in each case as permitted pursuant to the terms of the Loan Agreement.

However, as our ability to raise any such additional capital is based in part on factors that are outside of our control, we cannot provide any assurance that we will be successful in raising such additional capital.

This uncertainty as to our ability to comply with the minimum financing covenant indicate that we may be unable to continue as a going concern.

Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

We believe that our existing capital resources will be sufficient to meet the projected operating requirements for at least 12 months from the date of issuance of our financial statements, so long as the debt is not accelerated.

If our capital resources are insufficient to satisfy our 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.

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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

In addition, market conditions impacting financial institutions could impact our ability to access some or all of our cash, cash equivalents and marketable securities, and we may be unable to obtain alternative funding when and as needed on acceptable terms, if at all.

We have based our projected operating 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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• 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 seborrheic dermatitis and scalp psoriasis, ARQ-255 in alopecia areata, and our formulation and nonclinical efforts for ARQ-234;

• 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 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 development activities of ZORYVE cream in plaque psoriasis and atopic dermatitis, ZORYVE foam in seborrheic dermatitis and scalp psoriasis, ARQ-255 in alopecia areata, and our formulation and nonclinical efforts for ARQ-234;

• suspensions or delays in the enrollment or changes to the number of subjects we decide to enroll in our ongoing clinical trials;

Index to Financial Statements

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

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• 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 us in an aggregate principal amount of up to $225.0 million, comprised of:

• costs associated with any adverse market conditions or other macroeconomic factors.

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

The Loan Agreement was amended and restated on January 10, 2023 to include Arcutis Canada, Inc.

as a borrower and party 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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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.

On November 1, 2023, we entered into an amendment to the Loan Agreement.

Pursuant to the amendment, the terms of the Loan Agreement were revised to, among others, (i) eliminate the undrawn tranche C term loan of up to $25.0 million, (ii) modify the financial covenant relating to minimum net product revenue and remove the market capitalization threshold, and (iii) include an additional minimum financing covenant.

The modified financial covenant requires us to generate a minimum net product revenue equal to 75% of our projected net product revenue as set forth in our annual plan for the respective period, tested on a trailing 12 month basis for the month ending December 31, 2023 and then tested on a trailing six month basis, as of the end of each month, for the month ending January 31, 2024 and each month thereafter.

Pursuant to the amendment, each annual plan shall be approved by our board of directors and SLR, in its capacity as collateral agent, in its reasonable discretion.

Any failure by us to deliver such annual plan on or before December 15 of the prior year shall be an immediate event of default.

In addition, we agreed to raise at least $31.0 million in net cash proceeds, during the period commencing on November 1, 2023 and ending on April 1, 2024, from (a) the sale or issuance of the our equity interests, (b) business development or collaboration agreements (including upfront, milestone, royalty and other payments), or (c) subordinated debt, in each case as permitted pursuant to the terms of the Loan Agreement.

Any failure by us to raise such net cash proceeds during the specified period shall be an immediate event of default.

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

Following the approval of ZORYVE, we drew down $125.0 million on the tranche B term loans, which we received in August 2022.

See Notes 1 and 8 to the consolidated 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.

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

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

Following the approval of ZORYVE cream, we drew down $125.0 million on the tranche B term loans, which we received in August 2022.

As amended, the Loan Agreement provides for term loans to us in an aggregate principal amount of up to $200.0 million, which amounts were fully drawn as of December 31, 2023.

Index to Financial Statements

annum rate published by the Intercontinental Exchange Benchmark Administration Ltd.

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.

Starting in July 2023, the Secured Overnight Financing Rate (SOFR) for a term of one month was substituted for the benchmark rate.

On December 31, 2023, the rate was 12.90%.

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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.

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 its business or property, to change its 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 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 pursuant to the Loan Agreement.

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 December 31, 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.

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

We were in compliance with all covenants under the Loan Agreement as of December 31, 2023.

