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Item 7. Management’s Discussion and Analysis

2026-02-25 compared with 2025-02-25 · 173 added, 154 removed, 210 unchanged (61% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our “Selected Financial Data” and our audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

For a discussion of the year ended December 31, 2024 compared to the year ended December 31, 2023, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024.

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We believe this strategy uniquely positions us to rapidly advance our goal of bridging the treatment innovation gap in dermatology, while maximizing our probability of technical success and financial resources.

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

Food and Drug Administration (FDA) approval for the treatment of plaque psoriasis, including psoriasis in the intertriginous areas (e.g.

We launched our lead product, ZORYVE cream 0.3%, in August 2022 after obtaining our initial FDA approval for the treatment of plaque psoriasis, including psoriasis in the intertriginous areas (e.g.

groin or axillae), in individuals 12 years of age or older.

ZORYVE cream 0.3% is a once-daily topical formulation of roflumilast, a highly potent and selective phosphodiesterase-4 (PDE4) inhibitor.

ZORYVE cream 0.3% is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use.

ZORYVE cream 0.3% is approved for once-daily topical treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use.

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

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

In April 2023, we had our first commercial launch outside of the United States following Health Canada approval of ZORYVE cream 0.3% for the treatment of plaque psoriasis in individuals 12 years or age or older.

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

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

ZORYVE foam became commercially available in the United States in late January 2024, and was approved by Health Canada in October 2024 and became commercially available in Canada in December 2024.

In addition to the approval of ZORYVE cream 0.3% for plaque psoriasis and ZORYVE foam for seborrheic dermatitis, we also received FDA approval for and commercially launched ZORYVE (roflumilast) cream 0.15% (ZORYVE cream 0.15%), (collectively, ZORYVE), in July 2024 for the treatment of mild to moderate atopic dermatitis in adults and pediatric patients 6 years of age and older, with no limitation on location, body surface area treated, concomitant use, or duration of use specified in the approved labelling.

ZORYVE cream 0.15% is a once-daily, steroid-free cream that provides rapid disease clearance and significant reduction in itch and has been specifically developed to be a treatment option for long-term disease control.

We have also completed a Phase 3 trial of ZORYVE cream 0.05% in pediatric patients 2 to 5 years of age with mild to moderate atopic dermatitis (INTEGUMENT-PED).

Based on the positive results from the INTEGUMENT-PED study, and given our recent approval of ZORYVE cream 0.15% for the treatment of mild to moderate atopic dermatitis in individuals 6 years of age or older, we submitted a supplemental new drug application (sNDA) for topical ZORYVE cream 0.05% for children 2 to 5 years of age in December 2024.

We conducted INTEGUMENT-OLE, an open label extension study of the long-term safety of ZORYVE cream 0.15% in subjects 6 years of age or older and ZORYVE cream 0.05% in

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subjects between the ages 2 and 5 years, for which we reported positive results in September 2023 and August 2024, respectively.

Beyond seborrheic dermatitis, we are also developing ZORYVE foam for scalp and body psoriasis and have successfully completed our Phase 2b and pivotal Phase 3 clinical trials.

We announced positive topline data in September 2022, with ZORYVE foam showing rapid disease clearance and significant reduction in itch.

In the pivotal Phase 3 ARRECTOR study, at Week 8, 66% of individuals treated with ZORYVE foam achieved the co-primary efficacy endpoint of Scalp IGA Success, defined as a Scalp IGA score of “clear” or “almost clear” plus a 2-point improvement, and 46% of patients achieved the co-primary efficacy endpoint of Body IGA Success, defined as a Body IGA score of "clear" or "almost clear" plus a 2-point improvement.

In addition, individuals treated with ZORYVE foam reported reductions in itch from baseline within 24 hours of first application.

Based on the ARRECTOR results and a Phase 2b study, we submitted an sNDA to the FDA for a label expansion to include scalp and body psoriasis in adults and adolescents ages 12 and over, which was recently accepted by the FDA with a Prescription Drug User Fee Act (PDUFA) target action date in May 2025.

In July 2024, we entered into a co-promotion agreement with Kowa Pharmaceuticals, Inc.

In November 2025, our supplemental New Drug Application (sNDA) was accepted for filing by the FDA to potentially expand the indication of ZORYVE cream 0.3% for the treatment of plaque psoriasis in children down to the age of 2, with a Prescription Drug User Fee Act (PDUFA) target action date set for June 29, 2026.

In June 2023, we had our first commercial launch outside of the United States following Health Canada approval of ZORYVE cream 0.3% for the treatment of plaque psoriasis in individuals 12 years or age or older.

In February 2026, Health Canada accepted our Supplement to a New Drug Submission (SNDS) for ZORYVE cream 0.3% for individuals down to 2 years old.

