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Item 1A. Risk Factors

2025-02-25 compared with 2024-02-27 · 253 added, 226 removed, 1073 unchanged (31% of the section changed)

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Risks Related to Our Limited Operating History, Financial Condition, and Capital Requirements

We are a commercial-stage biopharmaceutical company with a limited operating history and two products approved for commercial sale.

We have incurred significant losses since our inception and expect to continue to incur losses, which, together with our limited operating history, makes it difficult to assess our future viability.

Our ability to comply with our minimum financing covenant raises substantial doubt about our financial viability and as to whether we will be able to continue as a going concern.

We are a commercial - stage biopharmaceutical company with a limited operating history.

We are a commercial-stage biopharmaceutical company with three products approved for commercial sale.

We have incurred significant losses since our inception and could continue to incur losses, which, together with our limited history as a commercial-stage company, makes it difficult to assess our future viability.

We are a commercial - stage biopharmaceutical company with three products approved for commercial sale.

Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk.

We have a limited operating history upon which you can evaluate our business and prospects, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields.

Our operations to date include organizing and staffing our company, business planning, raising capital, identifying potential product candidates, establishing licensing arrangements, undertaking various research and nonclinical studies, conducting clinical trials, establishing manufacturing and supply operations, and preparing for and launching commercialization activities for psoriasis, seborrheic dermatitis, and potentially atopic dermatitis later this year.

We have a limited history as a commercial-stage company upon which you can evaluate our business and

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prospects, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields.

We have incurred losses in each year since our inception in June 2016.

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As of December 31, 2024, we had an accumulated deficit of $1,121.9 million.

We commercially launched our first product, ZORYVE cream, in August 2022 and launched our second product, ZORYVE foam, in late January 2024.

We commercially launched our first product, ZORYVE cream 0.3%, in August 2022, our second product, ZORYVE foam, in late January 2024, and our third product, ZORYVE cream 0.15%, in July 2024.

We expect to continue to incur losses until our revenue from product sales of ZORYVE and any other approved products exceeds expenses, which may never occur.

We may never achieve profitability and, even if we do, we may not be able to sustain or increase our profitability.

We will continue to incur significant research and development and other expenses related to our ongoing operations, our commercialization efforts, and the development of our product candidates.

We will continue to incur research and development and other expenses related to our ongoing operations, our commercialization efforts, and the development of our product candidates.

Our prior losses, combined with anticipated future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

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We may encounter unforeseen expenses, difficulties, complications, delays, and other known or unknown factors in achieving our business objectives.

We are in the process of transitioning from a company with a focus on drug development to a company capable of supporting commercialization in the United States and Canada.

We may not be successful in this transition.

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

Pursuant to the amendment, we agreed to an additional minimum financing covenant that requires that the Company raise $31.0 million in net cash proceeds by April 1, 2024.

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

If we do not comply with the covenant, there would be an event of default under Loan Agreement and our 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 on commercially reasonable terms or at all.

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 auditor’s report on our financial statements for the year ended December 31, 2023 includes an explanatory paragraph 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.

There can be no assurance that additional financing will be available or will be available on commercially reasonable terms.

The inclusion of disclosures expressing substantial doubt about our ability to continue as a going concern could materially adversely affect our stock price and our ability to raise new capital or enter into business development or collaboration agreements.

Due to the recently initiated commercialization of ZORYVE cream and foam, and our continued development of our pipeline of product candidates through clinical trials, our capital requirements are difficult to predict and may change.

We may require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our product development, other operations, or commercialization efforts.

In addition, we may encounter unforeseen expenses, difficulties, complications, delays, and other known or unknown factors in achieving our business objectives.

Due to the ongoing commercialization of products approved for commercial sale, and our development strategy and continued development of our pipeline of product candidates through clinical trials, our capital requirements are difficult to predict and may change.

We may require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital if or when needed on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate certain operations or efforts.

We expect to continue to expend substantial resources in connection with our commercialization efforts, the development of our current product candidates, the maintenance and expansion of our business operations and capabilities, and the development or acquisition of additional product candidates.

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

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• 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;

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

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• the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for any current or future products;

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• the willingness of patients to pay out-of-pocket for any current or future products in the absence of health insurance coverage or sufficient reimbursement;

• delays in the commencement, enrollment, and the timing of clinical testing for our product candidates, in light of competing trials or otherwise;

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• the timing and success or failure of clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners;

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In addition, our assumptions and estimates of market opportunities are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including but not limited to those described herein.

If this third-party or internally generated data

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prove to be inaccurate or we make errors in our assumptions based on that data, our actual market may be more limited than our estimates.

If this third-party or internally generated data prove to be inaccurate or we make errors in our assumptions based on that data, our actual market may be more limited than our estimates.

In addition, these inaccuracies or errors may cause us to misallocate capital and other critical business resources, which could harm our business.

The estimates of our market opportunities should not be taken as indicative of our ability to grow our business.

The terms of our loan and security agreement require us to meet certain operating and financial covenants, including a minimum financing covenant, and place restrictions on our operating and financial flexibility.

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The terms of our loan and security agreement require us to meet certain operating and financial covenants, and place restrictions on our operating and financial flexibility.

If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

As of December 31, 2024, we had $100.0 million outstanding under our Loan Agreement.

On November 1, 2023, we entered into an amendment to the Loan Agreement, pursuant to which the terms 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 amended Loan Agreement provides for term loans to us in an aggregate principal amount of up to $200.0 million, which amount was fully drawn as of December 31, 2023.

On August 9, 2024, we entered into a second amendment to the Loan Agreement, pursuant to which the terms were revised to, among others, permit us to make an optional partial prepayment of term loans outstanding during the period commencing on October 7, 2024 and ending on December 15, 2024, subject to a 1.0% prepayment penalty (the 2024 Partial Prepayment).

On October 8, 2024, we made a 2024 Partial Prepayment of $100.0 million.

In connection with the 2024 Partial Prepayment, we are obligated to pay a prepayment penalty of $1.0 million by June 30, 2026 and a final fee of $6.95 million, representing the final fee applicable to the amount of the 2024 Partial Prepayment, on January 1, 2027.

As a result of such 2024 Partial Prepayment, subject to us generating a minimum net product revenue for the trailing six-month period ending as of the month prior to the borrowing date equal to 80% of our projected net product revenue as set forth in our annual plan for the respective period, we will be able to draw down a tranche C-1 term loan of up to $50.0 million and a tranche C-2 term loan of up to $50.0 million.

The tranche C-1 term loan availability will expire on March 31, 2026 and the tranche C-2 term loan availability will expire on June 30, 2026.

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

The Loan Agreement contains a number of representations and warranties and affirmative and restrictive covenants, including financial covenants, and the terms may restrict our current and future operations, particularly our ability to respond to certain changes in our business or industry, or take future actions.

The Loan Agreement includes a financial covenant whereby, beginning with the month ending December 31, 2023, we must generate minimum net product revenue for applicable measuring periods.

Pursuant to the amendment to the Loan Agreement, this 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.

The Loan Agreement includes a financial covenant whereby we must generate 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 six-month basis as of the end of each month.

Each annual plan shall be approved by our board of directors and SLR, in its capacity as collateral agent, in its reasonable discretion.

Failure to deliver such annual plan on or before December 15 of the prior year will result in an event of default.

In addition, pursuant to the amendment to the Loan Agreement, we agreed to a minimum financing covenant 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 (i) the sale or issuance of equity interests, (ii) business development or collaboration agreements (including upfront, milestone, royalty and other payments), or (iii) subordinated debt, in each case as permitted pursuant to the terms of the Loan Agreement.

To date, we have raised $5.3 million towards such minimum financing covenant and, as a result, we have not yet complied with the minimum financing covenant.

If we do not comply with the covenant, there would be an event of default under Loan Agreement and our debt could be accelerated.

We may not be able to raise such amounts and there can be no assurance that additional financing will be available or will be available on commercially reasonable terms.

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.

If the debt under the Loan Agreement were accelerated due to an event of default or otherwise, we may not have sufficient cash or be able to sell sufficient assets to repay this debt, which would harm our business and financial condition.

If we do not have or are unable to generate sufficient cash to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, our assets could be foreclosed upon and we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.