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

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Cash used in operating activities $ (247,057) $ (257,715) $ (174,627)

Cash used in investing activities (87,199) (75,953) (181,824)

Cash provided by (used in) investing activities

180,232 (87,199) (75,953)

Cash provided by financing activities 101,323 301,798 281,947

Net (decrease) increase in cash, cash equivalents and restricted cash $ (43,116) $ 31,367 $ 3,288

Effect of exchange rate changes on cash

Net increase (decrease) in cash, cash equivalents and restricted cash

$ 34,448 $ (43,116) $ 31,367

Net Cash Used in Operating Activities

Index to Financial Statements

During the year ended December 31, 2023, net cash used in operating activities was $247.1 million, which consisted of a net loss of $262.1 million and a change in net operating assets and liabilities of $23.5 million, partially offset by net non-cash and other charges of $38.6 million.

The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of $17.3 million, an increase in prepaid expenses and other current assets of $8.6 million, and an increase in inventories of $5.6 million, offset by an increase in accounts payable and accrued liabilities of $8.7 million.

The net non-cash and other charges were primarily related to stock-based compensation expense of $38.8 million.

During the year ended December 31, 2022, net cash used in operating activities was $257.7 million, which consisted of a net loss of $311.5 million and a change in net operating assets and liabilities of $10.2 million, partially offset by net non-cash and other charges of $63.9 million.

The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of $8.5 million and an increase in inventories of $7.5 million, partially offset by a decrease of prepaid expenses and other current assets of $3.5 million.

The net non-cash and

Index to Financial Statements

other charges were primarily related to stock-based compensation expense of $32.7 million and acquired in-process research and development of $29.6 million.

The net non-cash and other charges were primarily related to stock-based compensation expense of $32.7 million and acquired in-process research and development of $29.6 million.

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.

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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.

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.

Net Cash Used in Investing Activities

Net Cash Provided by (Used in) Investing Activities

During the year ended December 31, 2023, net cash provided by investing activities was $180.2 million, which was comprised primarily of the proceeds from the maturities of marketable securities of $406.5 million, partially offset by purchases of marketable securities of $225.8 million.

During the year ended December 31, 2022, net cash used in investing activities was $87.2 million, which was comprised primarily of purchases of marketable securities of $415.4 million, cash paid for IPR&D related to the acquisition of Ducentis of $15.5 million and a milestone payment made to AstraZeneca of $7.5 million, partially offset by the proceeds from the maturities of marketable securities of $351.5 million.

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.

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.

Net Cash Provided by Financing Activities

During the year ended December 31, 2023, net cash provided by financing activities was $101.3 million, which was comprised primarily of the net cash proceeds received from our October 2023 public stock offering of $95.8 million and our December 2023 sale of stock under our ATM facility of $3.1 million.

During the year ended December 31, 2022, net cash provided by financing activities was $301.8 million, which was comprised primarily of the net cash proceeds received from our August 2022 public stock offering of $161.6 million, our August 2022 debt facility draw down of $125.0 million, and our March 2022 sale of stock under our ATM facility of $14.5 million.

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.

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.

Index to Financial Statements

Contractual Obligations and Contingent Liabilities

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In April 2020, we amended our lease agreement for our facility in Westlake Village, California to relocate to a new expanded space including 22,643 square feet.

The lease payment term for the new space began on December 30, 2020 and will terminate 91 months thereafter, with a renewal option for a term of five years.

The lease payment term for the new space began on December 30, 2020 and will terminate 91 months thereafter, with a renewal option term of five years.

We have a one-time option to cancel the lease after month 67.

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Accordingly, as of December 31, 2023, we have a letter of credit and related restricted cash account of $0.9 million.

The total commitment under the operating lease agreement is $5.8 million, including $1.0 million for each of the years 2023 through 2025, $1.1 million for each of the

Index to Financial Statements

years 2026 and 2027, and $0.6 million for the year 2028.

The total commitment under the operating lease agreement is $4.8 million, including $1.0 million for each of the years 2024 and 2025, $1.1 million for each of the years 2026 and 2027, and $0.6 million for the year 2028.

See Note 7 to the consolidated financial statements for additional information.

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As of December 31, 2023, we had $200.0 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 $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

See Notes 1 and 8 to the consolidated financial statements for additional information.

The total commitment under the Loan Agreement as of December 31, 2022 is $309.7 million, including $23.9 million for each of the years 2023 through 2026, and $213.9 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 and the $125.0 million tranche B term loan on August 2, 2022.