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

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

ZORYVE foam became commercially available in the United States in January 2024 and became commercially available in Canada in December 2024 following approval by Health Canada.

We received FDA approval for ZORYVE foam for the treatment of plaque psoriasis of the scalp and body in adults and adolescents ages 12 and older in May 2025, followed by commercial launch in the United States in June 2025.

ZORYVE foam for the treatment of plaque psoriasis of the scalp and body in adults and adolescents ages 12 and older was also approved by Health Canada in October 2025, followed by commercial launch in November 2025.

We also received FDA approval for, and commercially launched, ZORYVE cream 0.15% in July 2024 for the topical treatment of mild to moderate atopic dermatitis in adults and pediatric patients 6 years of age and older, with no limitation on location, body surface area treated, concomitant use, or duration of use specified in the approved labelling.

ZORYVE cream 0.15% was also approved by Health Canada in March 2025 and commercially launched in April 2025.

We also received FDA approval for, and commercially launched, ZORYVE cream 0.05% for the topical treatment of mild to moderate atopic dermatitis in children 2 to 5 years of age in October 2025.

ZORYVE cream 0.15% and ZORYVE cream 0.05% are once-daily, steroid-free creams that provide rapid disease clearance and significant reduction in itch, and have been specifically developed to be treatment options for long-term disease control.

In February 2026, we announced positive topline data for INTEGUMENT-INFANT, a Phase 2 study to

Index to Financial Statements

evaluate the safety and efficacy of investigational ZORYVE cream 0.05% in infants as young as 3 months to less than 2 years with atopic dermatitis.

We intend to submit an sNDA to the FDA in the second quarter of 2026 based on the results of this trial to potentially expand the indication for ZORYVE cream 0.05% for the treatment of infants with atopic dermatitis down to the age of 3 months.

In July 2024, we entered into a promotion agreement with Kowa Pharmaceuticals America, Inc.

(Kowa) to leverage Kowa's primary care sales force to exclusively market and promote ZORYVE in the United States to primary care practitioners and pediatricians for all FDA-approved indications until at least July 2029.

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Promotion of ZORYVE in primary care and pediatrics under the Kowa agreement began in late September 2024.

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

We completed enrollment in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata and expect data in the first half of 2025.

Effective January 23, 2026, we mutually agreed to terminate the promotion agreement.

Following this termination, Kowa ceased all sales and promotions of ZORYVE and we will not be required to make any further payments to Kowa.

In August 2023, we entered into a strategic collaboration and licensing agreement (the Huadong Agreement) for topical roflumilast in Greater China and Southeast Asia with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd.

a wholly owned subsidiary of Huadong Medicine Co., Ltd.

In February 2024, we entered into a a strategic collaboration and licensing agreement (the Sato Agreement) for topical roflumilast in Japan with Sato Pharmaceutical Co., Ltd.(Sato).

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

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

We plan to develop ARQ-234 in atopic dermatitis, where we believe it could be a highly complementary biologic treatment option to ZORYVE cream 0.15% in that indication, if approved.

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

We are working towards submitting an Investigational New Drug (IND) application during 2025.

We have incurred net losses in each year since inception, including net losses of $140.0 million, $262.1 million and $311.5 million for the years ended December 31, 2024, 2023 and 2022, respectively.

We submitted an Investigational New Drug application (IND) to the FDA in July 2025, and anticipate commencing a Phase 1 study of ARQ-234 in the first quarter of 2026.

In July 2018, we executed a licensing agreement with AstraZeneca AB (AstraZeneca) for exclusive worldwide rights to roflumilast as a topical product in humans solely for dermatological indications.

Moreover, we have our own intellectual property portfolio around topical uses of roflumilast, with issued and pending formulation, pharmacokinetic, and method-of-use patents in the United States and other jurisdictions from several distinct patent families, which provides us with exclusivity in the United States for our product cream formulation through 2037 and foam formulation through 2042.

We have incurred annual net losses in each year since inception, including net losses of $16.1 million, $140.0 million and $262.1 million for the years ended December 31, 2025, 2024 and 2023, respectively.

As of December 31, 2025, we had an accumulated deficit of $1,138.1 million and cash, cash equivalents, restricted cash and marketable securities of $221.3 million.

As of December 31, 2025, we had $100.0 million outstanding under the Loan Agreement.

We paid down $100.0 million of principal related to the Loan Agreement using available cash on October 8, 2024, with the right to re-draw that principal for a defined period.

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

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

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

We paid down $100.0 million of principal related to the Loan Agreement using available cash in October 2024, with the right to re-draw that principal for a defined period.

The extent of any net income or losses for future periods is uncertain and we may continue to incur net losses in future periods.

We expect to continue to incur significant expenses as we commercialize ZORYVE, and as we advance our product candidates and label extensions through clinical trials, regulatory submissions and commercialization.