Moreover, regardless of a potential event of default, the debt under the Loan Agreement matures and is due on January 1, 2027.

Moreover, regardless of a potential event of default, the debt under the Loan Agreement matures and is due on August 1, 2029.

As a result, we may need to refinance or secure separate financing in order to repay amounts outstanding when due, however, no assurance can be given that an extension will be granted, that we will be able to renegotiate the terms of the agreement with the lender, or that we will be able to secure separate debt or equity financing on favorable terms, if at all.

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We cannot assure you that our business will be able to generate sufficient cash flow from operations or that future borrowings or other financings will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs.

To the extent we are required to use cash from operations or the proceeds of any future financing to service our indebtedness instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry

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and in the economy generally.

This may place us at a competitive disadvantage compared to our competitors that have less indebtedness.

We are a “smaller reporting company,” and as a result of the reduced disclosure and governance requirements applicable to smaller reporting companies, our common stock may be less attractive to investors.

Beginning with the quarter ended June 30, 2023, we re-qualified as a smaller reporting company.

We are therefore entitled to take advantage of many of the same exemptions from disclosure requirements as an emerging growth company, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

In addition, as a smaller reporting company [with annual revenue of less than $100 million for the year ended December 31, 2023], we qualify as a non-accelerated filer and thus are exempt from the requirement to obtain an auditor attestation on the effectiveness of our internal control over financial reporting provided in Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.

These exemptions and reduced disclosures in our SEC filings due to our status as a smaller reporting company and/or a non-accelerated filer may make it harder for investors to analyze our results of operations and financial prospects.

We are a large accelerated filer and no longer qualify as a “smaller reporting company,” which requires additional compliance initiatives and heightened disclosure and reporting requirements.

We are subject to Section 404 of the Sarbanes-Oxley Act, which generally requires a company's management to report upon the effectiveness of internal control over financial reporting and an independent registered public accounting firm to attest to the effectiveness of internal control over financial reporting in annual reports on Form 10-K.

However, during any period in which we qualified as a smaller reporting company, we were not required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.

As of June 30, 2024, the market value of our ordinary shares held by non-affiliates exceeded $700.0 million.

As a result, we became a large accelerated filer, effective December 31, 2024.

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of this transition, we are required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm with this Annual Report on Form 10-K for the fiscal year ending December 31, 2024.

To prepare for compliance with Section 404, we engaged in a process to document and evaluate our internal control over financial reporting, which was both costly and challenging.

In this regard, we dedicated internal resources, engaged outside consultants and adopted a detailed work plan to assess and document the adequacy of internal control over financial reporting.

We have continued steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.

As a result of this transition, we are subject to certain disclosure and compliance requirements that apply to other public companies but did not previously apply to us during the period in which we qualified as a smaller reporting company, and we are not able to take advantage of certain scaled disclosures available to smaller reporting companies.

Any failure to comply with the increased disclosure and reporting requirements could have an adverse effect on our business, financial condition and results of operations.

Changes in corporate governance policies and practices may impact our business.

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Risks Related to Development and Commercialization

We have limited experience as a commercial company and the sales, marketing, and distribution of ZORYVE or any future approved products may be unsuccessful or less successful than anticipated.

We recently began commercializing our first products, ZORYVE cream and foam, in the United States.

The sales, marketing, and distribution of ZORYVE or any future approved products may be unsuccessful or less successful than anticipated.

We began commercializing our first product in the United States in August 2022.

As a company, we had no prior experience commercializing a product.

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There are significant expenses and risks involved with establishing our own sales, marketing, and distribution capabilities, including our ability to hire, retain, and appropriately incentivize qualified individuals, provide adequate training to sales and marketing personnel, and effectively manage geographically dispersed sales and marketing teams to generate sufficient demand.

Any failure or delay in the development of these capabilities could delay or negatively affect the success of our commercialization efforts and our business.

Any failure in the development of these capabilities could delay or negatively affect the success of our commercialization efforts and our business.

For example, the commercialization of ZORYVE may not develop as planned or anticipated, which may require us to, among others, adjust or amend our business plan and incur significant expenses.

Further, given our lack of experience commercializing products, we do not have a track record of successfully executing on the commercialization of an approved product.

If we are unsuccessful in accomplishing our objectives and executing on our business plan, or if the commercialization of ZORYVE or any future approved products does not develop as planned, we may require significant additional capital and financial resources, we may not become profitable, and we may not be able to compete against more established companies in our industry.

Our business is dependent on the successful commercialization of ZORYVE and the development, regulatory approval, and commercialization of our current product candidates.

We currently have two products approved for commercial sale, ZORYVE cream, which is a potent PDE4 inhibitor topical cream that was approved by the FDA on July 29, 2022 for the treatment of plaque psoriasis, including intertriginous areas, in patients 12 years of age and older (subsequently expanded to patients 6 years of

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age and older), and ZORYVE foam, which is a potent PDE4 inhibitor topical foam that was approved by the FDA on December 15 , 2023 for the treatment of seborrheic dermatitis in individuals aged 9 years and older.

Our product candidate portfolio includes ZORYVE cream to treat atopic dermatitis, and ZORYVE foam for the treatment of scalp and body psoriasis, ARQ-255, a potent and highly selective topical JAK1 inhibitor under development for the treatment of alopecia areata, ARQ-252, an alternative formulation of our topical JAK1 inhibitor under development for the treatment of chronic hand eczema and vitiligo, and ARQ-234, a CD200R fusion protein for the treatment of moderate-to-severe atopic dermatitis.

We currently have three products approved for commercial sale:

ZORYVE cream 0.3%, a potent PDE4 inhibitor topical cream approved by the FDA on July 29, 2022, for the treatment of plaque psoriasis, including intertriginous areas, in patients 12 years of age and older (subsequently expanded to patients 6 years of age and older);

ZORYVE foam, a potent PDE4 inhibitor topical foam approved by the FDA on December 15, 2023, for the treatment of seborrheic dermatitis in individuals aged 9 years and older;

and ZORYVE cream 0.15%, a potent PDE4 inhibitor topical cream for the treatment of atopic dermatitis in adults and pediatric patients 6 years of age and older, which was approved on July 9, 2024.

Our product candidate portfolio includes ZORYVE foam for the treatment of scalp and body psoriasis, ZORYVE cream 0.05% for the treatment of atopic dermatitis in patients ages 2 to 5,

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ARQ-255, a potent and highly selective topical JAK1 inhibitor under development for the treatment of alopecia areata, ARQ-252, an alternative formulation of our topical JAK1 inhibitor under development for the treatment of chronic hand eczema and vitiligo, and ARQ-234, a CD200R fusion protein for the treatment of moderate-to-severe atopic dermatitis.

We currently do not have drug discovery efforts, and we have no intention to develop a drug discovery capability.

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• our ability to establish and enforce intellectual property rights in and to any current and future products and product candidates;

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• our ability to avoid third-party patent interference, intellectual property challenges, or intellectual property infringement claims;

• the ability to raise any additional required capital on acceptable terms, or at all.

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Furthermore, because ZORYVE and each of our product candidates targets one or more indications in the medical dermatology field, if ZORYVE or any of our product candidates encounter safety or efficacy problems, developmental delays, regulatory issues, supply issues, or other problems, our development plans for the affected product or product candidate and some or all of our other product candidates could be significantly harmed, which would harm our business.

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The degree of market acceptance will depend on a number of factors, including but not limited to:

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• the safety, efficacy, risk-benefit profile, and potential advantages compared to alternative or existing treatments, such as steroids topical treatments, oral treatments, and biologic injections for the treatment of psoriasis, which physicians may perceive to be adequately effective for some or all patients;

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Therefore, coverage and

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reimbursement for drug products can differ significantly from payer to payer.

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• the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.

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In addition, we could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the data safety monitoring board for such trial, or by the FDA or other regulatory authorities.

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• the FDA’s or the applicable foreign regulatory authority’s requirement for additional nonclinical studies or clinical trials which would increase our costs and prolong our development timelines;

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• the FDA or other relevant foreign regulatory authorities may disagree with our interpretation of data or significance of results from the nonclinical studies and clinical trials of any product or product candidate, or may require that we conduct additional studies;

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Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects.