The undiscounted future payments of principal and interest under the Loan Agreement as of December 31, 2023 is $292.4 million, including $26.3 million for the year 2024, $26.1 million for each of the years 2025 and 2026, and $213.9 million for the year 2027.

License Agreements & Acquisition

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Product Revenue, Net

We sell our product to our Customers in the United States.

We sell our product to our Customers in the United States and Canada.

Our Customers subsequently resell the products to pharmacies, health care providers, and patients.

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We estimate the probability of Customers paying promptly based on the percentage of discount outlined in the agreement, and deduct the full amount of these discounts from its gross product revenues and accounts receivable at the time such revenues are recognized.

Index to Financial Statements

Product Returns :

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We do not record a right-of-return asset.

Index to Financial Statements

A chargeback is the difference between the manufacturer's invoice price to the wholesaler and the wholesaler’s customer's contract price.

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Patients who meet certain eligibility requirements may receive co-payment assistance.

The Company recognizes contra-revenue expense, and adjusts the transaction price for, co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Cost of Sales

Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE, including raw materials, third-party manufacturing costs, packaging services, freight-in, third-party royalties payable on our net product revenues, and amortization of certain intangible assets associated with ZORYVE.

Cost of sales may also include period costs related to certain inventory warehouse and distribution operations and inventory adjustment charges.

We began capitalizing inventory costs upon FDA approval of ZORYVE on July 29, 2022.

As a result, manufacturing and other inventory costs incurred prior to FDA approval of ZORYVE were expensed and, therefore, are not included in cost of sales.

We recognize contra-revenue expense, and adjusts the transaction price for, co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Rebates and Discounts:

We accrue rebates for contractually agreed-upon discounts with commercial insurance companies and mandated discounts under government programs such as the Medicaid Drug Rebate Program in the United States.

Our estimates for expected utilization of commercial insurance rebates are based on data received from our customers.

Our estimates for rebates under government programs are based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launch.

Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates.

If actual rebates vary from estimates, we may need to adjust accruals, which would affect revenue in the period of adjustment.

Stock-Based Compensation

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Each of these inputs is subjective and generally requires significant judgement.

Fair value of common stock — Prior to our IPO in 2020, fair values of the shares of common stock underlying our share-based awards were estimated on each grant date in good faith by our board of directors using significant assumptions an estimates.

If we had made different assumptions, the fair value of the underlying common stock and amount of our stock-based compensation expense, net loss and net loss per share amounts would have differed.

Following the closing of our IPO, the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date.

Fair value of common stock — The fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date.

Expected Term —The expected term represents the period that we expect our stock-based awards to be outstanding.

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As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.

We recorded stock-based compensation expense of $32.7 million, $23.9 million, and $7.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, there was $58.3 million of unrecognized compensation expense related to unvested options, which are expected to be recognized over a weighted-average period of approximately 2.6 years.

As of December 31, 2022, there was $25.6 million of unrecognized compensation expense related to restricted stock, which are expected to be recognized over a weighted-average period of approximately 3.1 years.

We expect to continue to grant stock options, restricted stock, and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

As of December 31, 2023, we had net deferred tax assets of $216.2 million.

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The deferred tax assets are primarily composed of NOL tax carryforwards.

As of December 31, 2022, we had federal, California, and other state NOL carryforwards of $471.2 million, $388.9 million and $79.8 million, respectively, available to potentially offset future taxable income.

As of December 31, 2023, we had federal and state NOL carryforwards of $676.0 million and $523.3 million, respectively, available to potentially offset future taxable income.

In addition, we had foreign NOL carry forwards of approximately $4.0 million as of December 31, 2023, which can be carried forward indefinitely.

As of December 31, 2023, we also had federal and California research and development tax credit carryforwards of approximately $19.8 million and $4.4 million, respectively, available to potentially offset future federal income taxes.

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See Note 2 to our consolidated financial statements.

Index to Financial Statements

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 and systemic treatments with significant potential to treat immune-mediated dermatological diseases and conditions.

We believe we have built the industry's leading platform for dermatologic product development and commercialization.