We expect to incur commercialization expenses related to the sales, marketing, manufacturing, and distribution of ZORYVE, while we focus our clinical development spend on ARQ-234 and ZORYVE label expansions.

While we do not anticipate the need to obtain funds through financings or other sources to support our current planned operations, if our available cash and marketable securities balances and anticipated future cash flows from operations are insufficient to cover these expenses, we may need to fund our operations through equity or debt financings or other sources, such as future potential collaboration agreements.

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

Any failure to obtain sufficient funds on acceptable terms if or when needed could have a material adverse effect on our business, results of operations, and financial condition.

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

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

We have no internal manufacturing capabilities, and we will continue to rely on third parties, many of whom are single source suppliers, for our nonclinical and clinical trial materials, as well as the commercial supply of our products.

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Components of Our Results of Operations

Product Revenue, Net

In August 2022, in conjunction with the launch of our first FDA approved product, ZORYVE cream 0.3%, we began to recognize revenue from product sales, net of rebates, chargebacks, discounts, and other adjustments.

We also began recognizing revenue net of deductions for ZORYVE cream 0.3% in Canada in June 2023, ZORYVE foam in the United States in January 2024, ZORYVE cream 0.15% for atopic dermatitis in July 2024, and ZORYVE foam in Canada in December 2024.

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

In August 2022, in conjunction with the launch of our first FDA-approved product, we began to recognize revenue from product sales, net of deductions.

Below are the time periods that we began to recognize product revenue, net of deductions, related to the launches of each of our products and indications:

Product/Indication Concentration Region Age 2022 2023 2024 2025

Zoryve cream for Plaque Psoriasis

United States > 12 yrs

Canada > 12 yrs

United States 6-11 yrs October

Zoryve foam for Seborrheic Dermatitis

United States > 9 yrs

Canada > 9 yrs

Zoryve cream for Atopic Dermatitis

United States > 6 yrs

Canada > 6 yrs

United States 2-5 yrs October

Zoryve foam for Scalp & Body Psoriasis

United States > 12 yrs

Canada > 12 yrs

Other Revenue

Other revenue relates to our license agreements, primarily the Sato License Agreement and the Huadong License and Collaboration Agreement .

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

Cost of Sales

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

Our cost of sales will reflect a lower average per unit cost of materials until inventory that was previously expensed is sold, which is expected to occur in the first half of 2025.

As of December 31, 2024 and December 31, 2023, the value of this inventory, mostly at the raw materials stage, was approximately $5.5 million and $8.7 million, respectively.

Other revenue recognized to date is derived primarily from upfront license fees and milestone payments received pursuant to the Sato Agreement and Huadong Agreement.

We expect that any other revenue we generate pursuant to these agreements will fluctuate from period to period as a result of the timing of potential milestone achievement and any potential regulatory approvals within the respective Sato Territory and Huadong Territory.

Operating Expenses

Cost of Sales

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

Prior to the date on which the initial regulatory approval was received for each product, costs of inventory production were recorded as research and development expense.

As of December 31, 2025 and December 31, 2024, the value of this expensed inventory, mostly at the raw materials stage, was approximately $2.6 million and $5.5 million, respectively.

Subsequent to initial regulatory approval, costs of production are capitalized into inventory, and as that inventory is sold and revenue is recognized, the cost of the inventory is recognized in cost of sales.

Research and Development Expenses

Since our inception, we have focused significant resources on our research and development activities, including conducting nonclinical studies and clinical trials, manufacturing development efforts, and activities related to regulatory filings for our product candidates.

Since our inception, we have focused significant resources on our research and development activities, including conducting nonclinical studies and clinical trials, manufacturing development efforts, activities related to regulatory filings for our product candidates, and medical affairs activities related to ZORYVE.

Research and development costs are expensed as incurred.

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In addition, employee costs, including salaries, payroll taxes, benefits, stock-based compensation and travel, for employees contributing to research and development activities are classified as research and development costs.

We allocate direct external costs on a program specific basis (topical roflumilast program, topical JAK inhibitor program, and early-stage programs).

We allocate direct external costs on a program specific basis, such as the topical roflumilast program.

Our internal costs are primarily related to personnel or professional services and apply across programs, and thus are not allocable on a program specific basis.

Index to Financial Statements

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

In particular, we expect to incur research and development expenses for the phase 1 ARQ-255 study for alopecia areata, and early development of ARQ-234 for atopic dermatitis.

We have entered, and may continue to enter, into license agreements to access and utilize certain molecules for the treatment of dermatological diseases and disorders.

We evaluate if the license agreement is an acquisition of an asset or a business.

In particular, we expect to incur research and development expenses for the development of ARQ-234 for atopic dermatitis and for ZORYVE label expansions and life cycle management.