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Topline or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

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Accordingly, these subjective assessments can complicate clinical trial design, adversely impact the ability of a study to show a statistically significant improvement, and generally adversely impact a clinical development program by introducing additional uncertainties.

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The use of patient reported outcome instruments in our clinical trials and the inclusion of such data in any product labeling depends on, but is not limited to, the FDA’s review of the following:

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• the proximity and availability of clinical trial sites for prospective subjects.

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For example, it may be more challenging to identify and enroll certain patient populations or groups, such as pediatric patients, and we experienced enrollment delays in our INTEGUMENT-PED pediatric trial.

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Any of these events could prevent us from achieving or maintaining market acceptance and could significantly harm our business, results of operations, and prospects.

As a company, we have obtained marketing approval for only two products and we may be unable to successfully obtain marketing approval in a timely manner, or at all, for any of our other product candidates.

As a company, we have obtained marketing approval for only three products and we may be unable to successfully obtain marketing approval in a timely manner, or at all, for any of our other product candidates.

Obtaining marketing approval or an additional indication for a product candidate is a complicated process.

As a company, we have obtained approval for ZORYVE cream for the topical treatment of plaque psoriasis in the U.S.

and Canada, as well as approval for ZORYVE foam in the U.S..

Due to the complexities of the marketing

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approval process, this process and the related activities may require more time and/or cost more than we anticipate, and we may be unable to successfully complete such process and related activities for any of our product candidates.

As a company, we have obtained approval for ZORYVE cream 0.3% for the topical treatment of plaque psoriasis in

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adults and pediatric patients 6 years of age and older in the United States and Canada, approval for ZORYVE foam for the topical treatment of seborrheic dermatitis in adults and pediatric patients 9 years of age and older in the United States and Canada, as well as approval for ZORYVE cream 0.15% for the topical treatment of atopic dermatitis in adults and pediatric patients 6 years of age and older in the United States.

Due to the complexities of the marketing approval process, this process and the related activities may require more time and/or cost more than we anticipate, and we may be unable to successfully complete such process and related activities for any of our product candidates.

Failure to successfully complete, or delays in, our pivotal trials or related regulatory submissions would prevent us from or delay us in obtaining regulatory approval for our product candidates.

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For example, we paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of ZORYVE cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product (as defined below).

In addition, we paid AstraZeneca $7.5 million in August 2022 upon FDA approval to commercialize ZORYVE cream in the United States.

We are required to make additional cash payments to AstraZeneca of up to an aggregate of $5.0 million upon the achievement of specified regulatory approval milestones with respect to products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, 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.

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respect to any AZ-Licensed Products we commercialize under the 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.

In addition, we paid AstraZeneca $7.5 million in August 2022 upon FDA approval to commercialize ZORYVE cream 0.3% in the United States and $5.0 million in October 2024 upon achievement of $100.0 million in worldwide net sales.

We are required to make additional cash payments to

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AstraZeneca of up to an aggregate of $5.0 million upon the achievement of specified regulatory approval milestones with respect to products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, AZ-Licensed Products, and payments up to an additional aggregate amount of $10.0 million upon the achievement of certain aggregate worldwide net sales milestones.

With respect to any AZ-Licensed Products we commercialize under the 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.

In connection with the exercise of our exclusive option with Hengrui covering ivarmactinib in December 2019, we made a $1.5 million cash payment and also contemporaneously amended the agreement to expand the territory to additionally include Canada.

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ZORYVE and certain of our product candidates, if approved, will have to compete with existing therapies, some of which are widely known and accepted by physicians and patients.

To compete successfully in these markets, we will have to demonstrate that the relative cost, safety, and efficacy of our approved products, if any, provide an attractive alternative to existing and other new therapies to gain a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices.

To compete successfully in these markets, we will have to demonstrate that the relative cost, safety, and efficacy of our approved products, if any,

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provide an attractive alternative to existing and other new therapies to gain a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices.

Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces, and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts.

Such competition could

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lead to reduced market share for ZORYVE or our product candidates and contribute to downward pressure on the pricing of ZORYVE or our product candidates, which could harm our business, financial condition, operating results, and prospects.

Such competition could lead to reduced market share for ZORYVE or our product candidates and contribute to downward pressure on the pricing of ZORYVE or our product candidates, which could harm our business, financial condition, operating results, and prospects.

We are aware of several companies that are working to develop drugs that would compete against ZORYVE or our product candidates for the treatment of psoriasis, atopic dermatitis, chronic hand eczema, vitiligo, and alopecia areata, including a potential generic version of ZORYVE cream.

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non-injectable systemic therapies used to treat plaque psoriasis such as Otezla, marketed by Amgen Inc., and Sotyktu, marketed by Bristol Myers Squibb;

topical therapies such as tapinarof, marketed by Dermavant Sciences, Inc.;

topical therapies such as Vtama, marketed by Organon & Co.;

branded and generic versions of clobetasol, such as Clobex, marketed by Galderma Laboratories, LP;

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For atopic dermatitis, our primary competitors include topical therapies such as Eucrisa, marketed by Pfizer Inc.;

Opzelura, marketed by Incyte Corporation;

which was approved in September 2021, and generic and branded versions of low to mid-potency steroids such as hydrocortisone or triamcinolone.

In the moderate-to-severe setting, the injected biologic therapy Dupixent, marketed by Regeneron Pharmaceuticals, Inc;

is approved, as well as the recently approved injectable biologic therapy Adbry, marketed by LEO Pharma.

Non-injectable systemic therapies RINVOQ and CIBINQO were also recently approved in moderate-to-severe atopic dermatitis.

Opzelura, marketed by Incyte Corporation, Vtama, marketed by Organon & Co., and generic and branded versions of low to mid-potency steroids such as hydrocortisone or triamcinolone.

In the moderate-to-severe setting, the injected biologic therapies Dupixent, marketed by Regeneron Pharmaceuticals, Inc;

Adbry, marketed by LEO Pharma;

and Ebglyss, marketed by Eli Lilly & Co.

Non-injectable systemic therapies RINVOQ and CIBINQO are also approved in moderate-to-severe atopic dermatitis.

In addition, there are several prescription product candidates under development that could potentially be used to treat atopic dermatitis and compete with ZORYVE cream and ARQ-234, including but not limited to:

topical tapinarof, under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.

(approved as Corectim in Japan), topical PF-07038124, under development by Pfizer Inc, topical difamilast ointment, under development by Medimetriks/Otsuka Pharma, injectable lebrikizumab, under development by Eli Lilly and Company, injectable rocatinlimab, under development by Amgen, and injectable amlitelimab, under development by Sanofi.

topical difamilast ointment, under development by Medimetriks/Otsuka Pharma, injectable rocatinlimab, under development by Amgen, and injectable amlitelimab, under development by Sanofi.

For alopecia areata, our primary competitors include topical therapies such as branded and generic versions of high potency steroids, including Clobex, marketed by Galderma Laboratories, LP;

intralesional corticosteroid injections such as branded and generic versions of triamcinolone, including Kenalog, marketed by Bristol-Myers Squib;

and systemic immunosuppressants including generic versions of systemic steroids such as prednisone, branded and generic versions of cyclosporine, including Sandimmune, marketed by Sandoz, and branded systemic JAK inhibitors, especially Olumiant (baricitinib), marketed by Eli Lilly and Company, an oral JAK inhibitor and the first FDA-approved treatment for alopecia areata.

In addition, there are several prescription product candidates under development that could potentially be used to treat alopecia areata and compete with ARQ-255, including but not limited to:

ritlecitinib, under development by Pfizer, Inc., and deuruxolitinib (CTP-543), under development by Concert Pharmaceuticals (being acquired by Sun Pharmaceuticals).

and systemic immunosuppressants including generic versions of systemic steroids such as prednisone, branded and generic versions of cyclosporine, including Sandimmune, marketed by Sandoz, and branded systemic JAK inhibitors, especially Olumiant (baricitinib), marketed by Eli Lilly and Company, and Litfulo (ritlecitinib), marketed by Pfizer, inc., both oral JAK inhibitors, and the only FDA-approved treatments for alopecia areata.

In addition, there are several prescription product candidates under development that could potentially be used to treat alopecia areata and compete with ARQ-255, including but not limited to deuruxolitinib (CTP-543), under development by Sun Pharmaceuticals.