We launched our lead product, ZORYVE ® (roflumilast) cream 0.3%, in August 2022 after obtaining Food and Drug Administration (FDA) approval 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 location or duration of use.

In December 2022, we submitted a supplemental New Drug Application (sNDA) for ZORYVE for an expanded indication in plaque psoriasis down to the age of two, with potential FDA approval in the fourth quarter of 2023.

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 treatment of dermatological conditions.

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 are conducting or have completed three pivotal Phase 3 clinical studies:

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

In the fourth quarter of 2022, we announced positive topline data from both INTEGUMENT-1 and -2 in atopic dermatitis.

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

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

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

In seborrheic dermatitis, we submitted a New Drug Application (NDA) for the treatment of moderate-to-severe seborrheic dermatitis to the FDA in February 2023, supported by the positive results from the pivotal Phase 3 STRATUM trial, with potential FDA approval in late 2023.

In scalp and body psoriasis, we announced positive topline data in September 2022 and we expect the data to be a sufficient basis for an sNDA submission in the first quarter of 2024, following the potential approval of roflumilast foam for treatment of seborrheic dermatitis.

Beyond topical roflumilast, we are developing ARQ-255, a deep-penetrating topical formulation of ivarmacitinib, a potent and highly selective topical Janus kinase type 1 (JAK1) inhibitor, designed to preferentially deliver the drug deep into the hair follicle, the site of inflammation in alopecia areata, in order to potentially develop the first topical treatment for this disease.

In December 2022, we announced that the first subject had been enrolled in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata.

We are also developing ARQ-252, an alternative cream formulation of ivarmacitinib for chronic hand eczema, vitiligo, and other inflammatory dermatoses.

In September 2022, we acquired Ducentis BioTherapeutics LTD (Ducentis) and its lead asset, DS-234 (now ARQ-234), a fusion protein that is a potent and highly selective checkpoint agonist of the CD200 Receptor (CD200R).

ARQ-234 could potentially be used to treat other inflammatory conditions as well.

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 only recently started generating revenue from product sales and have historically 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.

In December 2021, we received $72.4 million in net proceeds under the Loan Agreement with SLR.

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

In August 2022, we received an additional $125 million in proceeds (excluding debt issuance costs) under the Loan Agreement with SLR and closed a public offering of our common stock, receiving an additional $161.6 million of aggregate net proceeds.

See Notes 1 and 8 to the consolidated financial statements for additional information.

We have incurred net losses in each year since inception, including net losses of $311.5 million, $206.4 million and $135.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, we had an accumulated deficit of $719.8 million and cash, cash equivalents, restricted cash and marketable securities of $410.8 million.

As of December 31, 2022, we had $200.0 million outstanding under the Loan Agreement and an aggregate of up to $25.0 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 and significant expenses as we commercialize ZORYVE in psoriasis and as we advance our product candidates and label extensions 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 product candidates and ZORYVE label extensions, if we obtain regulatory approval for them.

Adequate funding may not be available to us on acceptable terms, or at all.

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.

See “Liquidity, Capital Resources, and Requirements” below and Note 1 to the consolidated financial statements for additional information.

We rely on third parties in the conduct of our nonclinical studies and clinical trials and for manufacturing and supply of our product candidates.

COVID-19 Update

In March 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak.

COVID-19 has placed strains on the providers of healthcare services, including the sites where we conduct our clinical trials.

These strains have resulted in some clinical sites slowing or halting enrollment in clinical trials and restricting the on-site monitoring of clinical trials.

We follow FDA guidance on clinical trial conduct during the COVID-19 pandemic, including the remote monitoring of clinical data.

We are monitoring the impact COVID-19 may have on the clinical development of our product candidates, including potential delays or modifications to ongoing and planned trials.

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 and commercialization efforts.

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.

With COVID-19 moving to an endemic phase, we have formally returned to our previously existing hybrid work environment consisting of both local and remote employees.

Index to Financial Statements

We may need to undertake additional actions that could impact our operations as required by applicable laws or regulations, or which we determine to be in the best interests of our employees.

Index to Financial Statements

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What changed 10-K

Item 7. Management’s Discussion and Analysis