We have entered, and may continue to enter, into in-license agreements to access and utilize certain molecules for the treatment of dermatological diseases and disorders.

We evaluate if the in-license agreement is an acquisition of an asset or a business.

To date, none of our license agreements have been considered to be an acquisition of a business.

For asset acquisitions, the upfront payments, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects.

For asset acquisitions, the upfront payments, as well as any milestone payments made before regulatory approval, are immediately recognized as research and development expense, provided there is no alternative future use of the rights in other research and development projects.

The successful development of our product candidates is highly uncertain.

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

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

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

See “Risk Factors” for a discussion of the risks and uncertainties associated with the development of our product candidates.

Index to Financial Statement s

Selling, General and Administrative Expenses

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

Other selling, general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for auditing, tax, and general legal services.

The commission paid to Kowa under our co-promotion agreement is recorded as a selling expense.

We expect our selling, general and administrative expenses to continue to increase in the future as we continue to commercialize ZORYVE and potentially other product candidates, and support our operations, including increased expenses related to legal, accounting, insurance, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors and officers liability insurance premiums, and investor relations activities.

Other Income, Net

Other income, net primarily consists of interest income earned on our cash, cash equivalents, and marketable securities, as well as changes in the fair value of the derivative related to our debt.

See Note 9 to the consolidated financial statements for additional information.

Our selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel, for sales, commercial operations, human resources, information technology, and finance employees.

Other selling, general and administrative expenses include costs related to sales and marketing of ZORYVE;

commission paid to Kowa under our promotion agreement;

professional services costs for patent protection, accounting, auditing, tax, and general legal services;

other outside services and consulting costs;

information technology;

and other overhead.

Interest Income

Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.

Interest Expense

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

Interest expense is related to interest incurred on our debt.

Provision for Income Taxes

Provision for income taxes is related to the Huadong License and Collaboration Agreement .

See Note 7 and Note 11 to the consolidated financial statements for additional information.

Index to Financial Statement s

Provision for income taxes is primarily related to foreign income tax expense, foreign withholding taxes incurred in relation payments received pursuant to our in-license agreements and state income tax expense related to jurisdictions with minimum taxes or taxes based on revenue.

Index to Financial Statements

Results of Operations

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Product Revenue, Net

We began recording U.S.

product revenue in the third quarter of 2022 following the FDA approval and subsequent commercial launch of ZORYVE cream 0.3% in August 2022, and Canada product revenue in the second quarter of 2023 following the Health Canada approval and subsequent commercial launch of ZORYVE cream 0.3% in June 2023.

In the first quarter of 2024, we began recording U.S.

product revenue following the FDA approval and subsequent commercial launch of ZORYVE foam in January 2024.

In the third quarter of 2024, we began recording U.S.

product revenue following the FDA approval and subsequent commercial launch of ZORYVE cream 0.15% in July 2024.

In the fourth quarter of 2024, we began recording Canada product revenue following the Health Canada approval and subsequent commercial launch of ZORYVE foam in December 2024.

Year Ended December 31, Change

2024 2023 $ %

(in thousands)

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68,274 9,921 58,353 588 %

ZORYVE cream 0.05%

Total product revenue, net

$ 372,072 $ 166,542 $ 205,530 123 %

Product revenue, net, for ZORYVE cream 0.3% increased by $55.9 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily driven by higher end customer demand and improving gross-to-net discounts for ZORYVE cream 0.3% in the United States.

Product revenue, net, for ZORYVE foam increased by $71.5 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, driven by its commercial launch in January 2024.

Product revenue, net, for ZORYVE cream 0.15% increased by $9.9 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, driven by its commercial launch in July 2024.

*Not applicable

Product revenue, net, for ZORYVE cream 0.3% increased by $35.9 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily driven by greater patient demand in the United States and Canada.

Product revenue, net, for ZORYVE foam increased by $110.4 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily driven by greater patient demand for seborrheic dermatitis in the United States, the commercial launch of ZORYVE foam for plaque psoriasis of the scalp and body in the United States in June 2025, as well as the commercial launch of ZORYVE foam for seborrheic dermatitis in Canada in December 2024.

Product revenue, net, for ZORYVE cream 0.15% increased by $58.4 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily driven by its commercial launch in the United States in July 2024.

Product revenue, net, for ZORYVE cream 0.05% increased by $0.9 million for the year ended December 31, 2025 due to its commercial launch in the United States in October 2025.

Other Revenue

Other revenue in the year ended December 31, 2024 is a result of license revenues received in connection with the Sato License Agreement of $25.0 million and the Huadong License and Collaboration Agreement of $5.0 million.

Other revenue for the year ended December 31, 2023 primarily included licensed revenues received in connection with the Huadong License and Collaboration Agreement of $30.0 million.