For hand eczema, our primary competitors include topical therapies such as branded and generic versions of clobetasol, such as Clobex, and generic versions of betamethasone dipropionate.

The only other prescription product candidate we are aware of under development for the treatment of hand eczema that would compete with ARQ-252 is delgocitinib, under development by LEO Pharma A/S, which has reported positive Phase 3 results.

The only other prescription product candidate we are aware of under development for the treatment of hand eczema that would compete with ARQ-252 is Anzupgo (delgocitinib), under development by LEO Pharma A/S, is currently under review by the FDA, and is approved in Europe by the EMA.

For vitiligo, our primary competitors include topical therapies such as generic and branded versions of calcineurin inhibitors, including Elidel, marketed by Bausch Health;

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In addition, there are several prescription product candidates under development that could potentially be used to treat vitiligo and compete with ARQ-255, including but not limited to:

oral PF-06651600 and oral PF-06700841, both under development by Pfizer Inc.

oral ritlecitinib Litfulo under development by Pfizer Inc.

Many of our existing or potential competitors have substantially greater financial, technical, and human resources than we do and significantly greater experience in the discovery and development of product candidates, as well as in obtaining regulatory approvals of those product candidates in the United States and in foreign countries.

Many of our current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing.

Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a smaller number of our competitors.

Competition may reduce the number and types of subjects available to us to participate in clinical trials,

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because some subjects who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors.

Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a smaller number of our

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Competition may reduce the number and types of subjects available to us to participate in clinical trials, because some subjects who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors.

Due to less stringent regulatory requirements in certain foreign countries, there are many more dermatological products and procedures available for use in those international markets than are approved for use in the United States.

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Furthermore, upon the expiration or loss of any patent protection for any of our approved products, or upon the “at-risk” launch, despite pending patent infringement litigation against the generic product or its equivalent, by a generic competitor of a generic version of any of our approved products, which may be sold at significantly lower prices than our products, we could lose a significant portion of sales of that product in a short period of time, which would adversely affect our business, financial condition, operating results and prospects.

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Risks Related to Our Business and Operations

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If we are unable to identify and acquire suitable product candidates for clinical development, this would adversely impact our business strategy, our financial position, and share price.

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize future product candidates.

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We may seek collaboration arrangements for the commercialization, or potentially for the development, of certain of our product candidates depending on the merits of retaining commercialization rights for ourselves as compared to entering into collaboration arrangements.

We will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators.

Our current and future collaboration arrangements may not be successful, which could adversely affect our ability to develop and commercialize future product candidates.

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We have entered into a strategic collaboration and licensing agreement for topical roflumilast in Greater China and Southeast Asia with Hangzhou Zhongmei Huadong Pharmaceutical Co., a wholly owned subsidiary of Huadong Medicine Co., Ltd., a strategic collaboration and licensing agreement for topical roflumilast in Japan with Sato Pharmaceutical Co., Ltd., and a co-promotion agreement with Kowa Pharmaceuticals America, Inc.

to exclusively market and promote ZORYVE to primary care practitioners and pediatricians for all FDA-approved indications in the United States.

In the future, we may seek additional collaboration arrangements for the commercialization, or potentially for the development, of certain of our product candidates depending on the merits of retaining commercialization rights for ourselves, as compared to entering into collaboration arrangements.

To the extent that we decide to enter into future collaboration agreements, we will face significant competition in seeking appropriate collaborators.

Moreover, collaboration arrangements are complex and time-consuming to negotiate, document, implement, and maintain.

We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so chose to enter into such arrangements.

We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements.

The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

Any future collaborations that we enter into may not be successful.

Our current and future collaborations may not be successful.

The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators.

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• collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates;

• a collaborator with sales, marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;

• we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;

• collaborators are or may in the future be entitled to fees, royalties, profit sharing, and other consideration, which may limit or otherwise negatively impact our profit and financial performance;

• we have and could in the future grant exclusive rights to our collaborators that prevent us from collaborating with others;

• collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;

• disputes may arise between us and a collaborator that causes the delay or termination of the research, development, or commercialization of our current or future product candidates or that results in costly litigation or arbitration that diverts management attention and resources;

• collaborations may be terminated, and, if terminated, this may result in a need for additional capital to pursue further development or commercialization of the applicable current or future product candidates;

• collaborators may own or co-own intellectual property covering products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property;

• collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable current or future product candidates;

• collaborators may own or co-own intellectual property covering products that result from our collaborating with them, and in such cases, would result in us not having the exclusive right to develop or commercialize such intellectual property;

• disputes may arise with respect to the ownership of any intellectual property developed pursuant to our collaborations;

• a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws, resulting in civil or criminal proceedings.

Furthermore, we cannot assure you that following any such collaboration, or other strategic transaction, we will achieve the expected synergies to justify the transaction.

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Furthermore, we cannot assure you that any collaboration or other strategic transaction will achieve the expected synergies.

For example, such transactions may require us to incur non-recurring or other charges, increase our near- and long-term expenditures, and pose significant integration or implementation challenges or disrupt our management or business.

These transactions would entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business, and diversion of our management’s time and attention in order to manage a collaboration or develop acquired products, product candidates or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the

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collaboration or combining the operations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business.

These transactions entail numerous operational and financial risks, including exposure to unknown liabilities, dependence upon the performance and discretion of counterparties that we do not control and that may underperform or fail, disruption of our business, and diversion of our management’s time and attention in order to manage a collaboration or develop acquired products, product candidates or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of ZORYVE or our current or future product candidates.

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Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.

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If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could undermine the credibility of our operating results, harm investors’ views of us and, as a result, the value of our common stock.

We are subject to Section 404 of the Sarbanes-Oxley Act, which generally requires a company ’ s management to report upon the effectiveness of internal control over financial reporting and an independent registered public accounting firm to attest to the effectiveness of internal control over financial reporting in annual reports on Form 10-K.

Pursuant to Section 404(a), we are required to file with the SEC an annual management assessment of the effectiveness of our internal control over financial reporting.

However, because we re-qualified as a smaller reporting company and are a non-accelerated filer, we are no longer required to comply with the auditor attestation requirements regarding the effectiveness of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act until we become an accelerated filer or large accelerated filer.

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Our management’s assessment of the effectiveness of our internal control over financial reporting needs to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.

If we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

The effectiveness of our controls and procedures may be limited by a variety of factors, including faulty human judgment and simple errors, omissions or mistakes;

fraudulent action of an individual or collusion of two or more people;

inappropriate management override of procedures;

and the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control.

While we believe our internal control over financial reporting is currently effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions.

Establishing, testing and maintaining an effective system of internal control over financial reporting requires significant resources and time commitments on the part of our management and our finance staff, may require additional staffing and infrastructure investments and would increase our costs of doing business.

We can give no assurance that material weaknesses in our internal control over financial reporting will not be identified in the future.

Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.

Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report upon the effectiveness of our internal control over financial reporting and, since we are no longer a smaller reporting company, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting beginning with this Annual Report on Form 10-K.

The rules governing the standards that must be met for our management and our independent registered public accounting firm to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation.

In connection with our and our independent registered public accounting firm’s evaluations of our internal control over financial reporting, we may need to upgrade our systems, including information technology systems;

implement additional financial and management controls, reporting systems and procedures;

and hire additional accounting and finance staff.

Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations.

An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not.

Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.

In addition, any testing by us or our independent registered public accounting firm conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002 may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement.

Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

Internal control deficiencies could also result in a restatement of our financial results in the future.

We could become subject to stockholder or other third-party litigation, as well as investigations by the SEC, the stock exchange on which our securities are listed, or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions, payment of damages or other penalties.

In addition, as a public company we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act.

Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from the Nasdaq Global Select Market, or other adverse consequences that would materially harm our business.

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Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our securities.

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Security breaches, cyber-attacks, loss of data, and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business, results of operations, financial condition, and prospects.

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We collect and maintain information in digital form that is necessary to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business.

In the ordinary course of our business, we collect, store, and transmit large amounts of confidential information, including intellectual property, proprietary business information, and personal information.

It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such Confidential Information.

We have established physical, electronic, and organizational measures to safeguard and secure our systems to prevent a data compromise, and rely on commercially available systems, software, tools, and monitoring to provide security for our information technology systems and the processing, transmission, and storage of digital information.

We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may or could have access to our confidential information.

Our internal information technology systems and infrastructure, and those of our current and any future collaborators, contractors and consultants, and other third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization.

Our information technology systems and infrastructure, and those of our current and any future service providers, strategic partners, and other collaborators, contractors and consultants, are vulnerable to attack, damage and interruption from computer viruses and malware (e.g., ransomware), misconfigurations, “bugs” or other vulnerabilities, malicious code, natural disasters, terrorism, war, telecommunication and electrical failures, hacking, cyberattacks or cyber-intrusions over the Internet, phishing attacks and other social engineering schemes, employee theft or misuse, human error, fraud, denial or degradation of service attacks and, sophisticated nation-state and nation-state-supported actors.

While our controls and procedures help enable us to protect from or respond to cybersecurity threats, there can be no assurance that these controls and procedures will be adequate to protect us from any cyber incident.

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The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased.

If we or our third-party vendors were to experience a significant cybersecurity breach of our or their information systems or data, the costs associated with the investigation, remediation and potential notification of the breach to counter-parties and data subjects could be material.

In addition, our remediation efforts may not be successful.

If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology and cybersecurity infrastructure, we could suffer significant business disruption, including transaction errors, supply chain or manufacturing interruptions, processing inefficiencies, data loss or the loss of or damage to intellectual property or other proprietary information.

We and certain of our service providers are from time to time subject to cyberattacks and security incidents.

While we do not believe that we have experienced any significant system failure, accident or security breach to

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date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss, corruption or unauthorized disclosure of our trade secrets, personal information or other proprietary or sensitive information or other similar disruptions.

It could also expose us to risks, including an inability to provide our services and fulfill contractual demands, and could cause management distraction and the obligation to devote significant financial and other resources to mitigate such problems, which would increase our future information security costs, including through organizational changes, deploying additional personnel, reinforcing administrative, physical and technical safeguards, further training of employees, changing third-party vendor control practices and engaging third-party subject matter experts and consultants and reduce the demand for our technology and services.

Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted.

In addition, the prevalent use of mobile devices and employees and contractors working from home and/or remote locations that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information or other intellectual property.

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We may also experience security breaches that may remain undetected for an extended period.

Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.

The costs to us to mitigate network security problems, bugs, viruses, worms, malicious software programs, and security vulnerabilities could be significant and are likely to increase in the future.

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Further, while we maintain liability coverage, we cannot be certain that our coverage is adequate for all material incidents or losses incurred.

Any security compromise affecting us, our service providers, strategic partners, other contractors, consultants, or our industry, whether real or perceived, could harm our reputation, erode confidence in the effectiveness of our security measures and lead to regulatory scrutiny.

If such an event were to occur, it could result in a material disruption of our product development programs and commercial operations.

For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.

Moreover, if a computer security breach affects our systems or results in the unauthorized release of personally identifiable information, our reputation could be materially damaged.

In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to various federal and state privacy and security laws, if applicable.

Moreover, if a computer security breach affects our systems or results in the unauthorized release of confidential, proprietary, or personal information, our reputation could be materially damaged.

In addition, such a breach may require notification to governmental agencies, supervisory bodies, the media or individuals pursuant to various federal and state privacy and security laws, if applicable.

Any adverse impact to the availability, integrity or confidentiality of our or third-party systems or Confidential Information can result in legal claims or proceedings (such as class actions), regulatory investigations and enforcement actions, fines and penalties, negative reputational impacts that cause us to lose existing or future customers, and/or significant incident response, system restoration or remediation and future compliance costs.

We would also be exposed to a risk of loss or litigation and potential liability, which could materially adversely affect our business, results of operations, and financial condition.

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Any failure or perceived failure by us to comply with federal, state or foreign laws or regulation, our internal policies and procedures or our contracts

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governing our processing of personal information could result in negative publicity, government investigations and enforcement actions, claims by third parties and damage to our reputation, any of which could have a material adverse effect on our operations, financial performance and business.

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Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners.

In addition, California enacted the California Consumer Privacy Act (CCPA) on June 28, 2018, which went into effect on January 1, 2020.

The CCPA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information.

The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that has increased the likelihood of, and risks associated with data breach litigation.

Further, the California Privacy Rights Act (CPRA) generally went into effect in January 2023, and imposes additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data.

It also creates a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement.

In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.

Furthermore, in July 2023, the SEC adopted new cybersecurity disclosure rules, aimed at enhancing and standardizing disclosures made by public companies regarding cybersecurity risk management, strategy, governance and incident reporting.

In addition, California enacted the California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act (collectively, the CCPA) requires covered businesses that process the personal information of California residents to, among other things:

(i) provide certain disclosures to California residents regarding the business’s collection, use, and disclosure of their personal information;

(ii) receive and respond to requests from California residents to access, delete, and correct their personal information, or to opt out of certain disclosures of their personal information;

and (iii) enter into specific contractual provisions with service providers that process California resident personal information on the business’s behalf.

Additional compliance investment and potential business process changes may also be required.

Similar laws have been passed in other states, and are continuing to be proposed at the state and federal level, reflecting a trend toward more stringent privacy legislation in the United States.

The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.

In the event that we are subject to or affected by HIPAA, the CCPA, or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.

Furthermore, the Federal Trade Commission (the “FTC”) and many state Attorneys General continue to enforce federal and state consumer protection laws against companies for online collection, use, dissemination and security practices that appear to be unfair or deceptive.

For example, according to the FTC, failing to take appropriate steps to keep consumers’ personal information secure can constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act.

The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.

Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply.

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We face significant risks if we or any of our directors, officers, employees, agents or other partners or representatives fail to comply with these laws and governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, financial condition, and results of operations.

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Our employees, contractors, and agents, and companies to which we outsource or license certain activities, may take actions in violation of our internal policies or applicable law.

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In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

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In addition, we may be subject to U.S.

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We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products.

Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials.

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this is the case or eliminate the risk of accidental contamination or injury from these materials.

In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations.

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We do not currently carry biological or hazardous waste insurance coverage.

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Risks Related to Our Reliance on Third Parties

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Instead, we currently rely on single source third-party manufacturers to manufacture nonclinical, clinical, and commercial supplies of ZORYVE and intend to rely on third-party manufacturers for any future approved product.

As a new commercial-stage company with a limited history of product sales, the quantity and quality of deliveries received to date may not represent what will be required to meet our future commercial requirements.

As an early commercial-stage company with a limited history of product sales, the quantity and quality of deliveries received to date may not represent what will be required to meet our future commercial requirements.

We and the manufacturers of our products rely on suppliers of raw materials and components used in the production of our products.

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In addition, any significant delay in, or quality control problems with respect to, the supply of ZORYVE or a product candidate, or the raw material components thereof, for an ongoing study or trial could considerably delay completion of our nonclinical studies or clinical trials, product testing and potential regulatory approval of our product candidates.

In addition, to manufacture our product candidates in the quantities that we believe would be required to meet anticipated market demand, our third-party manufacturers may need to increase manufacturing capacity and, in some cases, we plan to secure alternative sources of commercial supply, which could involve significant challenges and may require additional regulatory approvals.

In addition, to manufacture our product candidates in the quantities that we believe would be required to meet anticipated market demand, our third-party manufacturers may need to increase manufacturing capacity and, in some cases, we are securing alternative sources of commercial supply, which could involve significant challenges and may require additional regulatory approvals.

Neither we nor our third-party manufacturers may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all.

If either we or our manufacturers are unable to purchase the raw materials necessary for the manufacture of our product candidates on acceptable terms, at sufficient quality levels, or in adequate quantities, if at all, the commercial launch of our lead product candidates or any future product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of such product candidates, if approved.

Additionally, the imposition of tariffs and other orders or restrictions impacting trade could adversely impact our business, including by increasing or otherwise impacting the costs and expenses we incur in connection with our operations and supply chain.

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The loss of these suppliers, or their failure to comply with applicable regulatory requirements or to provide us with sufficient quantities at acceptable quality levels or prices, or at all, would materially and adversely affect our business.

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Before commencing with commercial manufacturing, the processes and systems used in the manufacture of products and product candidates must be approved and each facility must have a compliance status that is acceptable to the FDA and other regulatory authorities.