Other revenue in the year ended December 31, 2025 is a result of milestone payments earned and received in connection with the Huadong License and Collaboration Agreement of $4.0 million.

Other revenue for the year ended December 31, 2024 is a result of license revenues received in connection with the Sato License Agreement of $25.0 million and the Huadong License and Collaboration Agreement of $5.0 million.

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

Cost of Sales

Cost of sales increased by $14.1 million for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The increase is related primarily to an increase in customer demand for ZORYVE cream 0.3% and launch of ZORYVE foam in 2024.

Prior to the dates on which the initial regulatory approvals were received for each product, inventory manufacturing and raw materials costs were recorded as research and development expense.

Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to occur in the first half of 2025.

Index to Financial Statement s

Cost of sales increased by $17.6 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, and was due to the increase in cost of products sold consistent with the growth in ZORYVE cream and foam product revenue and related increase in royalty expense, coupled by a $2.7 million increase in amortization expense recorded in connection with the AstraZeneca milestones achieved in the first quarter of 2025.

Index to Financial Statements

Research and Development Expenses

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Total research and development expense $ 77,051 $ 76,420 $ 631 1 %

______________

*Not applicable

Research and development expenses decreased by $34.2 million, or 31%, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The decrease was primarily due to the completion of Phase 3 studies of roflumilast cream in atopic dermatitis, coupled with decreases in compensation and personnel-related expenses, partially offset by manufacturing and preclinical costs incurred related to the development of early-stage programs.

Research and development expenses increased slightly by $0.6 million, or 1%, for the year ended December 31, 2025 compared to the year ended December 31, 2024.

The increase in the topical roflumilast direct program costs was primarily due to expenses related to the Phase 2 study of ZORYVE cream 0.05% for the treatment of atopic dermatitis in infants and the 2024 comparative period included reductions in expense as a result of the close-out of certain clinical studies.

The decrease in the topical JAK inhibitor direct program costs resulted from the completion of a Phase 1b study in our ARQ-255 program for the treatment of alopecia areata.

Lower direct costs associated with our other early stage programs was primarily due to a reduction in ARQ-234 preclinical costs and clinical manufacturing in 2025, as compared to 2024, ahead of the anticipated initiation of our Phase 1 study of ARQ-234 in the first quarter of 2026.

We expect research and development expenses to increase in 2026, primarily due to our clinical development program for ARQ-234, as well as the development costs associated with ZORYVE label expansions and life cycle management efforts.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $44.2 million, or 24%, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The increase was primarily due to an increase in compensation and personnel related expenses of $28.9 million and an increase in sales and marketing expenses of $14.1 million.

Selling, general and administrative expenses increased by $45.2 million for the year ended December 31, 2025 compared to the year ended December 31, 2024.

The increase was primarily due to an increase in sales and marketing expenses of $30.8 million and an increase in compensation and personnel related expenses of $13.3 million.

These increases were primarily due to our continued commercialization efforts for ZORYVE.

Other Income, Net

Other income, net increased by $4.4 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the impact of higher interest rates on a higher marketable securities balance for the first three quarters of the year.

We expect our selling, general and administrative expenses to increase in future periods as we continue to commercialize ZORYVE and potentially other product candidates, as well as support our operations.

Interest Income

Interest income decreased by $7.2 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily due to lower cash, cash equivalents, and marketable securities balances, coupled with the impact of lower investment yields resulting from reductions in market interest rates.

Interest Expense

Interest expense decreased by $2.5 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the impact of lower interest rates and the partial prepayment of principal related to the Loan Agreement.

Interest expense decreased by $15.1 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, due to a lower outstanding principal balance on our long-term debt driven by our $100.0 million principal paydown in October 2024, coupled with the impact of lower interest rates.

See Note 9 to the consolidated financial statements for additional information.

Provision for Income Taxes

Income tax expense of $0.6 million for the year ended December 31, 2024 and $3.1 million for the year ended December 31, 2023 were due to income tax expense related to withholding taxes on payments received in connection with the Huadong License and Collaboration Agreement.

See Note 7 and Note 11 to the consolidated financial statements for additional information.

Income tax expense continues to not be material, as we remain in a loss position for the year ended December 31, 2025.

The income tax expense for the periods presented primarily related to withholding taxes on payments received in connection with the Huadong License and Collaboration Agreement and tax on the income earned in Canada.

Index to Financial Statements

Liquidity, Capital Resources and Requirements

Our primary sources of capital to date have been private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020, February 2021, August 2022, October 2023, and March 2024, our Loan Agreement, our ATM program, and revenue from the sale of ZORYVE.

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

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

As of December 31, 2025 and 2024, we had cash, cash equivalents, restricted cash, and marketable securities of $221.3 million and $228.6 million, respectively, and an accumulated deficit of $1,138.1 million and $1,121.9 million, respectively.