In addition, pharmaceutical manufacturing facilities are

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continuously subject to inspection by the FDA and foreign regulatory authorities before and after product approval.

In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and foreign regulatory authorities before and after product approval.

Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, any potential third-party manufacturer may be unable to continue to pass or initially pass federal, state, or international regulatory inspections.

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If the third parties conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties, which could be difficult, costly, or impossible, and our clinical trials may be extended, delayed or terminated, or may need to be repeated, which would have a material adverse effect on our business.

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Risks Related to Intellectual Property

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Any patents that we may obtain may be narrow in scope and thus easily circumvented by competitors.

Further, in countries where we do not have granted patents, third

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parties may be able to make, use, or sell products identical to or substantially similar to, ZORYVE and our product candidates.

Further, in countries where we do not have granted patents, third parties may be able to make, use, or sell products identical to or substantially similar to, ZORYVE and our product candidates.

The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and our current licensors, or any future licensors or licensees may not be able to prepare, file, and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

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(Padagis) had submitted an ANDA to the FDA seeking authorization to manufacture, use, sell, and import a generic version of ZORYVE cream.

Padagis' Paragraph IV certification stated that our patents listed in the FDA's Orange Book will not be infringed by Padagis’ proposed product, are invalid and/or are unenforceable.

We will file suit against Padagis as appropriate, which would trigger the automatic 30-month stay of FDA approval of the ANDA.

We plan to vigorously defend our extensive intellectual property rights in ZORYVE.

On July 16, 2024 and September 12, 2024, we received additional Paragraph IV Notice Letters from Padagis, Padagis' Paragraph IV certifications stated that our patents listed in the FDA's Orange Book will not be infringed by Padagis’ proposed product, are invalid and/or are unenforceable.

We filed suit against Padagis in the U.S.

District Court for the District of Delaware on March 27, 2024 for infringement of certain of our patents and amended our complaint on July 19, 2024 to add additional patents to our infringement allegations.

On August 2, 2024, Padagis responded to the first amended complaint, denying infringement and asserting counterclaims seeking a declaratory judgment that the asserted patents are not infringed, invalid, and/or unenforceable.

The court issued a scheduling order on June 10, 2024, which sets trial at the court’s convenience, or around April 13-17, 2026.

The complaint triggered the automatic 30-month stay of FDA approval of the ANDA, which expires on August 14, 2026, and we plan to vigorously defend our extensive intellectual property rights in ZORYVE.

In addition, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us.

Even with respect to our patents that have issued or will issue, we cannot guarantee that the claims of these patents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

Even with respect to our patents that have issued or will issue, we cannot guarantee

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that the claims of these patents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all.

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Even if patents do successfully issue covering such aspects of our technology, third parties may design around or challenge the validity, enforceability, or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated, or held unenforceable.

If the breadth or strength of protection provided by the patents we own or license

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with respect to ZORYVE or our product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, ZORYVE our product candidates.

If the breadth or strength of protection provided by the patents we own or license with respect to ZORYVE or our product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, ZORYVE our product candidates.

Even if the patent applications that we own or license issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage.

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• we may not develop additional proprietary technologies that are patentable.

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Patents have a limited lifespan.

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patents relating to ZORYVE with claims directed to, among other things, formulating roflumilast in combination with hexylene glycol and a method of treatment with a topical roflumilast formulation with an extended half-life are currently projected to expire in mid-2037, our method of treatment patent specifically for roflumilast foam in the treatment of seborrheic dermatitis is currently projected to expire in 2041, and the issued U.S.

patents which we have exclusive rights to from Hengrui as a result of the exercise of our exclusive option with Hengrui in December 2019 for the amount of $1.5 million cash, related to the composition of matter of the active ingredient in ARQ-252 and ARQ-255 (or bisulfate or crystal forms thereof) are currently projected to expire between December 19, 2032 and October 15, 2035 unless a PTE is granted.

Additionally, an issued U.S.

patent related to the composition of matter in ARQ-234 is currently projected to expire on July 14, 2038 unless any PTE is granted.

Proprietary trade secrets and unpatented know-how are also very important to our business.

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In addition, courts outside the United States may be less willing to protect trade secret information.

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We may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claims seeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay or prevent the development and commercialization of ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, ARQ-234, or any other product candidates.

We may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claims seeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay or prevent the development and commercialization of ZORYVE cream 0.3%, ZORYVE cream 0.15%, ZORYVE cream 0.05%, ZORYVE foam, ARQ-252, ARQ-255, ARQ-234, or any other product candidates.

There have been many lawsuits and other proceedings asserting patents and other intellectual property rights in the pharmaceutical and biotechnology industries.

We cannot assure you that our exploitation of ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234 will not infringe existing or future third-party patents.

Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234.

We cannot assure you that our exploitation of ZORYVE cream 0.3%, ZORYVE cream 0.15%, ZORYVE cream 0.05%, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234 will not infringe existing or future third-party patents.

Moreover, we may face claims from non-practicing entities that have no relevant product revenue and against whom our own patent portfolio may thus have no deterrent effect.

We may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234.

We may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of ZORYVE cream 0.3%, ZORYVE cream 0.15%, ZORYVE cream 0.05%, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234.

We may be subject to third-party claims in the future against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing a third party’s patents.

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Any of these events could harm our business significantly.

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In addition to infringement claims against us, if third parties prepare and file patent applications in the United States that also claim technology similar or identical to ours, we may have to participate in interference or derivation proceedings in the U.S.

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We may also become involved in similar opposition proceedings in the European Patent Office or similar offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology.

For example, Teva Pharmaceutical Industries Ltd.

filed Oppositions with the European Patent Office against two of our European patents, European Patent Nos.

EP 3634380 B1 and EP 3684334 B1, on September 20, 2024 and August 13, 2024, respectively.

Since patent applications are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates.

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Litigation may be necessary to defend against these claims.

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In addition, while it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may in the future be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own.

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Even if we and our licensor are successful in prosecuting or defending against such claims, litigation could result in substantial costs.

The validity, scope, and enforceability of any patents listed in the Orange Book that cover ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234 can be challenged by competitors.

One or more third parties may challenge the patents covering ZORYVE cream or ZORYVE foam, or if approved by the FDA, ZORYVE cream for atopic dermatitis, ZORYVE foam for scalp and body psoriasis, ARQ-252, or ARQ-255, which could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims or a finding of non-infringement.

For example, if a third-party files an abbreviated NDA, or ANDA, for a generic drug bioequivalent to ZORYVE cream, ZORYVE foam, ARQ-252, or ARQ-255, and relies in whole or in part on studies conducted by or for us, the third-party will be required to certify to the FDA that either:

The validity, scope, and enforceability of any patents listed in the Orange Book that cover ZORYVE cream 0.3%, ZORYVE cream 0.15%, ZORYVE Cream 0.05%, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234 can be challenged by competitors.

One or more third parties may challenge the patents covering ZORYVE cream 0.3%, ZORYVE cream 0.15%, or ZORYVE foam, or if approved by the FDA, ZORYVE foam for scalp and body psoriasis, ZORYVE cream 0.05%, ARQ-252, or ARQ-255, which could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims or a finding of non-infringement.

For example, if a third-party files an abbreviated NDA, or ANDA, for a generic drug bioequivalent to ZORYVE cream 0.3%, ZORYVE cream 0.15%, ZORYVE cream 0.05%, ZORYVE foam, ARQ-252, or ARQ-255, and relies in whole or in part on studies conducted by or for us, the third-party will be required to certify to the FDA that either:

(1) there is no patent information listed in the FDA’s Orange Book with respect to our NDA for the applicable approved drug candidate;

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We may then initiate a lawsuit to defend the patents identified in the notice.

The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the third-party’s ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in favor of the third-party.

The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the third-party’s ANDA until the earliest of 30 months from the date of receipt of the notice or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in favor of the third-party.

If we do not file a patent infringement lawsuit within the required 45-day period, the third-party’s ANDA will not be subject to the 30-month stay of FDA Approval.

Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that could limit our ability to prevent third parties from competing with ZORYVE or our product candidates.

On February 14, 2024, we received a Paragraph IV Notice Letter advising that Padagis had submitted an ANDA to the FDA seeking authorization to manufacture, use, sell, and import a generic version of ZORYVE cream.