We maintain cash

Index to Financial Statement s

balances with financial institutions in excess of insured limits.

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

As of December 31, 2025, we had $100.0 million outstanding under the Loan Agreement.

We paid down $100.0 million of principal related to the Loan Agreement using available cash on October 8, 2024, with the right to re-draw that principal for a defined period.

See Note 9 to the consolidated financial statements for additional information.

We paid down $100.0 million of principal related to the Loan Agreement using available cash in October 2024, with the right to re-draw that principal for a defined period.

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

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If we are unable to obtain additional funding from these or other sources if or when needed it may be necessary to significantly reduce our current rate of spending through, among other things, reductions in staff and delaying, scaling back, or stopping certain research and development programs, nonclinical studies, clinical trials or other development activities, and commercialization efforts.

Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose.

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

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

• our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;

• the costs related to milestone payments to AstraZeneca, Hengrui, or any future collaborator or licensing partner, upon the achievement of predetermined milestones;

• our ability to acquire attractive assets or businesses or to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;

• the costs related to milestone payments to AstraZeneca or any future collaborator or licensing partner, upon the achievement of predetermined milestones;

• any product liability or other lawsuits related to our products;

Index to Financial Statements

• the expenses needed to attract and retain skilled personnel;

• any disputes, lawsuits, or other legal proceedings related to contracts or employment matters;

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

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

Index to Financial Statement s

On December 22, 2021, we entered into a loan and security agreement (the Prior Loan Agreement) with SLR Investment Corp (SLR) and the lenders party thereto.

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

The Prior Loan Agreement was amended and restated on January 10, 2023 (the AR Loan Agreement) to include Arcutis Canada, Inc., a corporation incorporated under the laws of the Province of Ontario, as a borrower and party.

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With the approval of ZORYVE cream 0.3% on July 29, 2022, the tranche B term loans were funded in August 2022.

As of December 31, 2024 and 2023, the aggregate principal amount outstanding under the Loan Agreement was $100.0 million and $200.0 million, respectively.

As of December 31, 2025 and 2024, the aggregate principal amount outstanding under the Loan Agreement was $100.0 million.

In October 2024, we made a 2024 Partial Prepayment of $100.0 million, which reduced the aggregate principal amount outstanding under the Loan Agreement to $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 us generating a minimum net product revenue for the trailing six (6) 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 its annual plan for the respective period, we will be able to draw down the tranche C-1 and tranche C-2 term loans.

As a result of such 2024 Partial Prepayment, subject to us generating a minimum net product revenue for the trailing six (6) 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 its annual plan for the respective period, we will be able to draw down the tranche C-1 and tranche C-2 term loans.

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.

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

Index to Financial Statements

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

Index to Financial Statement s

on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock or to redeem capital stock.

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

We also agreed to a financial covenant whereby we must 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 six-month basis as of the end of each month.

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Effect of exchange rate changes on cash

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

Net decrease in cash, cash equivalents and restricted cash

$ (28,737) $ (17,371)

Index to Financial Statements

Net Cash Used in Operating Activities

During the year ended December 31, 2025, net cash used in operating activities was $5.6 million, which consisted of a net loss of $16.1 million and a change in net operating assets and liabilities of $34.8 million, partially offset by net non-cash and other charges of $45.3 million.

The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of $47.3 million, offset by an increase in accounts payable and accrued liabilities of $34.3 million.

The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of $73.2 million driven by higher sales, coupled with a $7.3 million increase in inventories to support higher unit demand, partially offset by a $50.0 million increase in accrued liabilities driven by higher accrued sales deductions associated with higher sales volume.

The net non-cash and other charges were primarily related to stock-based compensation expense of $40.4 million.

Index to Financial Statement s

During the year ended December 31, 2024, net cash used in operating activities was $112.2 million, which consisted of a net loss of $140.0 million and a change in net operating assets and liabilities of $15.1 million, partially offset by net non-cash and other charges of $43.0 million.

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

The net non-cash and other charges were primarily related to stock-based compensation expense of $41.7 million.

Net Cash Provided by (Used in) Investing Activities

During the year ended December 31, 2025, net cash used in investing activities was $30.3 million, which was comprised primarily of purchases of marketable securities of $247.0 million, coupled with a milestone payment made to AstraZeneca of $10.0 million, partially offset by the proceeds from the maturities of marketable securities of $227.4 million.

During the year ended December 31, 2024, net cash provided by investing activities was $28.8 million, which was comprised primarily of the proceeds from the maturities of marketable securities of $288.8 million, partially offset by purchases of marketable securities of $254.8 million, as well as a milestone payment made to AstraZeneca of $5.0 million.