Padagis' Paragraph IV certification stated that our patents listed in the Orange Book will not be infringed by Padagis’ proposed product, are invalid and/or are unenforceable.

We will file suit against Padagis as appropriate, which would trigger the automatic 30-month stay of FDA approval of the ANDA.

We plan to vigorously defend our extensive intellectual property rights in ZORYVE.

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On July 16, 2024 and September 12, 2024, we received additional Paragraph IV Notice Letters from Padagis.

Padagis' Paragraph IV certifications stated that our patents listed in the Orange Book will not be infringed by Padagis’ proposed product, are invalid and/or are unenforceable.

We filed suit against Padagis in the U.S.

The court issued a scheduling order on June 10, 2024, which sets trial at the court’s convenience, or around April 13-17, 2026.

The complaint triggered the automatic 30-month stay of FDA approval of the ANDA, and we plan to vigorously defend our extensive intellectual property rights in ZORYVE 0.3% cream as appropriate.

If we do not obtain protection under the Hatch-Waxman Amendments by extending the patent term of ZORYVE or our product candidates, our business may be materially harmed.

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Our issued U.S.

patents, with claims directed to roflumilast formulations with reduced crystal growth, encompassing ZORYVE and a method of treatment with a topical roflumilast formulation with an extended half-life are currently projected to expire in mid-2037.

patents, with claims encompassing ZORYVE, directed to roflumilast formulations with reduced crystal growth and beneficial pharmacokinetic parameters and methods of treatment with a topical roflumilast formulation with an extended half-life and that decrease gastrointestinal side effects relative to oral roflumilast formulations are currently projected to expire in mid-2037.

We also have a method of treatment patent specifically for roflumilast foam in the treatment of seborrheic dermatitis which expires 2041.

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Additional third parties, apart from our current licensors, may hold intellectual property, including patent rights, that are important or necessary to the development of our product candidates.

It may be necessary for us to use the patented or proprietary technology of these third parties to commercialize our product candidates, in which case we would be required to obtain a license from these third parties on commercially reasonable terms.

It may be necessary for us to

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use the patented or proprietary technology of these third parties to commercialize our product candidates, in which case we would be required to obtain a license from these third parties on commercially reasonable terms.

Such a license may not be available, or it may not be available on commercially reasonable terms, in which case our business would be harmed.

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In some cases we may not have control over the prosecution, maintenance, or enforcement of the patents that we license, and may not have sufficient ability to provide input into the patent prosecution, maintenance, and defense process with respect to such patents, and our licensors may fail to take the steps that we believe are necessary or desirable in order to obtain, maintain, defend, and enforce the licensed patents.

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We may not be able to protect our intellectual property rights throughout the world.

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Depending on actions by the U.S.

Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future.

Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in

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unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future.

Similarly, changes in patent law and regulations in other countries or jurisdictions or changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we have licensed or that we may obtain in the future.

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Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.

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federal government retains certain rights in inventions produced with its financial assistance under the Bayh-Dole Act.

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Under the unitary patent system, European applications have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unified Patent Court (UPC).

As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation.

As the UPC is a new court system, there is little precedent for the court, increasing the uncertainty of any litigation.

Patents granted before the implementation of the UPC will have the option of opting out of the jurisdiction of the UPC and remaining as national patents in the UPC countries.

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We will require final regulatory approval of, and registered trademarks for, any commercial tradename and registered trademarks for a commercial trade name for our product candidates in the United States or foreign jurisdictions and failure to secure such approval in a timely fashion could adversely affect our business.

We have received Notices of Allowance from the USPTO for commercial trade names for certain of our lead product candidates in the United States.

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We have received Registrations and Notices of Allowance from the USPTO for commercial trade names for certain of our lead product candidates in the United States.

We will be required to obtain similar approvals in certain foreign jurisdictions and will be required to undertake similar registrations with respect to any future product candidates.

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Moreover, any name we propose to use with our product candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark.

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typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names.

The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names.

While we have received Notices of Allowance from the USPTO for commercial trade names for certain of our lead product candidates, we have not received final FDA Approval of such names.

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Moreover, others may independently develop similar or equivalent proprietary information, and third parties may otherwise gain access to our proprietary knowledge.

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If we fail to comply with our obligations under any license, collaboration, or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary for developing and protecting our product candidates.

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We may not be able, alone or with our licensors or potential partners, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

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Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or other proceedings.

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Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing product candidates.

As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk increases that our product candidates or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third parties.

As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk increases that our product

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candidates or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third parties.

Third parties may assert that we are infringing their patents or employing their proprietary technology without authorization.

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Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

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Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources.

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We cannot provide any assurances that third-party patents do not exist which might be enforced against our drugs or product candidates, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties or other forms of compensation to third parties.

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Risks Related to Government Regulation

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If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action, which would adversely affect our business, prospects, financial condition, and results of operations.

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Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.

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Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business.

For example, over the last several years, the U.S.

For example, in recent years, the U.S.

government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

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Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections at domestic and foreign manufacturing facilities at various points.

Even though the FDA has since resumed standard inspection operations, any resurgence of the virus may lead to other inspectional or administrative delays.

If a prolonged government shutdown occurs, or if global health concerns prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

If a prolonged government shutdown occurs, or if renewed global

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health concerns prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

We may be subject to healthcare laws and regulations relating to our business, and could face substantial penalties if we are determined not to have fully complied with such laws, which would have an adverse impact on our business.

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federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

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Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain non-physician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants, and certified nurse midwives) and teaching hospitals, the ownership and investment interests held by such physicians and their immediate family members;

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• federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;

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• analogous state and non-U.S.

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(ii) the trials were performed by clinical investigators of recognized competence and pursuant to GCP regulations;

and (iii) the data may be considered valid without the need for an on-

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site inspection by the FDA, or if the FDA considers such inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means.

and (iii) the data may be considered valid without the need for an on-site inspection by the FDA, or if the FDA considers such inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means.

In addition, even where the foreign study data are not intended to serve as the sole basis for approval, if the study was not otherwise subject to an IND, the FDA will not accept the data as support for an application for marketing approval unless the study was well-conducted in accordance with GCP requirements and the FDA is able to validate the data from the study through an onsite inspection if deemed necessary.

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jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell ZORYVE or any product candidates for which we obtain marketing approval.

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For example, in March 2010, the Patient Protection and ACA, as amended by the Health Care and Education Reconciliation Act, collectively the ACA, was enacted in the United States to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.

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• a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected;

• a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

• extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;

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• an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

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Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA.

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imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023);

and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025).

The IRA permits the Secretary of the Department of Health and Human Services to implement many of these provisions through guidance, as opposed to regulation, for the initial years.

On August 29, 2023, HHS announced the list of the first ten drugs that will be subject to price negotiations.

HHS has issued and will continue to issue guidance implementing the IRA, although the Medicare drug price negotiation program is currently subject to legal challenges.

and replaces the Part D coverage gap discount program with a new discounting program (which began in 2025).

The IRA permits the Secretary of the Department of Health and Human Services to implement many of these

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provisions through guidance, as opposed to regulation, for the initial years.

CMS has published the negotiated prices for the initial ten drugs, which will first be effective in 2026, and the list of the subsequent 15 drugs that will be subject to negotiation, although the Medicare drug price negotiation program is currently subject to legal challenges.

While the impact of the IRA on the pharmaceutical industry and our business cannot yet be fully determined, it may be significant.

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If we fail to comply with reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the United States, we could be subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, results of operations and financial condition.

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Upon marketing ZORYVE we expect to participate in the Medicaid Drug Rebate Program, or MDRP, and other federal and state government pricing programs in the United States, and we may participate in additional government pricing programs in the future.

Upon commercializing ZORYVE, we started to participate in the Medicaid Drug Rebate Program, or MDRP, and other federal and state government pricing programs in the United States, and we may participate in additional government pricing programs in the future.

These programs generally require manufacturers to pay rebates or otherwise provide discounts to government payers in connection with drugs that are dispensed to beneficiaries of these programs.

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The 340B program is administered by the Health Resources and Services Administration (HRSA) and requires a participating manufacturer to charge statutorily defined covered entities no more than the 340B “ceiling price” for its covered outpatient drugs used in an outpatient setting.