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

Net Cash Provided by Financing Activities

During the year ended December 31, 2024, net cash provided by financing activities was $66.2 million, which was comprised primarily of the net cash proceeds received from our February 2024 public stock offering of $161.7 million, offset by the 2024 Partial Prepayment of our long-term debt of $100.0 million.

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

During the year ended December 31, 2025, net cash provided by financing activities was $7.0 million, which was comprised of net proceeds from employee stock award transactions.

During the year ended December 31, 2024, net cash provided by financing activities was $66.2 million, which was comprised primarily of the net cash proceeds received from our 2024 public stock offering of $161.7 million, offset by the 2024 Partial Prepayment of our long-term debt of $100.0 million.

Contractual Obligations and Contingent Liabilities

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We lease a facility in Westlake Village, California under an operating lease that commenced in February 2019 and was amended in April 2020 in order to relocate to a new expanded space.

The total commitment under the operating lease agreement is $3.8 million, including $1.0 million for each of the years 2025 and 2026, $1.1 million for the year 2027, and $0.7 million for the year 2028.

In August 2025, we entered into a second amendment to extend the term of the lease by five years, extending the lease expiration from August 2028 to July 2033.

The total commitment under the operating lease agreement, as amended, is $8.1 million, including $0.8 million for 2026, $0.5 million for the year 2027, $0.9 million for the year 2028, $1.3 million for the year 2029, and $1.3 million for the year 2030.

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

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As of December 31, 2025, we had $100.0 million outstanding under our Loan Agreement.

See Notes 1 and 9 to the consolidated financial statements for additional information.

The undiscounted future payments of principal and interest under the Loan Agreement as of December 31, 2024 is $171.3 million, including $12.4 million for the year 2025, $13.6 million for the year 2026, $19.0 million for the year 2027, $12.2 million for the year 2028, and $114.1 million for the year 2029.

License Agreements & Acquisition

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

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

The undiscounted future payments of principal and interest under the Loan Agreement as of December 31, 2025 is $156.4 million, including $12.9 million for the year 2026, $18.3 million for the year 2027, $11.5 million for the year 2028, and $113.7 million for the year 2029.

See Note 9 to the consolidated financial statements for additional information.

Index to Financial Statements

In-License Agreements & Ducentis Acquisition

The terms of our in-license agreements and our acquisition of Ducentis require us to pay potential future payments based on product development and commercial success.

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

These potential obligations are further described in Note 7 to the consolidated financial statements.

Manufacturing Agreements

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

Firm future purchase commitments under these agreements are approximately $7.5 million for 2025, and approximately $0.9 million per year for 2026 and 2027.

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

Index to Financial Statement s

In the normal course of business, we enter into manufacturing supply agreements for the commercial supply of ZORYVE, which include certain minimum purchase commitments.

As of December 31, 2025, firm future purchase commitments that are subject to these agreements with a term of greater than one year, excluding those recognized on the consolidated balance sheets, are $1.7 million in 2026 and $0.9 million in 2027, respectively.

These future purchase commitments do not represent all of our anticipated purchases, but instead represents only the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts.

Indemnification

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Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses during the reporting periods.

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Actual results may differ materially from these estimates under different assumptions or conditions.

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

Nonclinical and Clinical Accruals and Costs

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

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

Prepaid and Accrued Research and Development Expenses

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

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

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We accrue for these costs based on factors such as estimates of the work completed and in accordance with agreements established with third-party service providers under the service agreements.

As it relates to clinical trials, the financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

As it relates to clinical trials, the financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods

Index to Financial Statements

over which materials or services are provided under such contracts.

Payments made prior to the receipt of goods or services to be used in research and development are recorded as prepaid expenses until the goods or services are received.

Such payments are evaluated for current or long-term classification based on when they will be realized.

Additionally, if expectations change such that we do not expect goods to be delivered or services to be rendered, such prepayments are charged to expense.

Our objective is to reflect the appropriate expense in our consolidated financial statements by matching those expenses with the period in which the services and efforts are expended.

We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial utilizing financial models taking into consideration discussions with applicable personnel and outside service providers.

Our objective is to reflect the appropriate expense in our consolidated financial statements by matching those costs with the period in which the services and efforts are expended.

We account for these expenses according to the progress of the trial as measured by underlying activity, such as patient progression, and the timing of various aspects of the trial utilizing financial models taking into consideration discussions with applicable personnel and outside service providers.

In this manner, our clinical trial accrual is dependent in part upon the timely and accurate reporting of progress and efforts incurred from CROs, contract manufacturers and other third-party vendors.

Although we expect our estimates to be materially consistent with actual amounts incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period.

We make significant judgments and estimates in determining the accrued liabilities balance in each reporting period.

As actual costs become known, we adjust our

Index to Financial Statement s

accrued liabilities.