These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients.

These 340B covered entities include a variety of community health clinics and other entities that receive

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health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients.

The 340B ceiling price is calculated using a statutory formula, which is based on the AMP and rebate amount for the covered outpatient drug as calculated under the MDRP.

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Requirements under such laws include advance notice of planned price increases, reporting price increase amounts and factors considered in taking such increases, wholesale acquisition cost information disclosure to prescribers, purchasers, and state agencies, and new product notice and reporting.

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comply with drug price transparency requirements, including the untimely, inaccurate, or incomplete reporting of drug pricing information.

Such legislation could limit the price or payment for certain drugs, and a number of states are authorized to impose civil monetary penalties or pursue other enforcement mechanisms against manufacturers who fail to comply with drug price transparency requirements, including the untimely, inaccurate, or incomplete reporting of drug pricing information.

If we are found to have violated state law requirements, we may become subject to penalties or other enforcement mechanisms, which could have a material adverse effect on our business.

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In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other foreign regulatory authorities as consistent with the product’s approved labeling.

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Any regulatory approval that the FDA or a foreign regulatory authority grants is limited to those specific diseases and indications for which a product is deemed to be safe and effective.

For example, the FDA-approved label for ZORYVE cream is limited to the topical treatment of plaque psoriasis, including intertriginous areas, in patients 6 years of age and older, and we are not permitted to promote ZORYVE cream for any other uses, unless and until such uses are approved.

For example, the FDA-approved label for ZORYVE cream 0.3% is limited to the topical treatment of plaque psoriasis, including intertriginous areas, in patients 6 years of age and older, the label for ZORYVE cream 0.15% is limited to the topical treatment of atopic dermatitis in patients 6 years of age and older, and the label for ZORYVE foam 0.3% is limited to the treatment of seborrheic dermatitis in adult and pediatric patients 9 years of age and older, and we are not permitted to promote these products for any other uses, unless and until such uses are approved.

In addition, although we believe ZORYVE and our product candidates may exhibit a lower risk of side effects or more favorable tolerability profile or better symptomatic improvement than other products for the indications we are studying, without head-to-head data, we will be unable to make comparative claims for ZORYVE or our product candidates, if approved.

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It is also possible that other federal, state, or foreign enforcement authorities might take action if they determine our business activities constitute promotion of an off-label use or promotion inconsistent with the label, which could result in significant penalties, including criminal, civil or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations.

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We cannot, however, prevent a physician from using ZORYVE or our product candidates in ways that fall outside the scope of the approved indications, as he or she may deem appropriate in his or her medical judgment.

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Furthermore, the use of ZORYVE or our product candidates for indications other than those approved by the FDA and/or other regulatory authorities may not effectively treat such conditions, which could harm our brand and reputation among both physicians and patients.

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Risks Related to Our Common Stock

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However, future sales of substantial amounts of our common stock in the public market, including shares issued upon exercise of our outstanding warrant or options, or the perception that such sales may occur, could adversely affect the market price of our common stock.

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Our ability to utilize our Net Operating Loss carryforwards and research and development income tax credit carryforwards may be limited.

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Under current law, our federal NOLs generated in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs in tax years beginning after December 31, 2020, is limited to 80% of taxable income.

It is uncertain if and to what extent various states will conform to federal tax laws.

In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change U.S.

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In addition, at the state level, there may be periods during which the use of net operating losses is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

For example, in June 2024, California enacted Senate Bill 167 (SB 167), which, with certain exceptions, suspends the ability to use California net operating losses to offset California income and limits the ability to use California business tax credits to offset California taxes, for taxable years beginning after 2023 and before 2027.

While SB 167 did not have a material impact to the Company in 2024, it is possible that it may in future years.

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

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• the requirement that a special meeting of stockholders may be called only by the chief executive officer or the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

• advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

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discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.

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There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.

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General Risk Factors

Unfavorable global and regional economic, political and health conditions could adversely affect our business, financial condition or results of operations.

Macroeconomic factors, including unfavorable or uncertain global and regional economic, political and health conditions, could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by global or regional economic, political and health conditions.

For example, if inflation or other factors were to significantly increase our business costs, we may be unable to manage such increased expenses or pass through price increases to purchasers of our approved product.

For example, various macroeconomic factors could adversely affect our business, financial condition and results of operations, including changes in inflation, interest rates and overall economic conditions and uncertainties, including those resulting from political instability (including workforce uncertainty), political uncertainty (such as during transitional periods for new administrations and changes to leadership positions within government or national offices, agencies, and divisions), conflicts, trade disputes between nations and the current and future conditions in the global financial markets.

In addition, the imposition of tariffs and other orders or restrictions impacting trade could adversely impact our business, including by increasing or otherwise impacting the costs and expenses we incur in connection with our operations and supply chain, and by potentially increasing the price of our products to purchasers of our approved products.

The actual impacts of any tariffs and other orders or restrictions are subject to a number of factors including the effective date and duration of such tariffs, orders and restrictions, the amount, scope and nature of such inputs, any countermeasures that the target countries may take and any mitigating actions that may become available.

A global financial crisis or global or regional political and economic instability, wars, terrorism, civil unrest, outbreaks of disease, and other unexpected events, such as supply chain constraints or disruptions, could cause extreme volatility and disrupt our business.

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• variations in the level of expenses related to our nonclinical and clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites;

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• variations in the level of expenses related to our commercialization activities for ZORYVE or any of our product candidates, if approved;

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• changes in operating performance and stock market valuations of other pharmaceutical companies;

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• market conditions or trends in our industry or the economy as a whole, including as a result of market volatility related to global health concerns;

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If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

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If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop our current and any future product candidates, commercialize ZORYVE or our product candidates or otherwise implement our business plan.

Our ability to compete in the highly competitive pharmaceuticals industry depends upon our ability to attract and retain highly qualified managerial, scientific, medical, sales and marketing and other personnel.

We are highly dependent on our management and scientific personnel, including our Chief Executive Officer, Todd Franklin Watanabe, our Chief Financial Officer, John Smither, our Chief Technical Officer, Bethany Dudek, Ph.D, our Chief Medical Officer, Patrick Burnett, M.D., Ph.D, and our Chief Commercial Officer, L.

We are highly dependent on our management and scientific personnel, including our Chief Executive Officer, Todd Franklin Watanabe, our Chief Financial Officer, David Topper, our Chief Technical Officer, Bethany Dudek, Ph.D, our Chief Medical Officer, Patrick Burnett, M.D., Ph.D, and our Chief Commercial Officer, L.

Todd Edwards.

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If such an event were to affect our supply chain, it could have a material adverse effect on our business.

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Changes in tax laws or regulations could have a material adverse effect on our business and results of operations.

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Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us.

The Current Administration and Congress have proposed various U.S.

The Current Administration and Congress may propose various U.S.

federal tax law changes, which if enacted could have a material impact on our business, cash flows, financial condition, or results of operations.

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Future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S.

In October 2021, the Organization for Economic Co-operation and Development (the OECD) announced the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Framework), which agreed to a two-pillar solution to address tax challenges arising from digitalization of the economy.

In December 2021, the OECD released Pillar Two Model Rules defining the global minimum tax rules, which contemplate a minimum tax rate of 15%.

To date, various jurisdictions have enacted, or are in the process of enacting, legislation on these rules, and the OECD continues to release additional guidance.

While it is uncertain whether the United States will enact legislation to adopt the minimum tax directive, certain countries in which we operate have adopted legislation to implement the minimum tax directive.

Further, the OECD issued administrative guidance providing transition and safe harbor rules that could delay the impact of the minimum tax directive.

While we continue to monitor the implementation of the Framework and its potential impact, we currently do not expect the Framework to have a material impact on the Company.

We could be subject to additional tax liabilities

We are subject to U.S.

federal, state, local, and foreign income taxes in the United States, withholding taxes and transaction taxes in foreign jurisdictions.

Significant judgement is required in evaluating our tax positions and our worldwide provision for taxes.

During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain.

We may be audited in various jurisdictions, and such jurisdictions may assess additional income, sales, and value-added or other taxes against us.

Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period for which a determination is made.

Future litigation could have a material adverse effect on our business and results of operations.

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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-K

Item 1A. Risk Factors