We have not experienced any material differences between accrued costs as of December 31, 2024 and 2023 and actual costs incurred.

We make significant judgments and estimates in determining the prepaid expense and accrued liabilities balance in each reporting period.

As actual costs become known, we adjust the relevant balances.

We have not experienced any material differences between our estimates as of December 31, 2025 and 2024 and actual costs incurred.

Product Revenue, Net

Pursuant to Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (ASC 606), we recognize revenue when a customer obtains control of promised goods or services.

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We recognize as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied.

Product Revenue, Net

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

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

In accordance with ASC 606, we recognize net product revenues from sales when the Customers obtain control of our products, which typically occurs upon delivery to the Customer.

In accordance with ASC 606, we recognize net product revenue from sales when the customers obtain control of our products, which typically occurs upon delivery to the Customer.

Our payment terms are generally between 30 - 65 days.

Revenues from product sales are recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration that result from (a) invoice discounts for prompt payment and distribution service fees, (b) government and private payer rebates, chargebacks, discounts and fees, (c) product returns and (d) costs of co-pay assistance programs for patients, as well as other incentives.

Revenue from product sales are recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration that result from (a) invoice discounts for prompt payment and distribution service fees, (b) government and private payer rebates, chargebacks, discounts and fees, (c) product returns and (d) costs of co-pay assistance programs for patients, as well as other sales deductions.

Reserves are established for the estimates of variable consideration based on the amounts earned or to be claimed on the related sales.

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Where appropriate, we utilize the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.

The amount of variable consideration that is included in the transaction price may be constrained and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

The amount of variable consideration that is included in the transaction price may be constrained and is recognized as product revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

Actual amounts of consideration ultimately received may differ from our estimates.

If actual results vary from our estimates, we adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Index to Financial Statements

Distribution Service Fees :

We engage with wholesalers to distribute our products to end customers.

We pay the wholesalers a fee for services such as:

We engage with wholesalers and specialty pharmacies to distribute our products to end customers.

We pay the wholesalers and certain specialty pharmacies a fee for services such as:

data reporting, inventory management, chargeback administration, and service level commitment.

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We provide our customers with a percentage discount on their invoice if the customers pay within the agreed upon timeframe.

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

Index to Financial Statement s

We estimate the probability of customers paying promptly based on the percentage of discount outlined in the purchase agreement between the two parties, and deducts the full amount of these discounts from its gross product revenue and accounts receivable at the time such revenue is recognized.

Product Returns :

We provide Customers a return credit in the amount of the purchase price paid by Customers for all products returned in accordance with our returned goods policy.

We provide customers a credit for all products returned in accordance with our returned goods policy.

Once the product is returned, it is destroyed.

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In the early product launch period, we estimated a provision for sales returns based on industry data and adjusted the transaction price for such estimates at the time of sale to the customer.

As of the fourth quarter of 2024, we had collected history for our actual product returns, which we utilized to refine our returns rate and adjust our accrual.

This analysis resulted in a $4.1 million reduction in our accrual and favorable true-up impact to product revenue in the fourth quarter of 2024 related to prior period estimates.

We will continue to monitor our actual returns and if they vary from estimates, we may need to adjust accruals and reserve rates, which would affect revenue in the period of adjustment.

As we continue to collect history for our actual product returns, we have and will continue to refine our returns rate and adjust our accrual if they vary from estimates, which affects product revenue, net in the period of adjustment.

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

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

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

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

Rebates and Discounts:

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

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

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

Rebates are generally invoiced and paid in arrears.

The accrual balance consists invoiced amounts not yet paid as well as an estimate of the amount expected to be incurred but not yet invoiced to us as of the end of the reporting period.

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

Accounting for Income Taxes

See Note 11 to our consolidated financial statements for a complete discussion of the components of our income tax expense, as well as the temporary differences that exist as of December 31, 2025.

Our consolidated effective income tax rate is influenced by enacted tax laws and tax planning opportunities available to us in the various jurisdictions in which we conduct business.

Significant judgment is required in interpreting each jurisdiction's tax laws and evaluating our tax positions, including those that may be uncertain.

We are also required to exercise judgment with respect to the realization of our net deferred tax assets.

We evaluate all positive and negative evidence and exercise judgment regarding past and future events to determine if it is more likely than not that all or some portion of the deferred tax assets may not be realized.

If appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized.

We do not believe that there is a reasonable likelihood that there will be a material change in our liability for uncertain income tax positions or our effective income tax rate.

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses that could be material.

We recorded a valuation allowance of $255.5 million as of December 31, 2025 related primarily to net operating loss carryforwards, capitalized research expenses, tax credit carryforwards and accruals/reserves that are not currently deductible for tax purposes.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements.

Index to Financial Statements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis